**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**


(Mark
      One)


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




**For
      the fiscal year ended December 31, 2006**


OR


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


For
      the
      transition period from __________ to __________





Commission
      file number: **0-28560**





**BPO
      MANAGEMENT SERVICES, INC.**


(Name
      of
      small business issuer in its charter)





**Delaware**
              (State
                or other jurisdiction of incorporation or organization)
            
            **22-2356861**
              (I.R.S.
                Employer Identification No.)**1290
                N. Hancock, Ste 202, Anaheim, CA**
              (Address
                of principal executive offices)
            
            **92807**
              (Zip
                Code)




**(714)
      974-2670**


(Issuer’s
      telephone number, including area code)




Securities
      registered under Section 12(b) of the Act:


Title
                of each class
            Name
                of exchange on which registered**None**
            **None**




Securities
      registered under Section 12(g) of the Exchange Act:




**Common
      Stock, $0.01 par value**


(Title
      of
      Class)




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act.


Yes
o No x




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




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will 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-KSB
      or any amendment to this Form 10-KSB. x





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




The
      issuer’s revenues for the fiscal year ended December 31, 2006 were
      $4,711,139.




The
      aggregate market value of the voting common equity held by non-affiliates of
      the
      registrant computed by reference to the closing sale price of the common equity
      on March 30, 2007 was $3,399,705. The registrant has no outstanding non-voting
      common equity.




The
      number of shares outstanding of the registrant’s only class of common stock,
      $0.01 par value, was 8,619,400 on March 30, 2007.




**DOCUMENTS
      INCORPORATED BY REFERENCE:**


**None**


Transitional
      Small Business Disclosure Format (check one):  Yes
o
      No x








**TABLE
      OF CONTENTS**





**Page****PART
                I**Item
                1.Description
                of Business.
            3Item
                2.Description
                of Property.
            13Item
                3.Legal
                Proceedings.
            13Item
                4.Submission
                of Matters to a Vote of Security Holders.
            14**PART
                II**Item
                5.Market
                for Common Equity, Related Stockholder Matters and Small Business
                Issuer
                Purchases of Equity Securities.
            17Item
                6.Management’s
                Discussion and Analysis or Plan of Operation
            18Item
                7.Financial
                Statements.
            33Item
                8.Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure.
            33Item
                8A.Controls
                and Procedures.
            33Item
                8B.Other
                Information.
            34**PART
                III**Item
                9.Directors
                and Executive Officers, Promoters and Control Persons; Compliance
                With
                Section 16(a) of the Exchange Act.
            35Item
                10.Executive
                Compensation.
            37Item
                11.Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters.
            45Item
                12.Certain
                Relationships and Related Transactions.
            47Item
                13.Exhibits.
            49Item
                14.Principal
                Accountant Fees and Services.
            53Index
                to Consolidated Financial Statements
            F-1Signatures
            54Index
                to Exhibits Filed with This Form 10 KSB
            55




2




**BPO
      MANAGEMENT SERVICES, INC.**





**PART
      I**







**ITEM
                1.**
            **DESCRIPTION
                OF BUSINESS.**




**Overview**




We
      were
      incorporated in 1981 under the name Research Engineers, Inc., changed our name
      to netGuru, Inc. in 2000 and to BPO Management Services, Inc. (“BPOMS” or the
“Company”) on December 15, 2006, immediately following our reverse merger with
      privately held BPO Management Services. We are a Delaware corporation.





We
      provide business process outsourcing (BPO) services to middle market enterprises
      in North America. BPO refers to the outsourcing of an entire business process,
      typically to reduce cost and/or improve the performance of that process. Our
      objective is to provide a comprehensive suite of BPO services to support the
      back-office business requirements of middle-market enterprises throughout North
      America on an outsourced and/or recurring revenue basis.





Privately-held
      BPO Management Services was established on July 26, 2005 and has grown
      principally through acquisitions. For the purposes of this section we refer
      to
      the current publicly-held BPO Management Services, Inc. as “BPOMS”, “we”, “our”,
      or “us,” and the former privately-held BPO Management Services, Inc. as the
“Former BPOMS.”





In
      August
      2005, Former BPOMS acquired all the equity interests in Adapsys Transaction
      Processing, Inc. and Adapsys Document Management, Inc. (collectively “ADAPSYS”),
      providers of document management solutions located in Winnipeg, Canada. In
      February 2006, as anticipated, the sole legacy customer contract of ADAPSYS
      Transaction Processing ended. The Adapsys Transaction Processing entity has
      had
      no ongoing operations since that time. All of our document management business
      is being provided through Adapsys Document Management (“ADM”).





In
      November 2005, Former BPOMS purchased the assets of BPO Management Services
      CA,
      a provider of human resources outsourcing services based in San Francisco,
      California.





In
      December 2005, Former BPOMS purchased the assets of Deines Imaging (“Deines”) a
      Canada-based provider of document imaging, microfilming and records management
      solutions from Critical Control, and combined this business with
      ADM.





In
      January 2006, Former BPOMS acquired all of the equity interests of Digica,
      Inc.,
      a provider of information technology outsourcing services based in Branchburg,
      New Jersey (“Digica”).





In
      October 2006, Former BPOMS purchased all of the equity interests of Novus
      Imaging Solutions (“Novus”) a provider of document imaging, microfilming and
      records management solutions located in Winnipeg, Canada, whose business
      operations were then consolidated with the former Deines imaging business
      operations of ADM.





On
      December 15, 2006, netGuru, Inc. acquired all of the outstanding common stock
      of
      Former BPOMS in a reverse merger and changed its name to BPO Management
      Services, Inc. BPOMS began trading under the symbol BPOM.





3




**Products
      and Services**




Our
      strategic objectives are: 1) to become the leading provider of BPO services
      to
      support the back-office business requirements of North American middle market
      enterprises, and 2) to continue to grow through a combination of organic growth
      and accretive acquisitions.






We
      provide BPO services to support the back-office business requirements of
      enterprises in the United States and Canada. “BPO” refers to the outsourcing of
      an entire business process, typically to reduce cost and/or to improve the
      performance of that process. Our objective is to provide a comprehensive suite
      of BPO services to support the back-office business requirements of
      middle-market enterprises throughout North America on an outsourced or recurring
      revenue basis.






We
      believe the market for BPO services has grown rapidly in recent years and will
      continue to grow in the near future. We estimate that in 2007 BPO services
      is a
      $75 billion market in North America which, we believe, will continue to grow
      at
      15% per year.






In
      today’s rapidly changing and globally competitive business environment,
      executives are being asked to manage their companies more closely and to meet
      their growth and profitability commitments by doing more with less. They require
      greater efficiencies from their resources and improved worker productivity.
      Combined with this, an unprecedented increase in regulatory requirements, such
      as the Sarbanes-Oxley Act of 2002 and the Health Insurance Portability and
      Accountability Act, has resulted in executives increasingly turning to
      outsourcing a wide variety of essential non-core back-office business functions
      traditionally provided by in-house staff.






Although
      the BPO services market generally is dominated by large “Tier 1” providers who
      focus on the largest enterprises and governmental agencies, we believe those
      companies are not addressing the back-office needs of middle-market businesses.
      We define the middle market as businesses with revenues between $100 million
      and
      $3 billion and with 100 to 7,000 employees, which we estimate includes
      approximately 30,000 businesses in the United States. We believe middle market
      companies spend more per employee on back-office services (such as healthcare,
      IT services, staff benefits and payroll) than their larger counterparts and
      receive fewer benefits and less service in return. By outsourcing back-office
      business functions, these companies can obtain better functionality and breadth
      of service at a lower total cost.






We
      believe this middle market is underserved since the dominant Tier 1 BPO service
      providers are focused on the largest companies and government agencies, while
      other large BPO service providers generally offer a single, narrowly focused
      BPO
      solution, and the smaller BPO service providers offer only a few BPO services.
      Our goal is to acquire some of these smaller BPO service providers and integrate
      them under the BPOMS umbrella in order to increase the depth and breadth of
      our
      BPO services offering, our geographic coverage and ultimately become the BPO
      service provider of choice to this market.






The
      BPO
      services industry is highly competitive. Leading Tier 1 BPO service providers
      such as International Business Machines, Accenture, Electronic Data Services
      and
      Affiliate Computer Services dominate the marketplace, competing for very large
      contracts from Global 1000 enterprises and government agencies. Competition
      for
      BPO services provided to middle market enterprises - our target market - is
      highly fragmented, consisting of a few large companies providing a narrowly
      focused solution and thousands of small, mostly privately-held, companies
      offering a reduced subset of services and solutions. BPO service providers
      in
      this middle market compete on the basis of quality of service and price for
      a
      selected BPO function. We believe that the customer benefits that accrue from
      the depth, breadth and quality of our BPO service offerings will differentiate
      us from the many companies who provide only a few BPO services or focus on
      a
      particular industry.




4




We
      anticipate that our typical annual revenues per-customer contract will be from
      $500,000 to $5,000,000 with an initial contract term of three to five years.
      Given historic industry contract renewal rates, which we believe exceeds 95%,
      and typical customer reluctance in changing service providers for important
      business functions, we anticipate that once obtained, substantially all
      contracts should mature into long-term engagements resulting in a long-term
      recurring revenue stream.




Because
      our expected typical per-customer contract revenues will be below that of the
      Tier 1 providers, we do not expect to encounter significant competition from
      the
      Tier 1 providers, who built their organizations to sell and service Global
      1000
      enterprises, and are not expected to be responsive or cost-competitive for
      our
      expected potential customer base.




BPO
      service engagements require selling to high “C” level executives and, so, we
      have a small targeted senior sales team led by experienced individuals in each
      functional area. We have established a rigorous method of profiling
      opportunities based on a variety of characteristics and metrics, which allows
      us
      to quickly identify and focus on those opportunities which we believe, represent
      the highest probability of success.




Most
      of
      our services are provided by our employees, a few of whom we lease on a
      professional employer organization (“PEO”) basis from another outsourcing
      provider. Under this arrangement, the PEO is the actual employer and provides
      payroll, benefits and workers’ compensation insurance to these employees, who
      are in turn licensed to us. Some of our services are provided to customers
      through suppliers managed by us, where appropriate for business or economic
      reasons. For example, payroll services, 401(k) plan administration and software
      systems may be provided in such a manner.




Currently
      our BPO service offerings consist of (1) human resources outsourcing, (2)
      enterprise content management including finance and accounting outsourcing
      and
      (3) IT outsourcing.




*Human
      Resources Outsourcing (“HRO”)*





BPOMS
      offers all of the standard 22 human resource related services that the HR
      function is required to provide to the enterprise, including all tactical,
      transaction-intensive activities which consume approximately 80% of the time
      spent by most HR organizations which provide this function in-house. These
      services are offered as a complete outsource or through the selective
      implementation of specific human resource services “HRO Select”. Our service
      offering includes; employee benefits administration, employee data management,
      payroll administration, education and training programs, recruiting services,
      integration of HR information systems with other enterprise applications,
      employee help desk and self service portal and consulting services.
      Complementing BPOMS domain expertise are BPOMS HR information systems and a
      centralized technology hosting capability.




*Enterprise
      Content Management (“ECM”)*





BPOMS
      provides a full suite of services designed to address the data and records
      management business challenges for large enterprises and governmental agencies,
      from initial consultation through implementation and support. BPOMS imaging
      and
      data capture solutions allow customers to transform paper or other media-based
      documents into digital information stored in a document repository with
      application specific indexing, making it instantaneously available throughout
      a
      customer’s computer network. Workflow and electronic forms solutions eliminate
      paper forms and capture indexing, routing and tracking information
      electronically. BPOMS document collaboration technology, specifically its
      eReview technology, allows virtual customer workgroups - comprising both
      internal colleagues, external customers and business partners - with a secure
      ability to simultaneously or asynchronously meet, review and mark-up documents
      extracted from many different enterprise applications which have been stored
      in
      a document management repository.




5




Our
      Web4
      Division’s eReview and ForReview collaborative software products help change the
      way business people conduct their day-to-day business. Once installed at a
      host
      location, our eReview collaborative software enables a host and other
      participants to engage in real-time Web-based conferencing and document sharing
      anywhere and anytime in over 150 widely used document formats. eReview allows
      our customers to bridge physical distances in their global business environments
      by enabling decision makers to communicate without costly and time consuming
      travel to geographically dispersed locations. Complementing eReview, our
      WebWorks software provides comprehensive project-based document and team
      management functions. Our collaborative products can be implemented as
      stand-alone enterprise solutions or as an integrated system working in concert
      with other products and the solutions can be hosted by BPOMS or implemented
      and
      supported at customer locations.




*Finance
      and Accounting Outsourcing (“FAO”)*





As
      part
      of its ECM offering, BPOMS provides accounts payable invoice processing
      solutions for enterprises in multiple business sectors and an enhanced loan
      processing solution for financial service providers. The BPOMS accounts payable
      invoice processing solution allows customers to scan incoming invoices and
      capture important information from this image, such as, invoice date, invoice
      number, purchase order number and invoice total. This information is
      automatically loaded directly into the customers’ accounts payable, document
      management or other back-end system. This solution also provides the ability
      to
      automatically match purchase orders with invoices, eliminating labor intensive
      manual matching and allows customers to process all invoices the day they are
      received, maintaining relevant audit data, such as, scanned invoice image,
      batch
      number, date received and other data captured from key invoice fields -- not
      manually, but automatically with high-powered document scanners. The BPOMS
      process management/workflow solution for financial service providers works
      in
      conjunction with their existing computing systems to reduce costs and improve
      the time it takes to process a loan application, as well as providing a better
      cross-selling infrastructure capability, generating additional revenue
      opportunities and an enhanced customer service experience.





*Information
      Technology Outsourcing (“ITO”)*





BPOMS
      supports, hosts, and manages all related information technology infrastructure
      components, networks and applications on a 24x7 basis from a secure data center
      facility located in Branchburg, New Jersey, with high-speed, redundant
      fiber-based connectivity to a MCI mega-center providing instantaneous backup
      and
      recovery capability. This enables BPOMS to standardize, support and integrate
      with other customer enterprise applications all of its customer information
      systems required to support the customer's back-office business
      functions.





BPOMS
      also offers remote managed services to support other business application
      servers, networks and related desktop environment, specializing in IBM iSeries
      and Intel-based servers which are predominant in middle market
      enterprises.




6




Hosting
      and managed application support services offered by BPOMS provide a secure,
      rapidly implemented and cost-effective method of application delivery and
      management. Through this service customers are able to access scanned images,
      human resources records, accounting information or other documents from any
      computer or office location via a secure web or private network connection.
      These services are offered on an on-demand basis.




**Distribution
      methods**




BPOMS
      believes that middle market enterprises require a “high touch” customer service
      approach in conjunction with flexible service offerings specifically tailored
      to
      the unique characteristics of their businesses. At the same time the fundamental
      drivers of middle market BPO decisions are bottom line cost savings and improved
      business performance (i.e. faster response times, higher availability and
      improved business recovery/compliance capability) for the particular business
      function. These back-office business functions, when performed in-house,
      typically create needless expense, regulatory/compliance concerns and result
      in
      reduced business performance.




BPOMS
      back-office BPO solutions are designed to allow our customers;




·
            achieve
                significant bottom line cost
                savings;


·
            access
                BPOMS domain expertise on a regular basis to address changing business
                requirements;


·
            take
                advantage of business performance improvements in individual back-office
                business functions through the BPOMS workflow optimization approach
                and
                implementation of our standardized technology delivery platform;
                and


·
            increase
                their ability to respond to a dynamic business environment by focusing
                resources on their core business
                objectives.




BPOMS
      business domain experts in each of our business segments (i.e. HRO, ECM
      including FAO, and ITO) design and implement each solution, optimizing process
      workflow and utilizing elements from our standard technology delivery platform
      to suit our client’s specific business process requirement as part of the
      initial outsourcing transition process. Once implemented, the specific business
      function is then efficiently delivered, in terms of time and cost, from a
      centralized BPOMS facility managed and supported by BPOMS production staff,
      on a
      24/7/365 days per year basis, enabling our business model of the delivery of
      outsourced services on a ‘one-to-many’ basis. This also includes hosting of
      supporting applications and infrastructure from our hardened data center
      facility located in Branchburg, NJ. After implementation, customers continue
      to
      have access to BPOMS business domain experts who regularly monitor customer
      service levels and changing business requirements.




Additional
      cost savings are further driven by:




·
            Economies
                of scale and increased purchasing power of BPOMS as compared to our
                middle
                market customers since we are delivering our services across a much
                broader customer base; and


·
            BPOMS
                lower-cost talent pool created by our on-shore/near-shore/off-shore
                delivery model. Through a blended use of our US based business domain
                experts, our business operations in various locations in Canada and
                our
                off-shore capability in India, BPOMS is able to significantly reduce
                its
                cost of labor, without compromising responsiveness or service quality.
                Typically, this capability is beyond that directly available to middle
                market enterprises.




7




Accordingly,
      we entered into a services agreement with Research Engineers Ltd., our former
      India subsidiary (“REL”) which was simultaneously divested to Das Family
      Holdings (“DFH”) at the time of our merger with netGuru, Inc., to provide us
      with India-based resources that can be scaled as required to support our
      customer projects. We believe this arrangement will allow us to provide a
      comprehensive BPO service offering that maximizes the advantages of our onshore,
      near shore (Canada) and offshore (India) outsourcing business model. We believe
      that this blended multi-shore delivery capability will enable us to provide
      middle market enterprises with capabilities and cost-efficiencies similar in
      nature to those enjoyed by large, global corporations.




**Sales
      and Marketing**




We
      seek
      multi-year, recurring revenue BPO service contracts with middle market
      enterprises in North America and believe that the middle market offers shorter
      sales cycles, quicker implementation of services, and greater opportunity for
      continued growth and margin than the more traditional Tier 1 marketplace. We
      target our marketing to middle-market companies with revenues in the range
      of
      $100 million to $3 billion and employee populations of 100 to 7,000 staff
      members and believe approximately 30,000 businesses in the United States meet
      these criteria.




We
      believe we are well positioned to benefit from industry trends and continued
      consolidation in the Business Process Outsourcing industry. Currently the
      industry is dominated by large multibillion-dollar service providers (IBM,
      ACS,
      Accenture and others) focusing solely on the largest companies and governmental
      agencies with minimum annual contract value of $50M. For middle market companies
      the service provider market is comprised of thousands of smaller, under
      capitalized niche companies - typically focusing on individual segments, such
      as
      HR, IT, Document Management or finance functions.




We
      intend
      to rapidly achieve critical mass through accretive acquisitions and organic
      growth and to position the company as a leading provider of BPO services for
      middle market enterprises.




Our
      goal
      is to become the provider of choice, for all of our customers' back office
      needs
      by offering a full range of integrated services and superior “Customer First”
service. The key elements of our strategy include:




*Capitalize
      on Cross-Selling and Recurring Revenue Opportunities* .
      We
      constantly seek to deliver the highest level of service to our customers.
      Effective and responsive “Customer First” servicing of our middle-market
      customers has created strong loyalty and the opportunity to cross-sell
      additional services. By leveraging our existing customer base, we expect our
      cross-selling activities to increase our operating efficiency. Our service
      offerings are typically multi-year agreements and provide us with a recurring
      source of revenue and increased visibility with our customers. Our sales focus
      is the chief financial officer, who typically has management responsibility
      for
      all of the back office functions within our offering. BPOMS has an aggressive
      sales culture and its key executives have a long history of delivering strong
      organic growth.




*Further
      Penetrate the Middle Market.* The
      Business Process Outsourcing industry is characterized by the use of technology
      and standardized processes that yield significant cost improvements in back
      office functions. Historically BPO services were only available to large
      multi-national companies. With the increasing global acceptance of BPO and
      cost
      pressure to improve operating expenses, middle market companies now represent
      the fastest growing segment of the BPO market. This rapid adoption and the
      limited number of service providers with sufficient critical mass to focus
      on
      middle market companies present many opportunities for service providers. As
      more middle-market businesses move to take full advantage of the financial
      and
      operational efficiencies associated with BPO, we expect to sell more
      comprehensive service solutions into this market. We believe our position,
      as a
      leading provider of BPO solutions, will allow us to meet the needs of these
      customers and expand our customer base.




8




*Selectively
      Pursue Strategic Acquisitions.* We
      intend to continue to pursue strategic acquisitions that project the company
      into new market areas, broaden our product offerings, and increase our market
      share within the geographic markets we currently serve.




BPO
      service engagements require selling to high “C” level executives and,
      accordingly, BPOMS has a small targeted senior sales team led by experienced
      individuals in each functional area. BPOMS has established a rigorous method
      of
      profiling opportunities based on a variety of characteristics and metrics,
      which
      allows BPOMS to quickly identify and focus on those opportunities which it
      believes represent the highest probability of success.




**Customer
      Service and Support**




BPOMS
      provides services to customers across a wide variety of industry segments such
      as, financial services, healthcare, manufacturing/logistics and government,
      to
      name a few. Our service offering is applicable to companies in a variety of
      industry sectors since the back-office business requirements for functions
      such
      as human resource management, document management, finance and accounting and
      information technology are primarily the same across most
      enterprises.





The
      BPOMS
      current revenue base is well distributed across our existing customer base.
      BPOMS has an existing customer base of approximately 100
      enterprises.





The
      buyer
      of BPOMS’ services in its target market is typically the chief financial
      officer, who is the control point for all back-office business functions and
      understands the potential cost savings and improved business performance that
      effectively implemented BPO services can provide. While BPOMS seeks to outsource
      discrete back-office business functions in their entirety, thereby generating
      the desired recurring revenue relationship, new customers often begin with
      an
      initial fee-based consulting services engagement in order to address a specific
      business pain point (for example, an IT systems evaluation or human resources
      effectiveness study). During this period, BPOMS’ domain experts seek to build
      greater confidence in BPOMS’ end-to-end service capabilities and to establish
      BPOMS as a “trusted advisor” to the customer chief financial officer. From this
      initial engagement, BPOMS leads new customers through an outsourcing evaluation
      study, including suggested workflow improvement, supporting systems
      implementation and a transition into an outsourced delivery environment for
      the
      specific business process. BPOMS believes that this approach allows both
      organizations the opportunity to grow with one another into an outsourcing
      relationship, significantly increasing the probability of a long-term and
      successful business relationship. In addition, BPOMS believes this approach
      allows it to generate immediate revenues for all transition and migration work,
      which is sometimes not the case in traditional Tier 1 outsourcing engagements
      where the provider is forced to recover the cost of the initial transition
      phase
      by amortizing it over the expected life of the contract.





Once
      BPOMS has successfully transitioned a specific business function to an
      outsourced relationship, BPOMS seeks to expand its customer relationship by
      offering other back-office support services, which can quickly increase its
      revenue base within each particular customer engagement. BPOMS anticipates
      that
      its typical per-customer contract revenues will be between $0.5 million to
      $5.0
      million of annual revenue, with an initial contract term of three to five years.
      Given historic industry contract renewal rates, which BPOMS believes exceed
      95%,
      and the historic reluctance to changing service providers for important business
      functions, BPOMS anticipates that once obtained, substantially all contracts
      should mature into long-term engagements. BPOMS believes that it’s expected
      typical per customer contract revenues will be well below the typical revenues
      for Tier 1 providers. Accordingly,


BPOMS
      does not expect to encounter significant competition from the Tier 1 providers,
      who built their organizations to sell and service Global 1000 enterprises,
      are
      not expected to be responsive or cost competitive.




9




Typically,
      middle market enterprises face the following problems with respect to their
      back-office business functions;





·
            Significant
                expense - Non-core back office business functions, when not managed
                effectively and efficiently, result in significant expense;





·
            Lack
                of scale - Mid-market companies lack the financial size necessary
                to
                benefit from economies of scale and technology investments;





·
            Lack
                of in-house expertise - Expertise required to provide effective and
                efficient services is not resident in-house - too expensive to have
                on
                payroll; and





·
            IT
                intensive - Back office services require enterprise applications
                and a
                robust support function provided from a hardened data center facility
                to
                effectively address audit, regulatory and compliance
                concerns.





Our
      solutions address these problems by providing our customers with:





·
            Significant
                savings - Economies of scale, workflow improvements and standardized
                technology deployment yield direct cost savings of 20% - 45% to our
                customers. In addition, our on-demand service delivery model provides
                a
                cost-effective mechanism to handle peak business volumes and increases
                the
                ability of our customers to focus resources on core business
                objectives;





·
            Back-office
                expertise - Improves customer’s back-office business performance by taking
                advantage of BPOMS deep domain
                expertise;





·
            Critical
                technology expertise - Common delivery platform leverages BPOMS technology
                expertise and provides faster implementation and reduced risk;
                and





·
            Is
                a “Trusted Advisor” - Initial consulting arrangement allows clients to
                ease into outsourcing relationship and reduces perceived risk
                profile.





In
      summary, BPOMS has competed successfully in the middle market with a value
      proposition that includes a comprehensive service offering, local sales
      resources, “high touch” support services and a competitive price
      package.




**Research
      and Development**




Our
      research and development is primarily related to our Web4 division that we
      acquired as part of our reverse merger with netGuru, Inc which is engaged in
      collaborative software technologies focused on:




·
            enhancing
                response times in application
                performance;




10




·
            incorporating
                and adding the viewing of new two-dimensional and three-dimensional
                file
                formats (including CAD formats);


·
            building
                open architecture and interfaces for easy migration and integration
                of
                legacy systems; and


·
            customizing
                and integrating our product into large systems integrator applications
                for
                OEM opportunities.




We
      offer
      a broad range of products and services designed to keep pace with the latest
      technological advances and address the increasingly sophisticated needs of
      our
      customers in all of our targeted markets. We continually focus on expanding
      our
      existing collaborative software product and service offerings with acquired,
      upgraded and new products and services, and actively seek opportunities to
      expand these products and service offerings through acquisitions and strategic
      alliances.




Our
      research and development group includes specialists in collaborative software
      and IT services. We have established research and development facilities in
      the
      U.S. and we contract with outside consultants in India and Russia. Our offshore
      research and development resources in India are used to provide technical
      support and customer services for our collaborative engineering clients
      worldwide, and to provide IT resources for our projects in the U.S. These
      projects require significant man-hours. Due to the availability of skilled
      technical resources in India at a fraction of the cost for comparable personnel
      in the U.S., these projects can be completed in a cost-effective manner. We
      believe our offshore technical resources provide a significant competitive
      advantage.




Research
      and development expenses are planned to be approximately $645,000 in 2007.
      The
      costs of these activities is not borne directly by our customers.




**Competition**




The
      BPO
      industry is highly competitive. Leading Tier 1 BPO service providers such as
      IBM, Accenture, EDS and ACS dominate the marketplace, competing for the very
      large contracts from Global 1000 enterprises and government agencies.
      Competition for BPO services provided to middle market enterprises - BPOMS’
target market - is highly fragmented, consisting of a few large companies
      providing a narrowly focused solution and thousands of small, mostly
      privately-held, companies offering a reduced subset of services and solutions.
      BPO providers in this middle market compete on the basis of quality of service
      and price for a selected BPO function. BPOMS believes that the depth and breadth
      of its BPO offerings differentiate it as able to offer greater customer benefits
      relative to the many companies who provide only a few BPO services or focus
      on a
      particular industry. In addition, BPOMS does not expect to encounter significant
      competition from Tier 1 providers, who have built their organizations to sell
      and service Global 1000 enterprises and are not responsive to, or cost
      competitive with middle market enterprises.




**Intellectual
      Property and Proprietary Rights**




We
      rely
      primarily on a combination of contract, copyright, trademark and trade secret
      laws, domain registration, license and confidentiality agreements and software
      security measures to protect our proprietary technology. We require all of
      our
      employees and other parties with access to our confidential information to
      execute agreements prohibiting the unauthorized use or disclosure of our
      technology. In addition, we periodically review our proprietary technology
      for
      patentability. Although we currently do not have any patents, we have a pending
      patent application for eReview. Our protective measures may be even less
      effective in the emerging Internet law field. Internet law is a relatively
      new
      and developing area of the law, and online contracting, privacy and liability
      issues, among others, are still being resolved. This lack of certainty is
      further exacerbated in India, where the use of the Internet is less evolved
      than
      in the U.S. In addition, effective copyright and trade secret protection may
      not
      be available in every jurisdiction where we distribute our products,
      particularly in foreign countries where the laws generally offer no protection
      or less protection than the laws of the U.S.




11




**Acquisitions**




In
      August
      2005, we acquired all of the equity interests of the ADAPSYS entities, providers
      of document management solutions located in Winnipeg, Canada. In February 2006,
      as previously planned, the sole legacy customer contract of ADAPSYS Transaction
      Processing (“ADP”) ended and, as a result, the ADP has had no ongoing operations
      since that time. All of our new document management business is being provided
      by ADM.




In
      November 2005, we purchased the assets of BPO Management Services CA, a provider
      of human resources outsourcing services based in San Francisco, California.




In
      December 2005, we purchased the Regina and Winnipeg, Canada-based assets of
      Deines Imaging, a provider of document imaging, microfilming and records
      management solutions from Critical Control, and consolidated this business
      within ADM.




In
      January 2006, we acquired all of the equity interests of Digica, Inc., a
      provider of information technology outsourcing services based in Branchburg,
      New
      Jersey.





In
      October 2006, we purchased all of the equity interests of Novus Imaging
      Solutions, a provider of document imaging, microfilming and records management
      solutions located in Winnipeg, Canada, whose business operations have been
      consolidated with the former Deines imaging business operations of
      ADM.




The
      stock
      purchase agreement pursuant to which we acquired Novus provides for the cash
      portion of the purchase price to be paid upon the earlier of March 1, 2007
      and
      the closing of a $1 million investment in the Company by persons other than
      our
      current shareholders. If the cash portion of the purchase price is not paid
      when
      due, then the sellers of Novus will have the right to rescind their sale of
      Novus to us and to purchase for $1.00 from us all of the assets and liabilities
      of ADAPSYS’ Deines business. On February 28, 2007, the sellers agreed to extend
      the due date of the cash payment to April 30, 2007.




On
      December 15, 2006 we completed our merger with netGuru, Inc. and have
      consolidated netGuru’s two business units, Web4, a provider of document
      management and enterprise collaboration technology, with our document management
      business headquartered in Winnipeg Canada, and netGuru Systems, a provider
      of
      contract computer programming staff and solutions to corporate enterprises,
      with
      our Information Technology business headquartered in Branchburg,
      NJ.




Our
      principal subsidiaries are the two ADAPSYS entities, Digica, Novus and Netguru
      Systems. We are headquartered in Anaheim, California, and have offices in San
      Francisco, California, Branchburg, New Jersey, Waltham, MA, Anaheim, CA and
      the
      Canadian cities of Winnipeg, Regina and Toronto. Our principal business address
      is 1290 N. Hancock, Suite 202, Anaheim, California 92807 and telephone number
      is
      (714) 974-2670.




**Employees**




As
      of
      December 31, 2006, we had 115 employees, of whom 112 were full time employees
      and three were part time employees, including 11 in product development and
      related support services, 18 in IT consulting, 10 in sales and marketing, 50
      in
      service and support, and 26 in finance and administration. As of that date,
      28
      of our employees were located in the U.S. and 88 were located in international
      locations.




12




**ITEM
                2.**
            **DESCRIPTION
                OF PROPERTY.**




We
      do not
      own real property and currently lease the following facilities:




·
            1,607
                square feet of office space in downtown San Francisco, California,
                which
                lease expires in 2010;




·
            7,642
                square feet of office space/data center facility in Branchburg, New
                Jersey, which lease expires in
                2011;




·
            8,961
                square feet of office space in Winnipeg, Canada, which lease expires
                in
                2007;




·
            10,316
                square feet of office space in Winnipeg, Canada, which lease expires
                in
                2007;




·
            2,958
                square feet of office space in Regina, Canada, which lease expires
                in
                2007;




·
            200
                square feet of office space in Toronto, Canada, which is leased on
                a
                month-to-month basis;




·
            3,500
                square feet of office space in Anaheim, CA which is leased on a
                month-to-month basis; and




·
            2,068
                square feet of office space in Waltham, MA which lease expires in
                2010.




We
      believe that our existing facilities are adequate to meet our current needs
      and
      that suitable additional or alternative space will be available in the future
      on
      commercially reasonable terms, although we have no assurance that future terms
      would be as favorable as our current terms.




**ITEM
                3.**
            **LEGAL
                PROCEEDINGS.**




***Morrison
      et al. v. Skytrack Systems, Inc. et al*** **.** (File
      No. CI 06-01-47005) was filed against BPOMS, ADAPSYS (as defined in Business
      of
      Issuer), and Adapsys Transaction Processing Inc. (formerly Skytrack systems,
      Inc.) and certain other affiliates of BPOMS on May 12, 2006 in the Court of
      Queen’s Bench of Manitoba in the City of Winnipeg by a total of 28 former
      employees of ADAPSYS L.P., a partnership of which ADAPSYS Transaction
      Processing, Inc. serves as general partner. As of the date of this disclosure
      we
      have reached settlements with 5 of the original 28 plaintiffs leaving 23
      plaintiffs (the “Remaining Plaintiffs”). The Remaining Plaintiffs allege that
      their employment was terminated in February of 2006 without either reasonable
      notice or compensation in lieu of reasonable notice, and that the defendants
      acted unfairly and improperly in effecting the termination. The Remaining
      Plaintiffs seek unspecified damages for severance payments and lost employment
      benefits allegedly arising out of the termination.




We
      have
      filed a statement of defense. On March 8, 2007, the Remaining Plaintiffs filed
      a
      Motion for summary judgment and a Motion to strike the statement of defense.
      We
      are contesting those Motions. In addition, in June 2006 we filed a Motion to
      have BPOMS removed as a defendant in this action on the basis that it was not
      the employer of the plaintiffs. That Motion was adjourned to enable the parties
      to negotiate a possible settlement. If this matter is not settled, we will
      proceed with that Motion. At the time of this annual report, no dates have
      been
      set for hearings on these Motions.




13




A
      separate action was filed on May 12, 2006 by two other former employees of
      ADP,
      but has since been settled.




We
      believe that ADP had a termination obligation to certain of these prior
      employees. We recorded the estimated liability as part of the allocation of
      the
      purchase price of the ADAPSYS entities in August 2005, and reduce the liability
      as we reach agreements with the Remaining Plaintiffs regarding the amount due.
      We believe that the balance at December 31, 2006 of the termination liability
      is
      sufficient to satisfy the remaining amounts due. However, due to uncertainty
      regarding the litigation process, the outcome of each of these matters is
      unpredictable and could be unfavorable in which event we could be required
      to
      pay damages and other expenses in amounts that could adversely affect our
      financial condition.




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





Our
      annual meeting of stockholders was held on November 18, 2006.





The
      following is a brief description of the matters voted on at the meeting and
      a
      statement of the number of votes cast for and against and the number of
      abstentions:





PROPOSAL
      ONE: Election of Amrit K. Das, Santanu K. Das, Benedict A. Eazzetta, D. Dean
      McCormick III, and Stanley W. Corbett as directors of the Company, all of whom
      were then serving as directors, by the holders of issued and outstanding shares
      of our common stock:





**For**
            
            **Abstain**
            
            **Withheld**Amrit
                K. Das
            
            
            17,780,802
            
            
            0
            
            
            41,819Santanu
                K. Das
            
            
            17,780,477
            
            
            0
            
            
            42,144Benedict
                A. Eazzetta
            
            
            17,780,727
            
            
            0
            
            
            41,894D.
                Dean McCormick III
            
            
            17,780,477
            
            
            0
            
            
            42,144Stanley
                W. Corbett
            
            
            17,779,727
            
            
            0
            
            
            42,894





PROPOSAL
      TWO: Approval of the issuance of shares of our common stock under the terms
      of
      an agreement and plan of merger dated as of August 29, 2006,:





For:
            12,576,548Abstain:
            2,950Against:
            192,764




PROPOSAL
      THREE: Approval of the sale and transfer of our interest in Research Engineers
      Ltd., and certain additional assets and liabilities, to Das Family Holdings,
      under the terms of a purchase agreement dated as of August 29,
      2006:





For:
            12,731,718Abstain:
            3,950Against:
            36,594





PROPOSAL
      FOUR: Approval of an amendment to our certificate of incorporation to change
      our
      name to BPO Management Services, Inc. from netGuru, Inc.:




14




For:
            12,586,566Abstain:
            156,552Against:
            29,144





PROPOSAL
      FIVE: Approval of an amendment to our Certificate of Incorporation to consummate
      a reverse stock split within a range to be determined by our board of directors
      from 1-for-4 to 1-for-30:





For:
            12,526,392Abstain:
            3,050Against:
            242,820





PROPOSAL
      SIX: Approval of an amendment to our Certificate of Incorporation to increase
      the total number of shares of preferred stock authorized for issuance from
      5,000,000 to


5,000,000
      plus the number of preferred shares needed to accommodate the creation of the
      three series of preferred stock for which the BPOMS preferred stock would be
      exchanged in the merger transaction:





For:
            12,519,246Abstain:
            2,950Against:
            250,066





As
      a
      result, all five directors were re-elected to the board of directors, and each
      of the proposals two, three, four, five and six was approved by stockholders.




On
      December 15, 2006, BPOMS merged with netGuru, Inc. in a reverse merger
      (“Merger”). Upon completion of the Merger all the elected directors resigned and
      the following persons were appointed in accordance with the terms of the Merger
      Agreement:




Patrick
                A Dolan
            Chairman
                of the Board, Chief Executive Officer, DirectorJames
                Cortens
            President,
                Secretary, DirectorDale
                Paisley
            Director,
                Chairman of the Audit Committee




In
      connection with the Merger on December 15, 2006, we issued an aggregate
      7,336,575 of our common shares to the holders of the common stock of Former
      BPOMS and 1,543,250 of our Series A preferred shares, 1,449,200 of our Series
      B
      preferred shares, and 916,666 of our Series C preferred shares to the holders
      of
      the respective series of preferred stock of Former BPOMS, in exchange for their
      shares of common and preferred stock, respectively, of Former BPOMS. For each
      share of the common stock of Former BPOMS, the holder thereof received 0.7246
      of
      our common shares. For each share of the Series A and Series B Convertible
      Preferred Stock of Former BPOMS, the holder thereof received 0.7246 of our
      preferred shares in the corresponding series. For each share of the Series
      C
      Non-Convertible Preferred Stock of Former BPOMS, the holder thereof received
      one
      of our Series C preferred shares.




In
      connection with the Merger we also issued to holders of warrants of Former
      BPOMS
      7-year warrants to issue an aggregate of 721,260 shares of our common stock
      with
      exercise prices ranging from $0.03 to $0.63 in exchange for their Former BPOMS
      warrants. The issuances were made pursuant to Section 4(2) of, and Regulation
      D
      and Regulation S under, the Securities Act of 1933, as amended, among other
      exemptions. We believe that exemption was available because (i) such issuances
      did not involve a public offering, (ii) the recipients are either accredited
      or
      are not U.S. persons and not acquiring the securities for the account or benefit
      of any U.S. person, and (iii) the securities were restricted in accordance
      with
      the requirements of the Securities Act of 1933 (including by issuing the
      certificates representing the securities with a restricted legend).




15




In
      the
      fourth quarter ended December 31, 2006, we granted to an officer a 7-year
      warrant exercisable for an aggregate of 33,333 shares of our common stock with
      an exercise price of $0.03, pursuant to a bridge loan agreement. In the fourth
      quarter ended December 31, 2006, we also granted to two employees stock options
      convertible into 434,760 shares of common stock at an exercise price of $0.03
      per share vesting over 2 to 4 years from the date of grant.




The
      issuances were made pursuant to Section 4(2) of, and Regulation D under, the
      Securities Act of 1933, as amended, among other exemptions. We believe that
      exemption was available because (i) such issuances did not involve a public
      offering, (ii) the recipients are accredited, and (iii)] the securities were
      restricted in accordance with the requirements of the Securities Act of 1933
      (including by issuing the certificates representing the securities with a
      restricted legend).




16


**PART
      II**




**ITEM
                5.**
            **MARKET
                FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
                ISSUER
                PURCHASES OF EQUITY
                SECURITIES.**




Our
      common stock trades under the ticker symbol “BPOM.” As of December 31, 2006,
      there were approximately 350 holders of record of our common stock. Within
      the
      holders of record of our common stock are brokerage firms that in turn, hold
      shares of stock for beneficial owners.





Prior
      to
      the Merger, our common stock was listed on the Nasdaq Capital Market under
      the
      trading symbol “NGRU.” The high and low closing sale prices of a share of our
      common stock, as reported by The Nasdaq Capital Market for each quarter of
      fiscal 2006 and 2005, are as follows:





**Fiscal
                2006 (1)**
            
            **Fiscal
                2005 (1)****High**
            
            **Low**
            
            **High**
            
            **Low**1stQuarter (January 1 - March 31)
            
            $
            0.33
            
            $
            0.26
            
            $
            0.37
            
            $
            0.272ndQuarter (April 1 - June 30)
            
            
            0.51
            
            
            0.17
            
            
            0.29
            
            
            0.243rdQuarter (July 1 - September 30)
            
            
            0.35
            
            
            0.14
            
            
            0.38
            
            
            0.214thQuarter (October 1 - December 31)
            
            
            2.60
            
            
            0.21
            
            
            0.20
            
            
            0.16









17




**ITEM
                6.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION**




**Forward-Looking
      Statements**




This
      report contains forward-looking statements within the meaning of Section 27A
      of
      the Securities Act and Section 21E of the Securities Exchange Act of 1934,
      as
      amended, (the “Exchange Act)”. We intend that those forward-looking statements
      be subject to the safe harbors created by those sections. These forward-looking
      statements generally include the plans and objectives of management for future
      operations, including plans and objectives relating to our future economic
      performance, and can generally be identified by the use of the words “believe,”
“intend,” “plan,” “expect,” “forecast,” “project,” “may,” “should,” “could,”
“seek,” “pro forma,” “goal,” “estimates,” “continues,” “anticipate” and similar
      words. The forward-looking statements and associated risks may include, relate
      to, or be qualified by other important factors, including, without
      limitation:




·
            Our
                ability to continue as a going
                concern;


·
            Our
                ability to obtain additional debt or equity financing to the extent
                needed
                for our continued operations or for planned expansion, particularly
                if we
                are unable to attain and maintain profitable operations in the future;


·
            Our
                ability to successfully implement our business plans and the possibility
                of strategic acquisitions;


·
            Our
                ability to attract and retain strategic partners and
                alliances;


·
            Our
                ability to hire and retain qualified
                personnel;


·
            The
                risks of uncertainty of protection of our intellectual
                property;


·
              Risks
                  associated with existing and future governmental regulation to
                  which we
                  are subject; and


·
                    Uncertainties
                          relating to economic conditions in the markets in which
                          we currently
                          operate and in which we intend to operate in the
                          future.
 These
              forward-looking statements necessarily depend upon assumptions and
              estimates
              that may prove to be incorrect. Although we believe that the assumptions
              and
              estimates reflected in the forward-looking statements are reasonable,
              we cannot
              guarantee that we will achieve our plans, intentions or expectations.
              The
              forward-looking statements involve known and unknown risks, uncertainties
              and
              other factors that may cause actual results to differ in significant
              ways from
              any future results expressed or implied by the forward-looking statements.
              We do
              not undertake to update, revise or correct any forward-looking
              statements.




Any
      of
      the factors described above or in the “Risk Factors” section of this report
      could cause our future financial results, including our net income (loss) or
      growth in net income (loss) to differ materially from prior results, which
      in
      turn could, among other things, cause the price of our common stock to fluctuate
      substantially.




**Overview**




We
      were
      incorporated in 1981 under the name Research Engineers, Inc., changed our name
      to netGuru, Inc. in 2000. On December 15, 2006, we acquired all of the
      outstanding common stock of privately held BPO Management Services, Inc.
      (“Former BPOMS”) in a reverse merger (“Merger”). Upon Merger, we adopted the
      accounting acquirer’s (BPOMS’) year end of December 31. We are a Delaware
      corporation.




18




We
      provide business process outsourcing (BPO) services to enterprises in the United
      States and Canada. “BPO” refers to the outsourcing of an entire business
      process, typically to reduce cost and/or to improve the performance of that
      process. Our objective is to provide a comprehensive suite of BPO services
      to
      support the back-office business requirements of middle-market enterprises
      throughout North America on an outsourced and/or recurring revenue basis.




Our
      primary business offerings are:




·
            Document
                and data management solutions, also known as enterprise content management
                or “ECM” including Finance and Accounting Outsourcing (“FAO”)
                services;




·
            Information
                technology services outsourcing or “ITO”;
                and




·
            Human
                resources outsourcing or “HRO”.




**Critical
      Accounting Policies**




We
      have
      identified the following as accounting policies that are the most critical
      to
      aid in understanding and evaluating our financial results:





·
            revenue
                recognition;


·
            allowance
                for doubtful accounts receivable; and


·
            impairment
                of long-lived assets, including
                goodwill.




*Revenue
      Recognition*




We
      derive
      revenues from:





·
            Enterprise
                content management services, including collaborative software products
                and
                services;


·
            IT
                outsourcing services; and


·
            Human
                resources outsourcing services.




We
      recognize revenues when the following criteria are met:





·
            Persuasive
                evidence of an arrangement, such as agreements, purchase orders or
                written
                or online requests, exists;


·
            Delivery
                has been completed and no significant obligations
                remain;


·
            Our
                price to the buyer is fixed or determinable;
                and


·
            Collection
                is reasonably assured.




Persuasive
      Evidence of an Arrangement




We
      document all terms of an arrangement in a written contract signed by the
      customer prior to recognizing revenue.




Delivery
      Has Occurred or Services Have Been Performed




We
      perform all services or deliver all products prior to recognizing revenue.
      Monthly services are considered to be performed ratably over the term of the
      arrangement. Professional consulting services are considered to be performed
      when the services are complete. Equipment is considered delivered upon delivery
      to a customer’s designated location.




19




The
      Fee for the Arrangement is Fixed or Determinable




Prior
      to
      recognizing revenue, a customer’s fee is either fixed or determinable under the
      terms of the written contract. Fees for most monthly services, professional
      consulting services, and equipment sales are fixed under the terms of the
      written contract. Fees for certain services are variable based on an objectively
      determinable factor such as usage. Those factors are included in the written
      contract such that the customer’s fee is determinable. The customer’s fee is
      negotiated at the outset of the arrangement.




Collectibility
      is Reasonably Assured




We
      determine that collectibility is reasonably assured prior to recognizing
      revenue. We assess collectibility on a customer by customer basis based on
      criteria outlined by management. New customers are subject to a credit review
      process, which evaluates the customer’s financial position and ultimately its
      ability to pay. We do not enter into arrangements unless collectibility is
      reasonably assured at the outset. Existing customers are subject to ongoing
      credit evaluations based on payment history and other factors. If it is
      determined during the arrangement that collectibility is not reasonably assured,
      revenue will be recognized on a cash basis.




We
      recognize revenues from software that we customize to fit a customer’s
      requirements based on satisfactory completion of pre-determined milestones
      (evidenced by written acceptance from the customer) and delivery of the product
      to the customer, provided no significant obligations remain and collection
      of
      the resulting receivable is reasonably assured. Customers may choose to purchase
      ongoing maintenance contracts that include telephone, e-mail and other methods
      of support, and unspecified upgrades on a when-and-if available basis. Revenue
      from the maintenance contracts is deferred and recognized ratably over the
      life
      of the contract, usually twelve months.




In
      1997,
      the Accounting Standards Executive Committee (“AcSec”) of the American Institute
      of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”)
      97-2, “Software Revenue Recognition.” SOP 97-2 distinguishes between significant
      and insignificant vendor obligations as a basis for recording revenue and
      requires that each element of a software licensing arrangement be separately
      identified and accounted for based on relative fair values of each element.
      We
      determine the fair value of each element in multi-element transactions based
      on
      vendor-specific objective evidence (“VSOE”). VSOE for each element is based on
      the price charged when the same element is sold separately.




In
      1998,
      the AICPA issued SOP 98-9, Modification of SOP 97-2, “Software Revenue
      Recognition, With Respect to Certain Transactions,” which modified SOP 97-2 to
      allow for use of the residual method of revenue recognition if certain criteria
      are met. If evidence of fair value of all undelivered elements exists but
      evidence does not exist for one or more delivered elements, then we recognize
      revenue using the residual method. Under the residual method, the fair value
      of
      the undelivered elements is deferred, and the remaining portion of the
      transaction fee is recognized as revenue.




We
      recognize revenues from our IT services primarily on a time and materials basis,
      with time at a marked-up rate and materials and other reasonable expenses at
      cost, as we perform IT services. Certain IT services contracts may be fixed
      price contracts where we would measure progress toward completion by mutually
      agreed upon pre-determined milestones and recognize revenue upon reaching those
      milestones. Our fixed price IT contracts typically are for a short duration
      of
      one to nine months. We did not have any uncompleted fixed price IT contracts
      at
      December 31, 2006 **.**




20




*Allowance
      for Doubtful Accounts Receivable*




We
      sell
      to our customers on credit and grant credit to those who are deemed credit
      worthy based on our analysis of their credit history. We review our accounts
      receivable balances and the collectibility of these balances on a periodic
      basis. Based on our analysis of the length of time that the balances have been
      outstanding, the pattern of customer payments, our understanding of the general
      business conditions of our customers and our communications with our customers,
      we estimate the recoverability of these balances. When recoverability is
      uncertain, we record bad debt expense and increase the allowance for accounts
      receivable by an amount equal to the amount estimated to be unrecoverable.
      If
      the historical data we use to calculate the allowance provided for doubtful
      accounts does not reflect our future ability to collect outstanding receivables,
      additional provisions for doubtful accounts may be needed and our future results
      of operations could be materially affected.




*Impairment
      of Long-Lived Assets Including Goodwill*




We
      account for goodwill and intangible assets according to the provisions of SFAS
      No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that
      goodwill and intangible assets with indefinite useful lives no longer be
      amortized, but instead be tested at least annually for impairment. We consider
      the following operating segments - collaborative software products and services
      as well as IT services - to be our reporting units for purposes of testing
      for
      impairment.




We
      use a
      two-step test to assess potential impairment to goodwill. In the first step,
      the
      fair value of each reporting unit is compared to its carrying value including
      goodwill. If the fair value exceeds the carrying value, then goodwill is not
      considered impaired, and we do not need to proceed to the second step. If the
      carrying value of a reporting unit exceeds its fair value, then we have to
      determine and compare the implied fair value of the reporting unit’s goodwill to
      the carrying value of its goodwill. If the carrying value of the reporting
      unit’s goodwill exceeds its implied fair value, then we have to record an
      impairment loss in the amount of the excess.




The
      implied fair value of goodwill is determined by allocating the fair value of
      the
      reporting unit to all of the assets (recognized and unrecognized) and
      liabilities of the reporting unit in a manner similar to a purchase price
      allocation, in accordance with SFAS No. 141, “Business Combinations.” The
      residual fair value after this allocation is the implied fair value of the
      reporting unit goodwill.




We
      are
      required to perform reviews for impairment annually, or more frequently when
      events occur or circumstances change that would more likely than not reduce
      the
      fair value of the net carrying amount. The evaluation of goodwill impairment
      involves assumptions about the fair values of assets and liabilities of each
      reporting unit. If these assumptions are materially different from actual
      outcomes, the carrying value of goodwill will be incorrect. In addition, our
      results of operations could be materially affected by the write-down of the
      carrying amount of goodwill to its estimated fair value.




We
      assessed the fair values of our three reporting units by considering their
      projected cash flows, using risk-adjusted discount rates and other valuation
      techniques and concluded that as of December 31, 2006, there was no impairment
      to goodwill. As of December 31, 2006, goodwill balance was 3,532,955.




21




Goodwill
      activity was as follows:




At
                December 31, 2005
            
            $
            826,071Additions
                from acquisitions
            
            
            2,787,005Exchange
                differences
            
            
            (80,120
            )At
                December 31, 2006
            
            $
            3,532,955




**Consolidated
      Results of Operations**




The
      Former BPOMS began operations in July 26, 2005 and merged with netGuru, Inc.
      on
      December 15, 2006 in a reverse merger (“Merger”). For accounting purposes, the
      acquisition has been treated as a recapitalization of Former BPOMS with Former
      BPOMS as the acquirer. The historical financial statements prior to December
      15,
      2006, are those of the Former BPOMS.




The
      following entities of BPOMS are included in the consolidated results of
      operations from the date of their respective acquisitions:




**Acquisition
                Date**ADAPSYS
                Document Management LP (“ADM”)
            July
                29, 2005ADAPSYS
                LP (“ADP”)
            July
                29, 2005Digica,
                Inc. (“Digica”)
            January
                1, 2006Novus
                Imaging Solutions, Inc. (“Novus”)
            September
                30,2006netGuru,
                Inc. (“netGuru”)
            December
                15, 2006




Since
      the
      Former BPOMS began operations on July 26, 2005, pro forma information giving
      effect to the acquisition, as if the acquisition took place January 1, 2005,
      is
      not practicable and therefore not presented. All prior period share and per
      share data have been revised giving effect to the Merger.




The
      reporting period of January 1, 2006 to December 31, 2006 is referred to as
      “fiscal 2006” and the reporting period of July 26, 2005 to December 31, 2005 is
      referred to as the “Prior Period 2005” in the discussion that
      follows:




22




**Net
      Revenues**




The
      following table presents our net revenues by operating segment:





**Year
                Ended December 31**
            
            **July
                26, 2005 to December 31,****2006**
            
            **2005****Net
                revenues**Enterprise
                Content Management
            
            $
            2,713,769
            
            $
            2,321,834%
                of total net revenues
            
            
            57.6
            %
            
            98.9
            %IT
                Outsourcing Services
            
            
            1,833,052
            
            
            -%
                of total net revenues
            
            
            38.9
            %
            
            -Human
                Resources Outsourcing Services
            
            $
            164,318
            
            $
            25,700%
                of total net revenues
            
            
            3.5
            %
            
            1.1
            %****Total
                net revenues
            
            $
            4,711,139
            
            $
            2,347,534




Total
      net
      revenues increased by $2,363,605 (100.7%) to $4,711,139 in fiscal 2006 from
      $2,347,534 in the Prior Period 2005. Our total net revenues primarily consisted
      of net revenues from (1) enterprise content management (2) IT Outsourcing
      services and (3) human resource outsourcing services.




*Enterprise
      Content Management (“ECM”)*




Net
      revenues from ECM products and services in fiscal 2006 increased by $391,935
      or
      16.9% to $2,713,769 from $2,321,834 in the Prior Period 2005. The increase
      in
      net revenues in fiscal 2006 was primarily due to the comparison of a full year
      of results of operations in fiscal 2006 for ADM compared to approximately five
      months’ results of operations for ADP and ADM in the Prior Period 2005. This
      increase in revenues was offset by the absence, in fiscal 2006, of ADP’s
      revenues recognized from one large contract in Prior Period 2005, which
      terminated in February 2006. Net revenues in the ECM business segment in fiscal
      2006 also includes net revenues for the three months ended December 31, 2006
      from Novus and net revenuess for 15 days from netGuru. The ECM segment includes
      our collaborative software products and services. The majority of our
      collaborative software revenues is generated from service-oriented projects
      where the revenue is recognized only upon completion of the entire project.
      The
      timing of completion and recognition of revenues from various size projects
      creates variability in our collaborative software net revenues between quarters
      and fiscal years.




*IT
      Outsourcing Services (“ITO”)*




Net
      revenues from ITO increased 100% to $1,833,052 in fiscal 2006 from none in
      the
      Prior Period 2005. The ITO segment includes a full year of revenue from our
      IT
      operations in New Jersey and 15 days’ revenue from our IT operations in
      Massachusetts in fiscal 2006.




*Human
      Resource Outsourcing Services (“HRO”)*




Net
      revenues from HRO increased 539.4% to $164,318 in fiscal 2006 from $25,700
      in
      the Prior Period 2005. The HRO segment includes a full year of revenue from
      our
      San Francisco, California operations in fiscal 2006 compared to five months’
revenue in the Prior Period 2005.




23




**Operating
      expenses**




The
      following table presents our operating expenses and the percentage of total
      net
      revenues:




**Year
                Ended December 31,****2006**
            
            **2005****Operating
                expenses**Cost
                of services
            
            $
            1,523,983
            
            $
            887,456%
                of total net revenues
            
            
            32.3
            %
            
            37.8
            %Selling,
                general and administrative expenses
            
            $
            5,737,334
            
            $
            1,230,011%
                of total net revenues
            
            
            121.8
            %
            
            52.4
            %Research
                and development expenses
            
            
            19,491
            
            
            -%
                of total net revenues
            
            
            0.4
            %
            
            -
            %Share-based
                compensation expense
            
            
            115,694
            
            
            24,415%
                of total net revenues
            
            
            2.5
            %
            
            1.0
            %Change
                in estimated severance liability
            
            
            (223,726
            )
            
            1,014,281%
                of total net revenues
            
            
            (4.7
            )%
            
            43.2
            %Total
                operating expenses
            
            $
            7,172,777
            
            $
            3,156,163%
                of total net revenues
            
            
            152.3
            %
            
            134.4
            %




*Selling,
      general and administrative expenses*




Selling,
      general and administrative (“SG&A”) expenses increased by $4,507,324
      (366.4%) to $5,737,335 in fiscal 2006 from $1,230,011 in Prior Period 2005
      primarily due a full year of operations for the ADAPSYS entities in fiscal
      2006
      compared to approximately five months’ operations in Prior Period 2005.
      Additionally, the SG&A expenses in fiscal 2006 included those of a full year
      of SG&A expenses for Digica, three months’ SG&A expenses for Novus and
      15 days’ SG&A expenses for the netGuru entities that were acquired in fiscal
      2006.





*Research
      and development expenses*




Research
      and development (“R&D”) expenses consist primarily of software developers’
wages. Fiscal 2006 results include only 15 days of R&D expenses.




*Share-based
      compensation expense*




We
      recorded share-based compensation expense of $115,694 in fiscal 2006 compared
      to
      $24,415 in the Prior Period 2005. Share-based compensation expense in fiscal
      2006 included $11,975 in convertible preferred A shares issued as compensation
      to officers.




*Change
      in estimated severance liability*




In
      Prior
      Period 2005 we recorded $1,014,281 in estimated severance liability related
      to
      certain terminated employees of ADP. At December 31, 2006, we reduced the
      estimated severance liability by $223,726 as a result of our periodic review
      in
      December 2006 that indicated the actual and anticipated costs related to the
      employee severance liability are less than previously anticipated. As a result,
      we revised the estimate of employee severance liability. The effect of this
      change in estimate was to reduce the employee severance liability by $223,726
      and increase 2006 net income by $223,726.




24




*Operating
      Loss by Segment*




Consolidated
      operating loss in the ECM segment increased to $610,858 from $464,915 due to
      the
      additional expenses in fiscal 2006 as a result of a full year of operations
      compared to five months’ operations in Prior Period 2005. The increase in
      operating loss in the ITO segment to $355,393 in fiscal 2006 from none in Prior
      Period 2005 is primarily due to the operating loss from Digica which was
      purchased by BPOMS in 2006. The increase in operating expenses in HRO segment
      in
      fiscal 2006 to $777,336 from $233,016 is due to a full year of operations in
      fiscal 2006 compared to one month of operations in Prior Period 2005. Corporate
      expenses increased to $678,358 in fiscal 2006 from $112,698 in Prior Period
      2005
      primarily due to increased professional fees. The following table details
      operating loss by segment:




**Year
                Ended December 31, 2006**
            ****
            **%
                of Total**
            ****
            **July
                26, 2005 to December 31, 2005**
            ****
            **%
                of Total****Operating
                loss**ECM
            
            $
            (650,551
            )
            
            26.4
            %
            $
            (462,915
            )
            
            57.2
            %ITO
            
            
            (355,393
            )
            
            14.4
            %
            
            -
            
            
            -HRO
            
            
            (777,336
            )
            
            31.6
            %
            
            (233,016
            )
            
            28.8
            %Corporate
            
            
            (678,358
            )
            
            27.6
            %
            
            (112,698
            )
            
            13.9
            %Consolidated
            
            $
            (2,421,945
            )
            
            100.0
            %
            $
            (808,629
            )
            
            100.0
            %




**Other
      expense (income)**




The
      following table presents our other expense (income) and its percentage of total
      net revenues:




**Year
                Ended**
              **December
                31, 2006**
            
            **July
                26, 2005 to**
              **December
                31, 2005****Other
                expense (income)**Interest
                expense, net
            
            $
            166,174
            
            $
            (7,210
            )%
                of total net revenues
            
            
            3.5
            %
            
            (0.3
            )%Other
                income
            
            $
            (10,732
            )
            $
            (899
            )%
                of total net revenues
            
            
            (0.2
            )%
            
            (0.0
            )%Total
                other expense
            
            $
            155,442
            
            $
            (8,109
            )%
                of total net revenues
            
            
            3.3
            %
            
            (0.3
            )%




25




*Interest
      expense, net*




Net
      interest expense increased by $173,384 (2,404.8%) in fiscal 2006 to $166,174
      from net interest income of $7,210 in Prior Period 2005 primarily due to $73,879
      in loan origination fees and $19,541in interest expense on bridge loans. In
      addition, $38,572 of interest expense in fiscal 2006 related to the amortization
      of the value of warrants issued pursuant to bridge loans. In 2007, in addition
      to interest on future borrowing, we anticipate interest expense will increase
      due to the interest on capital leases.




*Income
      taxes*




In
      fiscal
      2006 and in Prior Period 2005, we recorded no income tax expense since we had
      net losses from operations.




**Liquidity
      and Capital Resources**




Our
      principal sources of liquidity at December 31, 2006 consisted of $706,197 in
      cash and cash equivalents. Cash and cash equivalents decreased by $525,972
      during fiscal 2006. We incurred net losses from operations of $2,461,638 and
      $808,629 and used cash in operations of $1,958,731 and $49,536 in 2006 and
      Prior
      Period 2005, respectively.




The
      primary reasons for cash used in operations during fiscal 2006 were net loss
      of
      $2,617,080 that included non-cash charges related to recognition of cost related
      to the contract acquired from ADP of $245,265, depreciation and amortization
      expense of $160,720, share-based compensation expense of $115,694, bad debt
      expense of $109,005, and amortization of loan discount of $38,572. In addition,
      the timing differences in the payment of our current liabilities and collection
      of our current assets also contributed to the cash used in
      operations.





The
      primary reason for cash used in operations during the Prior Period 2005 was
      net
      loss of $800,520 which included $719,243 of costs related to the anticipated
      termination in February 2006 of one large contract acquired from the ADP in
      2005.





Net
      cash
      provided by investing activities in fiscal 2006 was $2,324,826, primarily due
      to
      cash acquired from Digica, Novus and netGuru acquisitions, net of $400,000
      in
      cash payments. In Prior Period 2005, net cash used in investing activities
      was
      $215,199, primarily due to the acquisition of the ADAPSYS entities, net of
      cash
      acquired.





Net
      cash
      used in financing activities during fiscal 2006 was $896,050, which primarily
      resulted from a cash distribution to our stockholders in the amount of
      $3,502,098 offset by cash proceeds from bridge loans of $2,340,000 and cash
      proceeds o f $287,112 from a bank line. In the Prior Period 2005, cash provided
      by financing activities consisted primarily of the initial investment of
      $1,500,000 by Messrs. Dolan and Cortens for which we issued preferred and common
      shares.




We
      have
      funded our operations primarily from the private placement of shares of our
      common stock and preferred stock and through the founders bridge loan facility
      established in August 2006. During the next twelve months, we anticipate raising
      capital necessary to grow our business and complete additional acquisitions
      by
      issuing our equity securities and/or debt in one or more private transactions.
      We have retained C. E. Unterberg, Towbin as our investment banker to lead this
      effort.




In
      the
      event that such transaction(s) do not take place at all and/or are unreasonably
      delayed, our future capital requirements will depend upon many factors. These
      factors include but are not limited to sales and marketing efforts, the
      development of new products and services, possible future corporate mergers
      or
      strategic acquisitions or divestitures, the progress of research and development
      efforts, and the status of competitive products and services. If our anticipated
      financing transactions do not take place at all and/or are unreasonably delayed,
      we may not have adequate funds to extinguish all our remaining liabilities
      and
      fund our current operations going forward.




26




Although
      we expect to meet our operating capital needs by additional private equity
      and/or debt transactions, additional draw down on the founders’ bridge loan
      facility, and current economic resources, there can be no assurance that funds
      required will be available on terms acceptable to us, if at all. If we are
      unable to raise sufficient funds on acceptable terms, we may be not be able
      to
      complete our business plan. If equity financing is available to us on acceptable
      terms, it could result in additional dilution to our existing
      stockholders.




This
      uncertainty, recurring losses from operations, limited cash resources, and
      an
      accumulated deficit, among other factors, raised doubt about our ability to
      continue as a going concern and led our independent registered public accounting
      firm to include an explanatory paragraph related to our ability to continue
      as a
      going concern in their report that accompanies these financial statements.
      Reports of independent auditors questioning a company's ability to continue
      as a
      going concern generally are viewed unfavorably by analysts and investors. This
      report may make it difficult for us to raise additional debt or equity financing
      to the extent needed for our continued operations or for planned expansion,
      particularly if we are unable to attain and maintain profitable operations
      in
      the future. Consequently, future losses may adversely affect our business,
      prospects, financial condition, results of operations and cash flows.




The
      following table summarizes our contractual obligations and commercial
      commitments at December 31, 2006:





**Payments
                Due by Period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than**
              **1
                year**
            
            **1-3
                years**
            
            **4-5
                years**
            
            **After**
              **5
                years**Long-Term
                Debt
            
            $
            372,047
            
            $
            325,645
            
            $
            31,916
            
            $
            14,486
            
            $
            -Capital
                Lease Obligations *
            
            
            185,291
            
            
            172,767
            
            
            12,524
            
            
            -
            
            
            -Operating
                Leases
            
            
            1,169,670
            
            
            413,951
            
            
            515,933
            
            
            238,411
            
            
            1,375Novus
                purchase price payable
            
            
            1,157,052
            
            
            977,473
            
            
            179,579
            
            
            -
            
            
            -Bridge
                loan payable**
            
            
            800,000
            
            
            800,000
            
            
            -
            
            
            -
            
            
            -Short-term
                loan payable
            
            
            125,000
            
            
            125,000
            
            
            -
            
            
            -
            
            
            -Total
                Contractual Cash Obligations
            
            $
            3,809,060
            
            $
            2,814,836
            
            $
            739,952
            
            $
            252,897
            
            $
            1,375





*
      Represents future minimum lease payments excluding deductions for imputed
      interest of $3,987.


**
      Excludes debt discount of $115,464 related to value of warrants
      issued.





27




**Impact
      of Recently Issued Accounting Standards**




***AccountingChanges
      and Error Correctionss***




In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
an amendment to Accounting Principles Bulletin Opinion (“APB”) No. 20,
“Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim
      Financial Statements.” Though SFAS No. 154 carries forward the guidance in APB
      No.20 and SFAS No.3 with respect to accounting for changes in estimates, changes
      in reporting entity, and the correction of errors, SFAS No. 154 establishes
      new
      standards on accounting for changes in accounting principles, whereby all such
      changes must be accounted for by retrospective application to the financial
      statements of prior periods unless it is impracticable to do so. SFAS No. 154
      is
      effective for accounting changes and error corrections made in fiscal years
      beginning after December 15, 2005, with early adoption permitted for changes
      and
      corrections made in years beginning after May 2005. The Company implemented
      SFAS
      No. 154 in its fiscal year beginning January 1, 2006. SFAS No. 156 did not
      have
      a material impact on the Company’s financial position, results of operations or
      cash flows.




**Accounting
      for Certain Hybrid Financial Instruments**




In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments,” which amends SFAS No. 133, “Accounting for Derivatives
      Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers
      and Servicing of Financial Assets and Extinguishment of Liabilities.” SFAS No.
      155 amends SFAS No. 133 to narrow the scope exception for interest-only and
      principal-only strips on debt instruments to include only such strips
      representing rights to receive a specified portion of the contractual interest
      or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow
      qualifying special-purpose entities to hold a passive derivative financial
      instrument pertaining to beneficial interests that itself is a derivative
      instrument. SFAS No. 155 is effective for the Company beginning January 1,
      2007.
      The Company is currently evaluating the impact this new Standard but believes
      that it will not have a material impact on the Company’s financial position,
      results of operations, or cash flows.




**Accounting
      for Servicing of Financial Assets**




In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets,” which provides an approach to simplify efforts to obtain hedge-like
      (offset) accounting. This Statement amends FASB Statement No. 140, “Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities,” with respect to the accounting for separately recognized servicing
      assets and servicing liabilities. The Statement (1) requires an entity to
      recognize a servicing asset or servicing liability each time it undertakes
      an
      obligation to service a financial asset by entering into a servicing contract
      in
      certain situations; (2) requires that a separately recognized servicing asset
      or
      servicing liability be initially measured at fair value, if practicable; (3)
      permits an entity to choose either the amortization method or the fair value
      method for subsequent measurement for each class of separately recognized
      servicing assets or servicing liabilities; (4) permits at initial adoption
      a
      one-time reclassification of available-for-sale securities to trading securities
      by an entity with recognized servicing rights, provided the securities
      reclassified offset the entity’s exposure to changes in the fair value of the
      servicing assets or liabilities; and (5) requires separate presentation of
      servicing assets and servicing liabilities subsequently measured at fair value
      in the balance sheet and additional disclosures for all separately recognized
      servicing assets and servicing liabilities. SFAS No. 156 also describes the
      manner in which it should be initially applied. SFAS No. 156 is effective for
      all separately recognized servicing assets and liabilities as of the beginning
      of an entity’s fiscal years beginning after September 15, 2006, and is effective
      for the Company beginning January 1, 2007. The Company does not believe that
      SFAS No. 156 will have a material impact on its financial position, results
      of
      operations or cash flows.




28




**Accounting
      for Uncertainty in Income Taxes**




In
      June
      2006, the FASB issued Interpretation (“FIN”) 48, “Accounting for Uncertainty in
      Income Taxes - an interpretation of FASB Statement No. 109,” which clarifies the
      accounting for uncertainty in income taxes recognized in an enterprise’s
      financial statements in accordance with SFAS No. 109, “Accounting for Income
      Taxes.” The interpretation prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return. FIN 48 requires
      recognition of tax benefits that satisfy a greater than 50% probability
      threshold. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure, and
      transition. FIN 48 is effective for the Company beginning January 1, 2007.
      The
      Company is currently assessing the potential impact that adoption of FIN 48
      will
      have on its financial position, results of operations or cash
      flows.




**Fair
      Value Measurements**




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. SFAS No. 157 does not require any new fair value
      measurements, but provides guidance on how to measure fair value by providing
      a
      fair value hierarchy used to classify the source of the information. This
      statement is effective for the Company beginning January 1, 2008. The Company
      is
      currently assessing the potential impact that adoption of SFAS No. 157 will
      have
      on its financial position, results of operations or cash flows.




**Effects
      of Prior Year Misstatements When Quantifying Current Year
      Misstatements**




In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements
      when Quantifying Current Year Misstatements.” SAB No. 108 requires analysis of
      misstatements using both an income statement (rollover) approach and a balance
      sheet (iron curtain) approach in assessing materiality and provides for a
      one-time cumulative effect transition adjustment. SAB No. 108 is effective
      for
      our fiscal year 2007 annual financial statements. The Company is currently
      assessing the potential impact that adoption of SAB No. 108 will have on its
      financial position, results of operations or cash flows.




**Accounting
      for Defined Benefit Pension and Other Postretirment Plans**




In
      September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined
      Benefit Pension and Other Postretirement Plans - an amendment of SFAS No. 87,
      88, 106, and 132(R).” SFAS No. 158 requires the full recognition, as an asset or
      liability, of the overfunded or underfunded status of a company-sponsored
      postretirement benefit plan. SFAS No. 158 will be effective for the Company
      beginning January 1, 2007. The Company is currently assessing the potential
      impact that adoption of SFAS No. 158 will have on its financial position,
      results of operations or cash flows.




29




***Fair
      Value Option for Financial Assets and Financial
      Liabilities***




In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities." Under the provisions of SFAS 159,
      Companies may choose to account for eligible financial instruments, warranties
      and insurance contracts at fair value on a contract-by-contract basis. Changes
      in fair value will be recognized in earnings each reporting period. SFAS 159
      is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The Company
      is
      required to and plans to adopt the provisions of SFAS 159 beginning in the
      first
      quarter of 2008. The Company is currently assessing the impact of the adoption
      of SFAS 159.




**Risk
      Factors**




An
      investment in shares of our common stock involves a high degree of risk. In
      addition to the other information contained or incorporated by reference in
      this
      annual report on Form 10-KSB, you should carefully consider the following risk
      factors before deciding to invest or maintain an investment in shares of our
      common stock. This annual report contains or incorporates by reference
      forward-looking statements that involve risks and uncertainties. Our actual
      results could differ materially from those anticipated in these forward-looking
      statements as a result of certain factors, including those set forth in the
      following risk factors and elsewhere in this annual report. If any of the
      following risks actually occurs, it is likely that our business, financial
      condition and operating results would be harmed. As a result, the trading price
      of our common stock could decline, and you could lose part or all of your
      investment.




We
      do not
      have a policy of updating or revising forward-looking statements, and silence
      by
      our management over time should not be assumed to mean that actual events are
      bearing out as estimated in the forward-looking statements.




***We
      have limited cash resources available to continue our operations and complete
      the planned acquisitions necessary to execute our business plan. Accordingly,
      if
      we are unable to raise needed capital in the future, we may be unable to fund
      operating cash shortfalls.***




We
      have
      limited cash resources, and these resources may quickly diminish in the future.
      Our future capital requirements will depend upon many factors, including sales
      and marketing efforts, the development of new products and services and possible
      future strategic acquisitions. As of December 31, 2006, we had negative
      working capital of $3,433,826 and an accumulated deficit of $3,417,600. As
      of
      that date, we had $706,197 in cash and cash equivalents and $743,114 in accounts
      receivable, net of allowance for doubtful accounts.




We
      recorded a net operating loss of $2,461,638 and used $1,958,731 of cash in
      operating activities during fiscal 2006. There is no assurance that we will
      be
      able to generate sufficient operating cash in future quarters. We believe that
      current and future available capital resources will not be adequate to fund
      our
      operations for the next twelve months. We do not have any debt instruments
      in
      place that we could use for future borrowings. We are currently seeking
      additional capital in order to continue our operations, complete our planned
      acquisitions and execute our business plan. It may be difficult for us to obtain
      additional equity or debt financing. Any terms of such a financing could be
      dilutive and unfavorable to our stockholders.




Alternatively,
      our inability to obtain any needed financing could result in a significant
      loss
      of ownership and/or control of our proprietary technology and other important
      assets and could also hinder our ability to fund our continued operations and
      our product development efforts that historically have contributed significantly
      to our competitiveness.




30




***We
      have a recent history of losses and an accumulated deficit that may continue
      in
      the future if we are unable to complete our planned acquisitions and that may
      adversely affect our business, prospects, financial condition, results of
      operations, cash flows and stock price.***




We
      have
      incurred net losses since our inception in July 26, 2005. Our accumulated
      deficit through December 31, 2006 was $3,417,600, and as of that date we had
      a
      total shareholders’ equity of $1,601,054.




Our
      recurring losses from operations, our limited cash resources and negative cash
      flow from operations and our accumulated deficit, among other factors, raised
      doubt about our ability to continue as a going concern and led our independent
      registered public accounting firm to include an explanatory paragraph related
      to
      our ability to continue as a going concern in their report for the year ended
      December 31, 2006. Reports of independent auditors questioning a company’s
      ability to continue as a going concern generally are viewed unfavorably by
      analysts and investors. This may make it difficult for us to raise additional
      debt or equity financing necessary to complete our planned acquisitions and
      execute our business plan, particularly if we are unable to attain and maintain
      profitable operations in the future. Consequently, future losses may adversely
      affect our business, prospects, financial condition, results of operations
      and
      cash flows. Investors should review the report of our independent registered
      public accounting firm and our consolidated financial statements before making
      a
      decision to invest or maintain an investment in BPO Management Services,
      Inc.





***Any
      business combination or acquisition will likely be dilutive to our existing
      stockholders.***




Any
      business combination involving BPOMS will most likely require our issuance
      of
      additional shares of common and/or preferred stock. These issuances could result
      in a change of control or substantial dilution to our existing stockholders,
      with or without stockholder review or approval.





***The
      market price for our common stock may become more volatile after an acquisition
      transaction or as a result of various other factors.***




We
      cannot
      predict the final terms associated with the equity or debt transactions which
      we
      are currently seeking in order to complete our planned acquisitions and execute
      our business plan, or how these terms, if any financing is obtained, might
      be
      viewed by the marketplace. Accordingly, such financing activities may add to
      the
      volatility of our stock price. The price of BPOMS stock could further decline
      due to the impact of any of the following factors:




·
            failure
                to meet sales goals or operating
                budget;




·
            decline
                in demand for our common stock;




·
            revenues
                and operating results failing to meet expectations of securities
                analysts
                or investors in any quarter;




·
            downward
                revisions in operating performance estimates or changes in general
                market
                conditions;




·
            technological
                innovations by competitors or in competing
                technologies;




·
            investor
                perception of our industry or prospects;
                or




·
            general
                economic trends.




31




Market
      fluctuations are often unrelated to operating performance and therefore are
      beyond our control.




***Our
      success in our continuing operatings depends, in part, on our ability to retain
      our current management team.***




Our
      founders, Chairman and Chief Executive Officer, Patrick A. Dolan, and our
      Preisdent and Secretary, James Cortens are an integral part of our operations
      and have primarily been the source of our funding since our inception. Their
      experience, expertise, industry knowledge and historical company knowledge
      would
      be extremely difficult to replace if we were to lose the services of either
      of
      them. The precise impact of the loss of services of either of them is extremely
      difficult to predict, but would likely result in, at a minimum, significant
      costs to recruit, hire and retain a successor and could impair operating results
      while the successor was being recruited and transitioning into the position.




***The
      markets in which we currently compete will continue to be highly competitive,
      which has resulted in significant price competition and may result in reduced
      revenues or loss of market share.***




The
      BPO
      services we offer are each highly competitive. The market for these services
      is
      characterized by an increasing number of entrants due to low start-up costs.
      Some of our competitors and potential competitors have larger technical staffs,
      more established and larger marketing and sales organizations and significantly
      greater financial resources than those we have. Our competitors may develop
      products and services that are superior to ours or that achieve greater market
      acceptance. Our future success will depend significantly upon our ability to
      increase our share of our target markets and to sell additional products,
      product enhancements and services to our customers. We are experiencing pricing
      pressures as we work to expand our software products and services market share.
      As a result of these pricing pressures, we may experience declines in our
      revenues, gross margins and market share.




***Our
      operating results may be adversely affected by exchange rate
      fluctuations.***




We
      have
      established and acquired international subsidiaries that prepare their balance
      sheets in the relevant foreign currency. In order to be included in our
      consolidated financial statements, these balance sheets are converted, at the
      then current exchange rate, into U.S. dollars, and the statements of operations
      are converted using weighted average exchange rates for the applicable periods.
      Foreign currency denominated sales may result in gains and losses on the
      conversion to U.S. dollars. We do not engage in hedging activities to protect
      against the risk of currency fluctuations. Therefore, exchange rate fluctuations
      can have a detrimental effect on our reported operating results.




***Changing
      technology may render our product and service offerings obsolete and, therefore,
      unmarketable.***




Our
      ability to compete successfully depends upon the continued compatibility and
      interoperability of our services with products and architectures offered by
      various vendors. Although we intend to support emerging standards in the market
      for Internet access, industry standards may not be established and, if they
      become established, we may not be able to conform to these new standards in
      a
      timely fashion or maintain a competitive position in the market. The
      announcement or introduction of new products or services by us or our
      competitors and any change in industry standards could cause our customers
      to
      defer or cancel purchases of existing products or services.




32




***Our
      stock price has been and may continue to be volatile, which could result in
      substantial losses for investors purchasing shares of our common stock and
      in
      litigation against us.***




The
      market prices of securities of technology-based companies like ours tend to
      be
      highly volatile. The market price of our common stock has fluctuated
      significantly in the past. In fact, during the 52-week period ended April 5,
      2007, the high and low sale prices of a share of our common stock (as adjusted
      to reflect the $2.73 per share cash distribution we made in December 2006)
      were
      $7.50 and $0.70, respectively. Our market price may continue to exhibit
      significant fluctuations in response to a variety of factors, many of which
      are
      beyond our control. These factors include, among others, deviations in our
      results of operations from the estimates of securities analysts, changes in
      securities analysts’ estimates of our financial performance, changes in market
      valuations of similar companies and stock market price and volume fluctuations
      generally. Additionally, it is likely that our quarter-to-quarter performance
      will be unpredictable and contribute to our stock price volatility.




In
      the
      past, securities class action litigation has often been brought against a
      company following periods of volatility in the market price of its securities.
      Because of the volatility of the market price of our common stock, we may in
      the
      future be the target of similar litigation. Securities litigation could result
      in substantial costs and divert management’s attention and
      resources.




***The
      concentration of ownership of our common stock gives a few individuals
      significant influence over important policy decisions and could delay or prevent
      changes of control.***




As
      of
      March 1, 2007, our executive officers and directors and their family members
      together beneficially owned approximately 69.7% of the issued and outstanding
      shares of our common stock. As a result, these persons have the ability to
      exert
      significant influence over matters that could include the election of directors,
      changes in the size and composition of the board of directors, and mergers
      and
      other business combinations or strategic transactions involving our company.
      In
      addition, through their voting power, they may be able to significantly
      influence certain decisions, including decisions regarding the qualification
      and
      appointment of officers, dividend policy, access to capital (including borrowing
      from third-party lenders and the issuance of additional equity securities),
      and
      the acquisition or disposition of our assets. In addition, the concentration
      of
      voting power in the hands of those individuals could have the effect of delaying
      or preventing a change of control of our company, even if the change of control
      would benefit our stockholders. A perception in the investment community of
      an
      anti-takeover environment at our company could cause investors to value our
      stock lower than in the absence of such a perception.




**ITEM
                7.**
            **FINANCIAL
                STATEMENTS.**




Our
      consolidated financial statements are included in this Form 10-KSB beginning
      on
      page F-1.




**ITEM
                8.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE.******




None.




**ITEM
                8A.**
            **CONTROLS
                AND PROCEDURES.**




Our
      management, with the participation of our principal executive officer and
      principal financial officer, has evaluated the effectiveness of our disclosure
      controls and procedures as of the end of the period covered by this report.
      Based on such evaluation, our principal executive officer and principal
      financial officer have concluded, as of the end of such period, that our
      disclosure controls and procedures are effective in recording, processing,
      summarizing and reporting, on a timely basis, information required to be
      disclosed by us in our reports that we file or submit under the Securities
      Exchange Act of 1934.




33




During
      the last quarter of 2006, there were no changes to our internal control over
      financial reporting that have materially affected, or are reasonably likely
      to
      materially affect, our internal controls over financial reporting.




**ITEM
                8B.**
            **OTHER
                INFORMATION.**




None.




34




**PART
      III**




**ITEM
                9.**
            **DIRECTORS
                AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
                WITH
                SECTION 16(A) OF THE EXCHANGE ACT.******




**Directors,
      Executive Officers and Key Employees**




Our
      directors, executive officers and key employees as of December 31, 2006, were
      as
      follows:





Name
            
            Age
            
            PositionPatrick
                Dolan
            
            49
            
            Chairman
                of the Board, Chief Executive Officer, and DirectorJames
                Cortens
            
            51
            
            Chief
                Operating Officer, President, Secretary, DirectorBruce
                Nelson (2)
            
            52
            
            Chief
                Financial OfficerDale
                Paisley (1)
            
            65
            
            DirectorKoushik
                Dutta
            
            43
            
            Chief
                Technology Officer




(1)
      Chairman of Audit Committee.


(2)
      Resigned from his position on January 26, 2007, and was replaced by Don
      Rutherford.




***Directors
      and Executive Officers***




**Patrick
      Dolan** founded
      BPOMS and has served as its Chief Executive Officer and Chairman of the Board
      since its inception in July 2005. Prior to co-founding BPOMS, Mr. Dolan served
      as President and Chief Operating Officer of Infocrossing Inc., a provider of
      selective information technology outsourcing solutions, from April 2004 through
      October 2004. For the two previous years, prior to Infocrossing acquiring ITO
      Acquisition Corporation, doing business as Systems Management Specialists
      (“SMS”), a California company, Mr. Dolan served as its Chairman and Chief
      Executive Officer. In December 2002, Mr. Dolan led a successful management
      team
      initiative, in conjunction with Los Angeles-based private equity fund Riordan,
      Lewis & Haden, to re-purchase SMS from Marconi, plc, which had acquired SMS
      from its prior owners in June 2000. Prior to that time, Mr. Dolan was President
      and Chief Operating Officer of SMS from November 1994. Mr. Dolan spent the
      early
      years of his career with Affiliated Computer Services and, subsequently, SHL
      Systemhouse. Mr. Dolan earned a B.S. in Economics from New York
      University.




**James
      Cortens** founded
      BPOMS and has served as its Chief Financial Officer, President, and a Director
      since its inception in July 2005. Prior to co-founding BPOMS, Mr. Cortens served
      as Executive Vice President of Infocrossing Inc., a provider of selective
      information technology outsourcing solutions, from April 2004 through October
      2004. For the two previous years, prior to Infocrossing acquiring SMS, Mr.
      Cortens served as its president and director. In December 2002, Mr. Cortens
      was
      part of a successful management team initiative, in conjunction with Los
      Angeles-based private equity fund Riordan, Lewis & Haden, to re-purchase SMS
      from Marconi, plc, which had acquired SMS from its prior owners in June 2000.
      Prior to that time, Mr. Cortens was Executive Vice President of Business
      Development of SMS from November 1994. Mr. Cortens spent the early years of
      his
      career with SHL Systemhouse. Mr. Cortens earned a B.Sc. in Computer Science
      from
      the University of Manitoba.




**Bruce
      K. Nelson** served
      as
      our Chief Financial Officer from April 2002 to January 26, 2007 and as our
      Secretary from November 2005 to December 15, 2006. Prior to joining us, Mr.
      Nelson served as Chief Financial Officer of Millennium Information Technologies,
      Inc. from 1997 to April 2002. From 1992 to 1997, he was co-founder and President
      of Comprehensive Weight Management, a healthcare marketing company. From 1985
      to
      1992, Mr. Nelson served as Treasurer of Comprehensive Care Corporation, a
      NYSE-traded national service company. Mr. Nelson holds a B.S. in Finance from
      University of Southern California and an M.B.A. from Bryant College in
      Smithfield, Rhode Island. Mr. Nelson resigned from the Company on January 26,
      2007.




35




**Don
      Rutherford** joined
      BPOMS as Chief Financial Officer on January 29, 2007 and brings to BPOMS 35
      years of financial experience and comes from Grant Life Sciences, Inc., a
      publicly held bio-tech company located in Los Angeles, California, where he
      served as Chief Financial Officer. Prior to that, he held numerous senior
      executive financial positions. Mr. Rutherford is also a partner with Tatum,
      LLC,
      a national executive services firm and a board member and Chairman of the audit
      committee of Performance Capital Management LLC, a public financial services
      company. Mr. Rutherford started his career with Coopers and Lybrand in its
      Toronto audit practice and is a Chartered Accountant. He also holds a BASc
      in
      Industrial Engineering from the University of Toronto.




**Dale
      Paisley** has
      been
      a financial and accounting consultant to primarily small public companies since
      2000. He assists his clients with regulatory reporting with the Securities
      and
      Exchange Commission and state regulators and has served as temporary Chief
      Financial Officer and Chief Executive Officer of several public and private
      companies. From October 2002 until December 2003, Mr. Paisley served as
      president of SoCal Waste Group, Inc., and from February 2003 until December
      2003, he served as Chief Executive Officer and Chief Financial Officer of USA
      Biomass Corporation. Prior to that time, Mr. Paisley was a partner in the
      international accounting firm of Coopers & Lybrand (now
      PriceWaterhouseCoopers). Mr. Paisley earned a B.S. in accounting from San Diego
      State University.




**Koushik
      Dutta** has
      served as our Chief Technology Officer since December 15, 2006. Prior to that
      he
      was our Chief Operating Officer from November 2005 to December 15, 2006. He
      has
      served as Chief Technology Officer of our Web4 division since April 2000. Prior
      to that, Mr. Dutta co-founded Allegria Software, Inc. and served as President
      and Chief Technology Officer of that company from February 1999 to March 2000.
      Additionally, Mr. Dutta served as Vice President of Research and Development
      for
      Advanced Technology Corporation from 1995 to June 1997 and as Senior Manager
      for
      Research Engineers International from 1992 to 1995. Mr. Dutta also co-founded
      and launched two business ventures, MicroWare and StanSoft. Mr. Dutta is the
      inventor of eReview, WebWorks, ForReview and Autoproject. Further Mr. Dutta
      is
      the winner of CSI’s (Computer Society of India) prestigious NSTPC award for
      programming. Mr. Dutta holds a Bachelors of Technology degree from Indian
      Institute of Technology and an M.B.A from Indian Institute of Management.




All
      directors hold office until the next annual stockholders’ meeting or until their
      respective successors are elected or until their earlier death, resignation
      or
      removal. Officers are appointed by, and serve at the discretion of, our board
      of
      directors.




**Code
      of Business Conduct and Ethics**




We
      have
      adopted a written code of ethics that governs all of our officers, directors
      and
      all employees. The code of ethics is posted on our website at www.bpoms.com .




We
      intend
      to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating
      to
      amendments to or waivers from provisions of the code that relate to one or
      more
      of the items set forth in Item 406(b) of Regulation S-B, by describing on our
      Internet Website, within five business days following the date of a waiver
      or a
      substantive amendment, the date of the waiver or amendment, the nature of the
      amendment or waiver, and the name of the person to whom the waiver was granted.




36




Information
      on our Internet website is not, and shall not be deemed to be, a part of this
      report or incorporated into any other filings we make with the Securities and
      Exchange Commission (the “SEC”).




**Audit
      Committee Matters**




Our
      Audit
      Committee consists of Mr. Dale Paisley who holds the position of chairman of
      that committee. Each of the members of our Audit Committee is “independent”
within the meaning of Rule 4200(a)(15) of the listing standards of the National
      Association of Securities Dealers. Our board of directors has determined that
      Mr. Paisley is an “audit committee financial expert” under SEC rules and meets
      the NASD’s professional experience requirements.




**Section
      16(a) Beneficial Ownership Reporting Compliance**




Section
      16(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act,
      requires our executive officers and directors, and persons who beneficially
      own
      more than 10% of a registered class of our common stock, to file initial reports
      of ownership and reports of changes in ownership with the Commission. These
      officers, directors and stockholders are required by SEC regulations to furnish
      us with copies of all such reports that they file.




Based
      solely upon a review of copies of such reports furnished to us during the fiscal
      year ended December 31, 2006 and thereafter, or any written representations
      received by us from reporting persons that no other reports were required,
      we
      believe that, during our fiscal 2006, all Section 16(a) filing requirements
      applicable to our reporting persons were met.




**ITEM
                10.**
            **EXECUTIVE
                COMPENSATION.**




**Summary
      Compensation Table**




The
      following table sets forth information concerning the annual and long-term
      compensation for services rendered during the last two fiscal years to our
      company in all capacities as an employee by our Chief Executive Officers,
      President and the two most highly compensated executive officers (collectively,
      the “named executive officers”) as of the end of fiscal 2006, shown
      below:




**Annual
                Compensation****Name
                and**
            
            **Fiscal
                Year Ended December**
            
            **Salary**
            
            **Bonus**
            
            **Stock
                Awards (2)**
            
            **Option
                Awards**
            
            **Non-Equity
                Incentive Plan Compensation**
            
            **Change
                in Pension Value and Non-Qualified Deferred Compensation
                Earnings**
            
            **All
                Other Compensation (1)**
            
            **Total****Principal
                Position**
            
            **31,**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **($)**Patrick
                A. Dolan,Chairman,
                Chief
            
            
            2006
            
            
            ---
            
            
            ---
            
            
            6,250
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            6,250Executive
                Officer
            
            
            2005
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            114,150
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            114,150James
                CortensPresident,
                Secretary,
            
            
            2006
            
            
            ---
            
            
            ---
            
            
            5,000
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            5,000Director
            
            
            2005
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            76,100
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            76,100Koushik
                DuttaChief
                Technology
            
            
            2006
            
            
            110,130
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            3,269
            
            
            113,399Officer
            
            
            2005
            
            
            114,231
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            3,427
            
            
            117,658Amrit
                K. Das (5)Former
                Chairman,
            
            
            2006
            
            
            259,121
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            13,518
                (3
            )
            
            272,639Former
                Chief Executive
            
            
            2005
            
            
            212,000
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            34,432
                (4
            )
            
            246,432Former
                PresidentBruce
                K. Nelson (6)Former
                Chief Financial
            
            
            2006
            
            
            127,000
            
            
            150,975
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            3,810
            
            
            281,785Officer,
                Former Secretary
            
            
            2005
            
            
            127,500
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            3,825
            
            
            131,325




37




(1)
            The
                costs of certain benefits are not included because they did not exceed
                $10,000 in the case of each named executive
                officer.


(2)
            Shares
                of Series A preferred stock.


(3)
            Includes
                $7,810 in premiums paid by us pursuant to a split-dollar life insurance
                policy established for the benefit of Amrit Das and $5,708 in company
                contributions to the 401(k) plan.


(4)
            Includes
                $6,324 in premiums paid by us pursuant to a split-dollar life insurance
                policy established for the benefit of Amrit Das and $5,300 in company
                contributions to the 401(k) plan.


(5)
            Mr.
                Das resigned from his position of Chairman, Chief Executive Officer
                and
                President upon the Merger.


(6)
            Mr.
                Nelson resigned from his position of Secretary upon Merger and from
                the
                position of Chief Financial Officer on January 26,
                2007.




**** **Option
      Grants In Last Fiscal Year**




No
      options were granted to Named Executive Officers in fiscal 2006.




**Aggregated
      Option Exercises in Last Fiscal Year and Fiscal Year-End Option
      Values**





No
      options were exercised during fiscal 2006.




**Long-Term
      Incentive Plan Awards**




In
      2006,
      no awards were made to the named executive officers under long-term incentive
      plans.




**Outstanding
      Equity Awards at the End of Fiscal 2006**




**Option
                Awards**
            
            **Stock
                Awards****Name
                and**
            
            **Number
                of Securities Underlying Unexercised Options**
            
            **Number
                of Securities Underlying Unexercised Options**
            
            **Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options**
            
            **Option
                Exercise Price**
            
            **Option
                Expiration**
            
            **Number
                of Shares or Units of Stock That Have Not Vested**
            
            **Market
                Value of Shares or Units of Stock That Have Not
                Vested**
            
            **Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not Vested**
            
            **Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not Vested****Principal
                Position**
            
            **(#)
                Exercisable**
            
            **(#)
                Unexercisable**
            
            **(#)**
            
            **($)**
            
            **Date**
            
            **(#)**
            
            **($)**
            
            **(#)**
            
            **($)**Patrick
                A. Dolan,
            
            
            135,863
            
            
            407,588
            
            
            ---
            
            
            0.025
            
            
            8/1/2015
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Chairman,
                ChiefExecutive
                OfficerJames
                Cortens
            
            
            90,575
            
            
            271,125
            
            
            ---
            
            
            0.025
            
            
            8/1/2015
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---President,
                Secretary,DirectorKoushik
                Dutta
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Chief
                TechnologyOfficerAmrit
                K. Das
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Former
                Chairman,Former
                Chief ExecutiveFormer
                PresidentBruce
                K. Nelson
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Former
                Chief FinancialOfficer,
                Former Secretary




38




**Directors’
      Compensation**




**Director
                Compensation (1)****Name
                and**
            
            **Fees
                Earned or Paid in Cash**
            
            **Stock
                Awards**
            
            **Option
                Awards**
            
            **Non-Equity
                Incentive Plan Compensation**
            
            **Change
                in Pension Value and Non-Qualified Deferred Compensation
                Earnings**
            
            **All
                Other Compensation**
            
            **Total****Principal
                Position**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **($)**Dale
                Paisley
            
            
            1,750
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            53,525
                (2
            )
            
            55,275D.
                Dean McCormick III
            
            
            53,750
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            53,750Stanley
                W. Corbett
            
            
            48,000
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            48,000Benedict
                A. Eazzetta
            
            
            48,000
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            48,000Santanu
                K. Das
            
            
            48,000
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            48,000


(1)
              Prior
                  to the merger directors were Messrs. McCormick, Corbett, Eazetta,
                  Santanu
                  Das and Amrit Das. Upon consummation of the Merger, all directors
                  resigned
                  and the following were appointed:
 
 Patrick
                  Dolan
              
              Chairman
                  of the BoardJames
                  Cortens
              
              Secretary,
                  DirectorDale
                  Paisley
              
              Director,
                  Audit Committee Chairman
 
 See
        Summary Compensation table above for compensation for Amrit Das, Patrick
        Dolan
        and James Cortens.
 
 (2)
              Mr.
                  Paisley provided professional services in the amount of $53,525
                  prior to
                  the merger.




Mr.
      Paisley is an independent director and receives a remuneration of $3,500 per
      month for his services to the Company’s board.




Messrs.
      McCormick, Eazzetta, and Corbett, were non-employee directors, received a
      special committee payment of $25,000 and a monthly remuneration of $2,000 per
      month, each, in consideration for their services on our board of directors.
      Mr.
      McCormick received an additional $500 per month in consideration for his
      services as Audit Committee Chairman. Non-employee directors are reimbursed
      for
      certain expenses in connection with attendance at board of directors and
      committee meetings. Mr. Santanu Das was a non-employee director, received a
      payment of $25,000 for past services and $2,000 per month for services on our
      board of directors.




39




**Repricing
      of Options and SARs**




No
      adjustments to or repricing of stock options previously awarded to named
      executives occurred in 2006.




**Employment
      Agreements, Termination of Employment and Change-in-Control Arrangements**




**Patrick
      Dolan**




We
      have
      an employment agreement with Patrick Dolan, dated July 29, 2005. The employment
      agreement provides that Mr. Dolan will serve as BPOMS' Chief Executive Officer
      for an initial two and one-half year term. The employment agreement includes
      the
      following provisions:




·
            Initial
                base salary of not less than $225,000, subject to annual review and
                increase in the discretion of BPOMS' board of directors. The board
                set
                2005-2006 base salary for Mr. Dolan at
                $250,000.




·
            For
                the period through December 31, 2006 Mr. Dolan waived receipt of
                his
                compensation. Annual bonus in an amount, if any, as determined by
                the
                board based on the achievement of BPOMS and individual performance
                goals
                as established by the board.




·
            Participation
                in BPOMS' employee welfare, pension and benefit plans as maintained
                for
                the benefit of BPOMS' employees.




·
            Six
                weeks of vacation annually.




·
            Reimbursement
                for all business, travel and entertainment expenses incurred prior
                to, on
                or after July 29, 2005, with respect to the business or prospective
                business of BPOMS, and including expenses incurred in connection
                with the
                formation of the company and the acquisition of ADAPSYS Document
                Management, Inc. and ADAPSYS Transaction Processing,
                Inc.




·
            Reimbursement
                of telephone, cell phones, computer usage and Internet access at
                home for
                business use, as well as a monthly car allowance of $750.00 per
                month.




Upon
      execution of the employment agreements, Mr. Dolan was granted an option to
      purchase 750,000 shares of BPOMS' common stock, vesting 25% per year. In the
      event of a change of control, or if the officer's employment is terminated
      by
      BPOMS without cause, or by the officer for good reason, as defined in the
      agreements, then BPOMS will:




·
            Pay
                a lump sum equal to the sum of all accrued and unpaid base salary
                and
                vacation pay through the date of termination, and if no change of
                control
                has occurred, the officer's base salary for the remainder of the
                employment period and two times the highest annual bonus paid for
                any
                fiscal year, and if no annual bonus has been paid, then two times
                the
                minimum annual bonus;




40




·
            Continue
                to provide the officer and his eligible spouse and dependents the
                various
                medical and life insurance provided for in the agreement or economic
                equivalent as if he had remained employed through the employment
                agreement
                term; and




·
            The
                officer's unvested stock options will become immediately 100%
                vested.




If
      BPOMS
      terminates the officer's employment for cause or the officer terminates his
      employment without good reason, then BPOMS will:




·
            Pay
                a lump sum equal to all accrued and unpaid base salary and vacation
                pay
                through the date of termination;
                and




·
            Have
                no further obligation to the officer except for the benefits provided
                under any stock option grants and any other agreements, plans or
                programs
                of BPOMS.




**James
      Cortens**




We
      have
      an employment agreement with James Cortens, dated July 29, 2005. The employment
      agreement provides that Mr. Cortens will serve as BPOMS' President and Secretary
      for an initial two and one-half year term. The employment agreement includes
      the
      following provisions:




·
            Initial
                base salary of not less than $200,000, subject to annual review and
                increase in the discretion of BPOMS' board of directors. The board
                set
                2005-2006 base salary for Mr. Cortens at
                $225,000.




·
            For
                the period through December 31, 2006 Mr. Cortens waived receipt of
                his
                compensation.




·
            Annual
                bonus in an amount, if any, as determined by the board based on the
                achievement of BPOMS and individual performance goals as established
                by
                the board.




·
            Participation
                in BPOMS' employee welfare, pension and benefit plans as maintained
                for
                the benefit of BPOMS' employees.




·
            Six
                weeks of vacation annually.




·
            Reimbursement
                for all business, travel and entertainment expenses incurred prior
                to, on
                or after July 29, 2005, with respect to the business or prospective
                business of BPOMS, and including expenses incurred in connection
                with the
                formation of the company and the acquisition of ADAPSYS Document
                Management, Inc. and ADAPSYS Transaction Processing,
                Inc.




·
            Reimbursement
                of telephone, cell phones, computer usage and Internet access at
                home for
                business use, as well as a monthly car allowance of $750.00 per
                month.




Upon
      execution of the employment agreements, Mr. Dolan was granted an option to
      purchase 500,000 shares of BPOMS' common stock, vesting 25% per year. In the
      event of a change of control, or if the officer's employment is terminated
      by
      BPOMS without cause, or by the officer for good reason, as defined in the
      agreements, then BPOMS will:




41




·
            Pay
                a lump sum equal to the sum of all accrued and unpaid base salary
                and
                vacation pay through the date of termination, and if no change of
                control
                has occurred, the officer's base salary for the remainder of the
                employment period and two times the highest annual bonus paid for
                any
                fiscal year, and if no annual bonus has been paid, then two times
                the
                minimum annual bonus;




·
            Continue
                to provide the officer and his eligible spouse and dependents the
                various
                medical and life insurance provided for in the agreement or economic
                equivalent as if he had remained employed through the employment
                agreement
                term; and




·
            The
                officer's unvested stock options will become immediately 100%
                vested.




If
      BPOMS
      terminates the officer's employment for cause or the officer terminates his
      employment without good reason, then BPOMS will:




·
            Pay
                a lump sum equal to all accrued and unpaid base salary and vacation
                pay
                through the date of termination;
                and




·
            Have
                no further obligation to the officer except for the benefits provided
                under any stock option grants and any other agreements, plans or
                programs
                of BPOMS.




In
      2006
      Mr. Dolans and Mr. Cortens were awarded 181,150 and 163,035 shares respectively
      of BPOMS' Series A Convertible Preferred Stock.




**Koushik
      Dutta**




We
      have
      an employment agreement with Koushik Dutta, dated December 13, 2006. The
      employment agreement provides that Mr. Dutta will serve as BPOMS' Chief
      Technology Officer for an initial two year term. The employment agreement
      includes the following provisions:




·
            Initial
                base salary of not less than $140,000, subject to a one-time increase
                by
                an amount equal to 15% of the then current base salary upon the occurrence
                of two consecutive fiscal quarters of positive EBITDA by the Company,
                as
                determined by the Company.




·
            Annual
                bonus equal to 50% of the then current base salary, as determined
                by the
                board based on the achievement of BPOMS and individual performance
                goals
                as established by the board.




·
            Participation
                in BPOMS' employee welfare, pension and benefit plans as maintained
                for
                the benefit of BPOMS' employees.




·
            Four
                weeks of vacation annually; up to three weeks of unused vacation
                shall be
                carried over to the next following fiscal year and no vacation shall
                accrue if Mr. Dutta has accrued but unused vacation in excess of
                five
                weeks




·
            Reimbursement
                for all business, travel and entertainment
                expenses.




·
            Reimbursement
                of cell phone, computer usage and Internet access at home for business
                use, as well as a monthly car allowance of $600.00 per
                month.




Upon
      execution of the employment agreements, Mr. Dutta was granted an incentive
      option to purchase 75,000 shares of BPOMS' common stock, vesting 25% per six
      months. In the event of a change of control, or if the officer's employment
      is
      terminated by BPOMS without cause, or by the officer for good reason, as defined
      in the agreement, then BPOMS will:




42




·
            Pay
                a lump sum equal to the sum of all accrued and unpaid base salary
                and
                vacation pay through the date of termination, and if no change of
                control
                has occurred, the officer's base salary for six month period payable
                in
                semi-monthly installments; and




·
            The
                officer's unvested stock options will become immediately 100%
                vested.




If
      BPOMS
      terminates the officer's employment for cause or the officer terminates his
      employment without good reason, then BPOMS will:




·
            Pay
                a lump sum equal to all accrued and unpaid base salary and vacation
                pay
                through the date of termination;
                and




·
            Have
                no further obligation to the officer except for the benefits provided
                under any stock option grants and any other agreements, plans or
                programs
                of BPOMS.




For
      purposes of the above employment agreements, termination for "cause" means
      the
      employee's willful gross misconduct or conviction of a felony that, in either
      case, results in material and demonstrable damage to the business or reputation
      of BPOMS, or the willful and continued failure to perform his duties (subject
      to
      a 20-business day cure period), within twenty business days after BPOMS delivers
      to him a written demand for performance that specifically identifies the actions
      to be performed. Termination for "good reason" means, subject to a ten-business
      day cure period,




·
            the
                assignment to the employee of duties inconsistent with this Agreement
                or a
                change in his titles or authority;




·
            any
                failure by BPOMS to comply with sections of the agreement regarding
                compensation and benefits in any material
                way;




·
            the
                requirement of the employee to relocate to locations other than Orange
                County, California;




·
            the
                failure of BPOMS to comply with and satisfy its obligations regarding
                any
                successor to its business and/or
                assets;




·
            any
                material breach of the agreement by BPOMS;
                or




·
            a
                change in control of BPOMS.




A
      change
      in control under the agreements is the acquisition of BPOMS by another entity
      by
      means of any transaction or series of related transactions (including, without
      limitation, any stock acquisition, reorganization, merger or consolidation)
      other than a transaction or series of transactions in which the holders of
      the
      voting securities of BPOMS outstanding immediately prior to the transaction
      continue to retain (either by such voting securities remaining outstanding
      or by
      such voting securities being converted into voting securities of the surviving
      entity), as a result of shares in BPOMS held by those holders prior to those
      transactions, at least fifty percent (50%) of the total voting power represented
      by the voting securities of BPOMS or the surviving entity outstanding
      immediately after the transaction or series of transactions, or sale of 80%
      or
      more of the assets of BPOMS.




43




**Bruce
      Nelson**




On
      March
      24, 2006, we entered into an employment agreement with Mr. Bruce Nelson, our
      Chief Financial Officer and then Secretary. The employment agreement superseded
      and made void a retention agreement that we had entered into with Mr. Nelson
      in
      June 2005 on the same terms as the retention agreement described above. The
      employment agreement provides for an annual base salary
      of
      $127,000 per year, or such greater amount as may be established by our
      compensation committee, plus additional incentive cash compensation as
      follows:




(a) A
      bonus
      payment equal to three months’ salary, payable on the date of execution of the
      agreement, March 24, 2006;




(b) A
      bonus
      payment equal to three months’ salary, payable at the earlier of five days after
      we close the sale of any of our three remaining business units or April 21,
      2006;




(c) A
      bonus
      payment equal to three months’ salary at the earlier of five days after we enter
      into a definitive agreement providing for a change in control transaction,
      which
      is defined as the merger of our company (or a subsidiary of ours) with any
      other
      company in which our stockholders immediately prior to the merger will (by
      virtue of the ownership of our stock) own less than 50% of the outstanding
      voting securities of the surviving entity (or parent thereof) immediately after
      the merger, five days after we deregister our securities under the Exchange
      Act,
      or July 31, 2006; and




(d) A
      bonus
      payment equal to three months’ salary plus an additional $20,000at the earlier
      of the completion of the sale of all three remaining business units, the closing
      of a change of control transaction, resignation of two or more members of our
      board of directors, including at least one of the independent members, or
      November 18, 2006.




The
      foregoing not withstanding, if Mr. Nelson’s employment is terminated for “good
      cause” or if he resigns without “good reason,” Mr. Nelson shall not be entitled
      to receive any bonus payable after the effective date of such termination. If
      we
      terminate Mr. Nelson’s employment without “good cause” or if Mr. Nelson dies or
      resigns for “good reason,” then any unpaid bonus amounts will become immediately
      due and payable. The third and fourth bonus payments described above are to
      be
      placed into escrow and released to Mr. Nelson or his estate upon satisfaction
      of
      the conditions described above, or released back to us if Mr. Nelson's
      employment is terminated for “good cause” or without “good reason” prior to the
      relevant payment date.




“Good
      cause” for us to terminate the agreement includes Mr. Nelson’s material breach
      of the agreement, conviction of a crime involving moral turpitude or
      imprisonment, failure to cure within ten days after receiving a written notice
      regarding his continuing repeated failure or refusal to perform his material
      and
      lawful duties required by the agreement or regarding his gross negligence,
      insubordination, disloyalty or other material misconduct.




“Good
      reason” for Mr. Nelson to terminate the agreement includes a reduction from Mr.
      Nelson’s title as Chief Financial Officer, or our material breach of the
      agreement or failure to provide Mr. Nelson with adequate staff or continued
      benefits.




The
      agreement also provides that Mr. Nelson is entitled to three weeks of paid
      vacation each year and standard employee medical and hospital insurance. If
      Mr.
      Nelson's employment terminates other than for “good cause” or without “good
      reason,” then Mr. Nelson or his estate will be entitled to receive $500 per
      month until the earlier of six months from the date of termination or November
      18, 2006.




44




The
      agreement contains restrictions on Mr. Nelson's disclosure and use of
      confidential company information and property and an assignment to us of
      intellectual property rights relating to Mr. Nelson's activities at our
      company.




Upon
      consummation of the Merger, Mr. Nelson’s employment agreement terminated. Mr.
      Nelson did not have an employment agreement with BPOMS. On January 29, 2007,
      Mr.
      Nelson resigned from his position as our chief financial officer.




**Item
                11.**
              **Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters.**




**Beneficial
      Ownership Table**




*General*




As
      of
      March 1, 2007, 8,619,400 shares of our common stock were outstanding. The
      following table sets forth information as of that date regarding the beneficial
      ownership of our common stock by:





·
            each
                of our directors;


·
            each
                of our current named executive officers listed in the summary compensation
                table;


·
            all
                of our directors and executive officers as a group; and


·
            each
                person known by us to beneficially own 5% or more of the outstanding
                shares of our common stock as of the date of the
                table.




Except
      as
      indicated below, the address for each named beneficial owner is the same as
      ours. The information with respect to each person is as supplied or confirmed
      by
      such person or based upon statements filed with the SEC. The inclusion of shares
      in this table as beneficially owned is not an admission of beneficial ownership.
      Percentages shown as an asterisk represent less than 1.0%.




Beneficial
      ownership is determined in accordance with Rule 13d-3 promulgated by the SEC,
      and generally includes voting or investment power with respect to securities.
      Except as indicated below, we believe each holder possesses sole voting and
      investment power with respect to all of the shares of common stock shown below
      as owned by that holder, subject to community property laws where applicable.
      In
      computing the number of shares beneficially owned by a holder and the percentage
      ownership of that holder, shares of common stock subject to options held by
      that
      holder that are currently exercisable or convertible or are exercisable or
      convertible within 60 days after the date of the table are deemed outstanding.
      Those shares, however, are not deemed outstanding for computing the percentage
      ownership of any other person or group.





**Name
                and Address**
              **of
                Beneficial Owner**
            
            **Amount
                and Nature of Beneficial**
              **Ownership
                of Common Stock**
            
            **Percent
                of Class**
              **of
                Common Stock**Patrick
                A Dolan
            
            
            4,631,210
            (1)
            
            45.1
            %James
                Cortens
            
            
            2,997,062
            (2)
            
            32.0
            %Don
                West
            
            
            1,925,308
            (3)
            
            20.2
            %Brian
                Meyer
            
            
            867,513
            (4)
            
            9.5
            %All
                directors and executive officers as a group (2 persons)
            
            
            5,253,350
            (5)
            
            69.4
            %




45







(1)
              Includes
                  2,989,975 shares of common stock, 999,152 shares of Series A convertible
                  preferred stock, 507,220 shares of common stock underlying warrants
                  and
                  135,863 shares of common stock underlying options; excludes 833,333
                  shares
                  of Series C nonconvertible preferred
                  stock.
 (2)
              Includes
                  2,264,375 shares of common stock, 574,964 shares of Series A convertible
                  preferred stock, 67,148 shares of common stock underlying warrants
                  and
                  90,575 shares of common stock underlying options; excludes 83,333
                  shares
                  of Series C nonconvertible preferred
                  stock.
 (3)
              Includes
                  565,458 shares of common stock held by Don West, 313,480 shares
                  of common
                  stock held by his wife Sharon West and 133,153 shares of common
                  held stock
                  by West LTP Trust; 461,148 shares of Series B convertible preferred
                  stock
                  held by Don West, 313,480 shares of Series B convertible preferred
                  stock
                  held by Sharon West and 133,153 shares of Series B convertible
                  preferred
                  stock held by West LTP Trust; and 5,435 shares of common stock
                  underlying
                  warrants held by Don West. The address of Mr. West is 1800-181
                  Bay Street,
                  Toronto, Ontario, M5J 2T9.
 (4)
              Includes
                  166,400 shares of common stock held by Brian Meyer and 169,102
                  shares of
                  common stock held by his wife Lynne Meyer; 270,710 shares of Series
                  B
                  convertible preferred stock held by Brian Meyer and 169,102 shares
                  of
                  Series B convertible preferred stock held by his wife Lynne Meyer,
                  5,435
                  shares of common stock underlying warrants held by Brian Meyer
                  and 86,765
                  shares of common stock underlying options held by Brian Meyer.




**Equity
      Compensation Plan Information**




The
      following table gives information about our common stock that may be issued
      upon
      the exercise of options, warrants and rights under all of our existing equity
      compensation plans as of December 31, 2006. The existing equity compensation
      plans include our BPO Management Services, Inc. Stock Option Plan (“BPOMS
      Plan”), 1996 Stock Option Plan, 1997 Stock Plan, 1998 Stock Option Plan, 2000
      Stock Option Plan, and 2003 Stock Option Plan (together “the option
      plans”).




**Plan
                Category**
            
            **Number
                of Securities to be**
              **Issued
                Upon Exercise of**
              **Outstanding
                Options and**
              **Warrants
                (1)**
            
            **Weighted
                Average**
              **Exercise
                Price of**
              **Outstanding
                Options**
              **and
                Warrants**
            
            **Number
                of Securities**
              **Remaining
                Available for**
              **Future
                Issuance Under**
              **Equity
                Compensation**
              **Plans
                (Excluding**
              **Securities
                Reflected in**
              **Column
                (a))**(a)
            
            (b)
            
            (c)Equity
                compensation
              plans
                approved by
              security
                holders
            
            
            -
            
            
            -
            
            
            3,658,000Equity
                compensation
              plans
                not approved by
              security
                holders(2)
            
            
            2,154,674
            
            $
            0.1296
            
            
            -Total
            
            
            2,154,674
            
            $
            0.1296
            
            
            3,658,000







(1)
            Number
                of shares is subject to adjustment for changes in capitalization
                for stock
                splits, stock dividends and similar
                events.


(2)
            Represents
                options and warrants outstanding under equity compensation plans
                not
                approved by security holders.




46




Options
      outstanding under equity compensation plans that were not approved by security
      holders at December 31, 2006, were 1,970,321 at a weighted average exercise
      price per share of $0.06.




Warrants
      outstanding under equity compensation plans that were not approved by security
      holders at December 31, 2006, were 184,353 at a weighted average exercise price
      per share of $0.90 issued as consideration for finder’s fees, business advisory
      services and investor relations.




There
      were no options outstanding under equity compensation plans approved by security
      holders at December 31, 2006 (see Note 6 “Stockholders’ Equity” of Notes to
      Consolidated Financial Statements included in this report for further
      information regarding the option plans).






The
      option plans permit grants of both incentive stock options and non-qualified
      stock options. Options under all plans generally vest over four years, though
      the vesting periods may vary from person to person, and are exercisable subject
      to continued service and other conditions.




**ITEM
                12.**
            **CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS.**




On
      August
      18, 2006, BPOMS entered into a bridge loan agreement with Patrick Dolan and
      James Cortens. Pursuant to the bridge loan agreement, Messrs. Dolan and Cortens
      and/or their assigns may, in their discretion, provide personal guarantees
      for a
      portion of or all of a bridge loan of up to $3,000,000 that may be arranged
      in
      favor of BPOMS. The guarantees would be subject to the bridge loan meeting the
      conditions specified in the bridge loan agreement, which include but are not
      limited to the granting of a first lien on all the assets of BPOMS.




Under
      the
      terms of the bridge loan agreement, if the bridge loan and personal guarantees
      are made, then Messrs. Dolan and Cortens and/or their assigns will receive
      a
      seven-year warrant to purchase a number of shares of common stock of BPOMS
      (or,
      if the merger has occurred, of netGuru) equal to one-third of the amount drawn
      on the bridge loan, at an exercise price of $0.03 per share (subject to
      adjustment for the merger exchange ratio, stock splits and the like). In
      addition, BPOMS will pay to Messrs. Dolan and Cortens and/or their assigns
      a
      cash fee of 3% of the amount that is drawn on the bridge loan and interest
      on
      the outstanding loan amount at an annual rate of 9%.




On
      August
      25, 2006, September 21, 2006, October 10, 2006 and December 14, 2006, bridge
      loans in the aggregate principal amount of $2,100,000 were made to BPOMS by
      a
      limited liability company controlled by Mr. Dolan and personally guaranteed
      by
      Mr. Dolan. In accordance with the terms of the bridge loan agreement, Mr. Dolan
      received warrants to purchase up to an aggregate of 507,222 shares of BPOMS
      common stock and is entitled to a $63,000 cash fee, of which $21,000 has been
      paid and $42,000 has been accrued.




On
      September 11, 2006, December 14, 2006, and December 20, 2006, Mr. Cortens made
      to BPOMS bridge loans in the aggregate amount of $240,000. In accordance with
      the terms of the bridge loan agreement, Mr. Cortens received warrants to
      purchase up to 67,149 shares of BPOMS common stock and is entitled to a $7,200
      cash fee, all of which has been accrued.




The
      value
      of the warrants issued to Messrs. Dolan and Cortens was determined using the
      Black-Scholes-Merton option pricing model and recorded as a discount to the
      bridge loan. The discount is being amortized to interest expense over the term
      of the bridge loan, which the Company expects to be paid off by the end of
      April
      2007. At December 31, 2006, the unamortized balance in loan discount was
      $115,465.




47




The
      bridge loan agreement also provides that if BPOMS requires additional equity
      in
      order to meet the condition under the merger agreement that BPOMS have at least
      $1,500,000 in capital surplus immediately prior to the closing of the merger,
      then Messrs. Dolan and Cortens and/or their assigns have the right, but not
      the
      obligation, to purchase shares of Series C of BPOMS (or, if the merger has
      occurred, of netGuru). The purchase price would equal the amount of additional
      equity required to meet the $1,500,000 capital surplus requirement. The number
      of shares of Series C issued for such purchase price would be equal to the
      purchase price divided by 50% of the value of the BPOMS common stock (or, if
      the
      merger has occurred, the market value of the netGuru common stock). On December
      15, 2006, upon successful completion of the merger of BPOMS with netGuru,
      Messrs. Dolan and Cortens elected to convert $1,540,000 of the bridge loan
      into
      916,667 shares of Series C non-convertible preferred stock. See note 6 of the
      Notes to Condensed Consolidated Financial Statements. At December 31, 2006,
      the
      balance owed on the bridge loan was $800,000.




The
      bridge loan agreement provides that if a bridge loan is outstanding, BPOMS
      will
      not prepay any other debt of the company, other than a stockholder loan, trade
      payables, the existing operating capital line of credit and other specified
      loans and leases. In addition, BPOMS has agreed that 25% of the net proceeds
      from any debt or equity financing transactions will be applied to the balance
      of
      any stockholder loan and then to the balance of the bridge loan.




**Discuss
      employment agreements, if any, with executives and significant
      employees.**




We
      are a
      party to director and executive officer compensation arrangements, employment,
      change in control and retention agreements with related parties, as more
      particularly described in Item 10 of this report.




48




**ITEM
                13.**
            **EXHIBITS.******





Exhibit
              Number
            Description2.1
            Stock
                Purchase Agreement dated March 27, 2000 between the registrant, Allegria
                Software, Inc. and GRAL, Inc. (1)2.2
            Stock
                    Purchase Agreement dated September 22, 2006, between the Registrant
                    and Sellers of Novus Imaging Solutions,
                    Inc. (*)2.3
            Stock
                  Purchase Agreement dated December 30, 2005, between the Registrant
                  and Sellers of Digica, Inc. (*)3.1
            Second
                Restated Certificate of Incorporation of NGRU, as filed with the
                Secretary
                of State of the State of Delaware on December 14, 2006
                (3)3.2
            Bylaws
                of the registrant (2)3.3
            Action
                With Respect To Bylaws, as certified by the registrant’s Secretary on
                October 22, 2004 (4)3.4
            Certificate
                of Merger, as filed with the Secretary of State of the State of Delaware
                on December 15, 2006 (3)3.5
            Certificate
                of Amendment ot Articles of Incorporation, as filed with the Secretary
                of
                State of the State of Delaware on December 15, 2006 (3)10.1
            Outsourcing
                Services Agreement, dated December 15, 2006, vetween DFH and the
                registrant (3)10.2
            Value-Added
                Reseller Agreement between REL and Web410.3
            Transition
                Agreement, dated December 15, 2006, between DFH and BPOMS/HRO,
                Inc.10.4
            Promissory
                Note, dated December 15, 2006, between DFH and the registrant
                (3)10.5
            Common
                Stock Purchase Warrant dated December 13, 2002 issued by the registrant
                in
                favor of Laurus Master Fund, Ltd. (5)10.6
            Common
                Stock Purchase Warrant dated July 31, 2003 issued by the registrant
                in
                favor of Laurus Master Fund, Ltd.
                (6)




49




Exhibit
              Number
            Description10.7
            Common
                Stock Purchase Warrant dated December 23, 2004 issued by the registrant
                in
                favor of Laurus Master fund, Ltd. (7)10.8
            Research
                Engineers, Inc. 1997 Stock Option Plan (8) (#)10.9
            Research
                Engineers, Inc. 1998 Stock Option Plan (9) (#)10.10
            netGuru,
                Inc. 2000 Stock Option Plan (8) (#)10.11
            netGuru,
                Inc. 2003 Stock Option Plan (10) (#)10.12
            Employment
                Agreement dated June 1, 2001, by and between the registrant and Amrit
                K.
                Das (11) (#)10.13
            Description
                of Salary and Bonus Programs for Executive Officers for Fiscal Year
                2006
                (12) (#)10.14
            Description
                of Non-Employee Director Regular Compensation (#)10.15
            Form
                of Change in Control and Executive Retention Agreement approved effective
                as of June 1, 2005 between netGuru, Inc. and each of Amrit K Das,
                Santanu
                Das, Clara Young and Bruce K. Nelson (12) (#)




50




Exhibit
              Number
            Description10.16
            Summary
                of special compensation approved August 31, 2005 for executive officers
                and special committee members. (13) (#)10.17
            Employment
                Agreement dated March 24, 2006 by and between the registrant and
                Bruce K.
                Nelson (14) (#)10.18
            Employment
              Agreement
              dated July 28, 2005 by and between the Registrant and Patrick A. Dolan
              (*)10.19
            Employment
              Agreement
              dated July 28, 2005 by and between the Registrant and James Cortens
              (*)10.20
            Employment
              Agreement
              dated October 2, 2006 by and between the Registrant and James Buchanan
              (*)10.21
            Employment
              Agreement
              dated December 13, 2006 by and between the Registrant and
              Koushick Dutta (*)10.22
            Letter of
              Agreement
              Dated January 19, 2007 to Extend Purchase Payment for the Purchase
              of
              Novus Imaging Solutions, Inc. (*)10.23
            Letter of
              Agreement
              Dated February 28, 2007 to Extend Purchase Payment for the Purchase
              of
              Novus Imaging Solutions, Inc. (*)21
            Subsidiaries
                of the registrant31.1
            Certification
                of Principal Executive Officer Required by Rule 13a-14(a) of the
                Securities Exchange Act of 1934, as amended, as Adopted Pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 200231.2
            Certification
                of Principal Financial Officer Required by Rule 13a-14(a) of the
                Securities Exchange Act of 1934, as amended, as Adopted Pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 200232
            Certification
                of Chief Executive Officer and Chief Financial Officer Pursuant to
                18
                U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002







(#)
            Management
                contract or compensatory plan, contract or arrangement required to
                be
                filed as an exhibit.




*
              Filed
                  herewith.


(1)
            Filed
                as an exhibit to the registrant’s Form 10-KSB for March 31, 2000 that was
                filed with the SEC on June 26, 2000 (File No. 0-28560), and incorporated
                herein by reference.






51




(2)
                Filed
                    as an exhibit to the registrant’s registration statement on Form SB-2
                    dated May 21, 1996 or amendment thereto dated June 14, 1996 (Registration
                    No. 333-4844-LA), and incorporated herein by
                    reference.
 (3)
                Filed
                    as an exhibit to the registrant's Current-Report on form 8-K
                    for December
                    15, 2006 that was filed with the SEC on December 22,
                    2006.
 (4)
                  Filed
                      as an exhibit to the registrant’s Form 8-K for October 29, 2004 that was
                      filed with the SEC on October 29, 2004 (File No. 0-28560),
                      and
                      incorporated herein by reference


(5)
            Filed
                as an exhibit to the registrant’s Form 8-K for December 5, 2002 that was
                filed with the SEC on December 20, 2002 (File No. 0-28560 and incorporated
                herein by reference.




(6)
            Filed
                as an exhibit to the registrant’s Form 8-K for July 25, 2003 that was
                filed with the SEC on August 7, 2003 (File No. 0-28560), and incorporated
                herein by reference.




(7)
            Filed
                as an exhibit to the registrant’s Form 8-K for December 23, 2004 that was
                filed with the SEC on December 30, 2004 (File No. 0-28560), and
                incorporated herein by reference.




(8)
            Filed
                as an exhibit to the registrant’s registration statement on Form S-8
                (Registration No. 333-84184) that was filed with the SEC on March
                12,
                2002, and incorporated herein by
                reference.




(9)
            Filed
                as an exhibit to the registrant’s proxy statement that was filed with the
                SEC pursuant to Section 14 (a) of the Securities Act on November
                12, 1998
                (File No. 0-28560), and incorporated herein by
                reference.




(10)
            Filed
                as an exhibit to the registrant’s Definitive Proxy Statement that was
                filed with the SEC pursuant to Section 14 (a) of the Securities Act
                on
                October 14, 2003 (File No. 0-28560), and incorporated herein by
                reference.




(11)
            Filed
                as an exhibit to the registrant’s Form 10-KSB for March 31, 2001 that was
                filed with the SEC on July 13, 2001 (File No. 0-28560), and incorporated
                herein by reference.




(12)
            Filed
                as an exhibit to the registrant’s current report on Form 8-K for June 7,
                2005 that was filed with the SEC on June 7, 2005 (File No. 0-28560),
                and
                incorporated herein by reference.




(13)
            Filed
                as an exhibit to the registrant’s current report on Form 8-K for August
                31, 2005 that was filed with the SEC on September 6, 2005 (File No.
                0-25860), and incorporated herein by
                reference.




(24)
            Filed
                as an exhibit to the registrants current report on Form 8-K for March
                24,
                2006 that was filed with the SEC on March 30, 2006 (File No. 0-25860),
                and
                incorporated herein by reference.




52




**Item
                14.**
            **Principal
                Accountant Fees and
                Services.**




The
      following table presents fees for professional services rendered by Kelly &
Company (“Kelly & Co”) for the years ended December 31, 2006 and 2005:







**2006**
            
            **2005**Audit
                Fees (1)
            
            $
            175,000
            
            $
            100,000Audit-Related
                Fees (2)
            
            
            -
            
            
            -Tax
                Fees (3)
            
            
            -
            
            
            -All
                Other Fees (4)
            
            
            -
            
            
            -Total
            
            $
            175,0000
            
            $
            100,000





(1)
            Audit
                Fees: Includes fees for professional services performed by Kelly
& Co
                in fiscal 2006, for the audit of our annual financial statements
                and
                review of financial statements included in our Form 10-QSB filings,
                and
                services that are normally provided in connection with statutory
                and
                regulatory filings or engagement, such as the filing of Form S-3
                or Form
                S-8.


(2)
            Audit-Related
                Fees: Kelly & Co did not provide any audit-related services.


(3)
            Tax
                Fees: Kelly & Co did not provide any professional services with
                respect to tax compliance, such as preparation and filing of original
                and
                amended returns for us and our consolidated subsidiaries, refund
                claims,
                payment planning, tax audit assistance and tax work stemming from
                “Audit-Related” items.


(4)
            All
                Other Fees: Kelly & Co did not provide other permissible work for us
                that does not meet the above category
                descriptions.




***Pre-approval
      Policy***




Our
      Audit
      Committee is responsible for approving all Audit, Audit-Related, Tax and Other
      Services. The Audit Committee pre-approves all auditing services and permitted
      non-audit services, including all fees and terms to be performed for us by
      our
      independent auditor at the beginning of the fiscal year. Non-audit services
      are
      reviewed and pre-approved by project at the beginning of the fiscal year. Any
      additional non-audit services contemplated by our company after the beginning
      of
      the fiscal year are submitted to the Audit Committee chairman for pre-approval
      prior to engaging the independent auditor for such services. Such interim
      pre-approvals are reviewed with the full Audit Committee at its next meeting
      for
      ratification.




53




**BPO
      MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**




**Index
      to Consolidated Financial Statements**





1.
                Report of Independent Registered Public Accounting Firm
            F-22.
                Consolidated Financial Statements: Consolidated Balance Sheet as
                of
                December 31, 2006
            F-3Consolidated
                Statements of Operations for the year ended December 31, 2006 and
                for the
                period July 26, 2005 (inception) to December 31, 2005
            F-4Consolidated
                Statements of Stockholders’ Equity and Comprehensive Loss for the year
                ended December 31, 2006 and for the period July 26, 2005 (inception)
                to
                December 31, 2005
            F-6Consolidated
                Statements of Cash Flows for the year ended December 31, 2006 and
                for the
                period July 26, 2005 (inception) to December 31, 2005
            F-7Notes
                to Consolidated Financial Statements
            F-9








F-1




*Report
        of Independent Registered Public Accounting Firm*
 
 To
        the
        Board of Directors and the Shareholders of
 BPO
        Management Services, Inc.
   We
        have
        audited the accompanying consolidated balance sheet of BPO Management Services,
        Inc. (a Delaware corporation) as of December 31, 2006 and the related
        consolidated statements of operations and cash flows for the year ended December
        31, 2006 and for the period from July 26, 2005 (inception), to December 31,
        2006, and the consolidated statement of stockholders' equity for the period
        from
        July 26, 2005 (inception), to December 31, 2006. These consolidated financial
        statements are the responsibility of the Company's management. Our
        responsibility is to express an opinion on these 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 audit to obtain reasonable assurance about whether the 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 audit 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 financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        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 the Company as of December
        31, 2006 and the results of its operations and its cash flows for the two
        years
        then ended and for the period from July 26, 2005 (inception), to December
        31,
        2006, and the statement of stockholders' equity for the period from July
        26,
        2005 (inception), to December 31, 2006 in conformity with accounting principles
        generally accepted in the United States of America.
  The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. The Company has incurred net losses for
        the
        year ended December 31, 2006 of $(4,629,006) and for the period from July
        26,
        2005 (inception) to December 31, 2005 of $(800,520). Despite its negative
        cash
        flows from operations of $(1,967,653) for the year ended December 31, 2006
        and
        $(49,536) for the period from July 26, 2005 (inception) to December 31, 2005,
        the Company has been able to obtain operating capital through private equity
        funding sources. Management's plans, which are described in Note 15 to the
        financial statements, include the continued development and eventual
        implementation of its business plan. The Company has relied upon private
        equity
        funding since inception. No assurances can be given that the Company can
        obtain
        sufficient working capital through the sale of the Company's common stock
        and
        borrowing or that the continued implementation of its business plan will
        generate sufficient revenues in the future to sustain ongoing operations.
        These
        factors raise substantial doubt about the Company's ability to continue as
        a
        going concern. The financial statements do not include any adjustments that
        might be necessary if the Company is unable to continue as a going
        concern.
 
 
 
 Kelly
        & Company
 Costa
        Mesa, California
 April
        16,
        2007






F-2




**BPO
      MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**


**Consolidated
      Balance Sheet**


**December
      31, 2006**


**Assets**




Current
                assets:Cash
                and cash equivalents
            
            $
            706,197Accounts
                receivable (net of allowance for doubtful accounts of
                $96,351)
            
            
            743,114Inventory
                (net of reserves of $0)
            
            
            37,960Income
                taxes receivable
            
            
            250,000Deposits
            
            
            26,821Prepaid
                expenses and other current assets
            
            
            96,344Total
                current assets
            
            
            1,860,436Property,
                plant and equipment, net (Note 3)
            
            
            509,929Goodwill
            
            
            3,532,955Intangible
                assets (net of amortization of $76,957)
            
            
            1,114,698Other
                assets
            
            
            146,722Total
                assets
            
            $
            7,164,740**Liabilities
                and Stockholders’ Equity**Current
                liabilities:Current
                portion of long-term debt, net of discount of $0
            
            $
            325,645Current
                portion of capital lease obligations
            
            
            170,976Accounts
                payable
            
            
            1,381,243Accrued
                expenses
            
            
            725,935Purchase
                price payable- short-term (Note 2)
            
            
            977,473Deferred
                revenues
            
            
            334,672Related
                party note payable (Note 7)
            
            
            809,535Severance
                obligations payable (Note 5)
            
            
            543,291Other
                current liabilities
            
            
            25,492Total
                current liabilities
            
            
            5,294,262Long-term
                debt , net of current portion
            
            
            46,402Capital
                lease obligations, net of current portion
            
            
            10,328Purchase
                price payable-long-term (Note 2)
            
            
            179,579Other
                long-term liabilities
            
            
            33,115Total
                liabilities
            
            
            5,923,476Commitments
                and contingencies (Note 9)Stockholders’
                equity:Convertible
                preferred stock A, par value $.01; authorized 1,608,612 shares; 1,574,116
                shares issued and outstanding
            
            
            15,741Convertible
                preferred stock B, par value $.01; authorized 1,449,204 shares; 1,449,200
                shares issued and outstanding
            
            
            14,492Non-convertible
                preferred stock C, par value $.01; authorized 21,738,000 shares;
                916,667
                shares issued and outstanding
            
            
            9,167Common
                stock, par value $.01; authorized 150,000,000 shares; 8,619,400 shares
                issued and outstanding
            
            
            86,194Additional
                paid-in capital
            
            
            4,993,734Accumulated
                deficit
            
            
            (3,417,600
            )Accumulated
                other comprehensive loss:Cumulative
                foreign currency translation adjustments
            
            
            (100,674
            )Total
                stockholders’ equity
            
            
            1,601,054$
            7,164,740




See
      accompanying notes to consolidated financial statements.




F-3




**BPO
      MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**


**Consolidated
      Statements of Operations**




**Year
                Ended**
            
            **From
                July 26 to****December
                31,**
            
            **December
                31,****2006**
            
            **2005**Net
                revenues:ECM
            
            $
            2,713,769
            
            $
            2,321,834ITO
            
            
            1,833,052
            
            
            -HRO
            
            
            164,318
            
            
            25,700Total
                net revenues
            
            
            4,711,139
            
            
            2,347,534Operating
                expenses:Cost
                of services
            
            
            1,523,983
            
            
            887,456Selling,
                general and administrative
            
            
            5,737,334
            
            
            1,230,011Research
                and development
            
            
            19,491
            
            
            -Change
                in estimated severance liability
            
            
            (223,726
            )
            
            1,014,281Share-based
                compensation
            
            
            115,694
            
            
            24,415Total
                operating expenses
            
            
            7,172,777
            
            
            3,156,163Operating
                loss
            
            
            (2,461,638
            )
            
            (808,629
            )Other
                (expense) income:Interest
                (expense) income, net
            
            
            (166,174
            )
            
            7,210Other
            
            
            10,732
            
            
            899Total
                other (expense) income
            
            
            (155,442
            )
            
            8,109Loss
                from operations before income taxes
            
            
            (2,617,080
            )
            
            (800,520
            )Income
                tax expense
            
            
            -
            
            
            -Net
                loss
            
            $
            (2,617,080
            )
            $
            (800,520
            )Basic
                and diluted loss per common share:Net
                loss per common share
            
            $
            (0.31
            )
            $
            (0.12
            )Weighted
                average shares used in computing:Basic
                and diluted loss per common share
            
            
            8,496,119
            
            
            6,682,788





See
      accompanying notes to consolidated financial statements.





F-4




**BPO
      MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**


Consolidated
      Statements of Stockholders’ Equity and Comprehensive Loss


for
      the
      period July 26, 2005 to December 31, 2006





**Preferred
                Series A**
            
            **Preferred
                Series B**
            
            **Preferred
                Series C**
            
            **Common
                stock****Number**
              **of
                shares**
            
            **Par**
              **value**
            
            **Number**
              **of
                shares**
            
            **Par**
              **value**
            
            **Number**
              **of
                shares**
            
            **Par**
              **value**
            
            **Number**
              **of
                shares**
            
            **Par**
              **value**
            
            **Additional**
              **paid
                in capital**
            
            **Accumulated**
              **deficit**
            
            **Accumulated
                other comprehensive income (loss)**
            
            **Total**
              **stockholders’**
              **equity**
            
            **Total
                comprehensive loss**Balance,
              July
                26, 2005
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —Initial
                shares issued for cash
            
            
            1,086,900
            
            
            10,869
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            5,253,350
            
            
            52,534
            
            
            1,436,597
            
            
            —
            
            
            —
            
            
            1,500,000
            
            
            —Acquisition
                of ADAPSYS entities
            
            
            —
            
            
            —
            
            
            1,449,200
            
            
            14,492
            
            
            —
            
            
            —
            
            
            1,449,200
            
            
            14,492
            
            
            604,596
            
            
            —
            
            
            —
            
            
            633,580
            
            
            —Acquisition
                of HRO
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            126,805
            
            
            1,268
            
            
            26,451
            
            
            —
            
            
            —
            
            
            27,719
            
            
            —Amortization
                of share-based compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            24,415
            
            
            —
            
            
            —
            
            
            24,415
            
            
            —Stock
                warrants issued
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            25,570
            
            
            —
            
            
            —
            
            
            25,570
            
            
            —Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (800,520
            )
            
            —
            
            
            (800,520
            )
            $
            (800,520
            )Foreign
                currency translation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            8,294
            
            
            8,294
            
            
            8,294Comprehensive
                loss-July 26, to December 31, 2005
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (800,520
            )
            
            8,294
            
            
            
            
            $
            (792,226
            )**Balance,**
              **December
                31, 2005**
            
            
            **1,086,900**
            
            $
            **10,869**
            
            $
            **1,449,200**
            
            $
            **14,492**
            
            $
            **—**
            
            $
            **—**
            
            $
            **6,829,355**
            
            $
            **68,294**
            
            $
            **2,117,629**
            
            $
            **(800,520**
            **)**
            $
            **8,294**
            
            $
            **1,419,058**




(Continued
      on the following page)


See
      accompanying notes to consolidated financial statements.





F-5




**BPO
        MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 Consolidated
        Statements of Stockholders’ Equity and Comprehensive Loss
 for
        the
        period July 26, 2005 to December 31, 2006






**Preferred**
              **Series
                A**
            
            **Preferred**
              **Series
                B**
            
            **Preferred
                Series C**
            
            **Common
                stock**
            
            **Additional**
              **paid
                in capital**
            
            **Accumulated**
              **deficit**
            
            **Accumulated
                other comprehensive income (loss)**
            
            **Total**
              **stockholders’**
              **equity**
            
            **Total**
              **comprehensive**
              **(loss)****Number**
              **of
                shares**
            
            **Par**
              **value**
            
            **Number**
              **of
                shares**
            
            **Par**
              **value**
            
            **Number**
              **of
                shares**
            
            **Par**
              **value**
            
            **Number**
              **of
                shares**
            
            **Par**
              **value**Amortization
                of share-based compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            103,819
            
            
            —
            
            
            —
            
            
            103,819
            
            
            —Acquisition
                of Digica
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            362,300
            
            
            3,623
            
            
            75,574
            
            
            —
            
            
            —
            
            
            79,197
            
            
            —Acquisition
                of Novus
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            144,920
            
            
            1,449
            
            
            3,551
            
            
            —
            
            
            —
            
            
            5,000
            
            
            —Share-based
                compensation
            
            
            344,185
            
            
            3,442
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            8,433
            
            
            —
            
            
            —
            
            
            11,875
            
            
            —Stock
                dividend
            
            
            143,031
            
            
            1,430
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,430
            )
            
            —
            
            
            —
            
            
            —
            
            
            —Conversion
                of officers’ loans
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            916,667
            
            
            9,167
            
            
            —
            
            
            —
            
            
            1,530,833
            
            
            —
            
            
            —
            
            
            1,540,000
            
            
            —Reverse
                merger with netGuru
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,282,820
            
            
            12,828
            
            
            879,687
            
            
            —
            
            
            —
            
            
            892,515
            
            
            —Stock
                purchase warrants issued
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            275,638
            
            
            —
            
            
            —
            
            
            275,638
            
            
            —Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,617,080
            )
            
            —
            
            
            (2,617,080
            )
            $
            (2,617,080
            )Currency
                translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (108,968
            )
            
            (108,968
            )
            
            (108,968
            )Comprehensive
                loss for the year ended December 31, 2006
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,617,080
            )
            
            (108,968
            )
            
            
            
            $
            (2,726,048
            )**Balance,
                December 31, 2006**
            
            
            **1,574,116**
            
            $
            **15,741**
            
            
            **1,449,200**
            
            $
            **14,492**
            
            
            **916,667**
            
            $
            **9,167**
            
            
            **8,619,395**
            
            **$**
            **86,194**
            
            **$**
            **4,993,734**
            
            **$**
            **(3,417,600**
            **)**
            **$**
            **(100,674**
            **)**
            **$**
            **1,601,054**





(continued
      on the following page)


See
      accompanying notes to consolidated financial statements.





F-6




**BPO
      MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**


**Consolidated
      Statements of Cash Flows**




**Year
                Ended**
            
            **July
                26, 2005 to****December
                31,**
            
            **December
                31,****2006**
            
            **2005**Cash
                flows from operating activities:Net
                loss
            
            $
            (2,617,080
            )
            $
            (800,520
            )Adjustments
                to reconcile loss from continuing operations to net cash used in
                operating
                activities:Depreciation
                and amortization
            
            
            160,720
            
            
            14,233Recognition
                of acquired customer contract cost
            
            
            245,265
            
            
            719,243Bad
                debt expense
            
            
            121,494
            
            
            -Compensation
                expense recognized on issuance of stock and stock options
            
            
            115,694
            
            
            49,985Amortization
                of discount on loan
            
            
            38,572
            
            
            -Gain
                on foreign exchange
            
            
            -
            
            
            (7,411
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            191,336
            
            
            (39,853
            )Prepaid
                expenses and other current assets
            
            
            (17,910
            )
            
            -Other
                assets
            
            
            (55,715
            )
            
            (5,279
            )Accounts
                payable and accrued expenses
            
            
            270,997
            
            
            192,819Change
                in severance liability
            
            
            (484,464
            )
            
            (68,768
            )Other
                current liabilities
            
            
            10,391
            
            
            -Deferred
                revenues
            
            
            111,165
            
            
            (103,985
            )Deferred
                gain on sale-leaseback
            
            
            (49,196
            )
            
            -Net
                cash used in operating activities
            
            
            (1,958,731
            )
            
            (49,536
            )Cash
                flows from investing activities:Purchase
                of property, plant and equipment
            
            
            (69,831
            )
            
            (7,839
            )Purchase
                of customer lists
            
            
            -
            
            
            (220,702
            )Cost
                of investment held-for-sale - sold
            
            
            -
            
            
            124,663Cash
                from acquired companies, net of acquisition costs paid
            
            
            2,394,657
            
            
            -Cash
                paid for acquisition, net of cash acquired
            
            
            -
            
            
            (111,321
            )Net
                cash provided by (used in) investing activities
            
            
            2,324,826
            
            
            (215,199
            )Cash
                flows from financing activities:Proceeds
                from issuance of preferred and common stock
            
            
            -
            
            
            1,500,000Payment
                on note payable
            
            
            -
            
            
            (3,096
            )Proceeds
                from bank debt
            
            
            287,112
            
            
            -Repayment
                of bank debt
            
            
            (1,286
            )Payment
                of capital lease obligations
            
            
            (19,778
            )
            
            -Proceeds
                from stockholder loans
            
            
            2,340,000
            
            
            -Cash
                distribution to shareholders
            
            
            (3,502,098
            )
            
            -Net
                cash (used in) provided by financing activities
            
            
            (896,050
            )
            
            1,496,904Effect
                of exchange rate changes on cash and cash equivalents
            
            
            3,983
            
            
            -Net
                cash (used in) provided by operations
            
            
            (525,972
            )
            
            1,232,169Cash
                and cash equivalents, beginning of period
            
            
            1,232,169
            
            
            -Cash
                and cash equivalents, end of period
            
            $
            706,197
            
            $
            1,232,169




(continued
        on the following page)


F-7


**Consolidated
      Statements of Cash Flows (Continuation)**





**Year
                Ended**
            
            **July
                26, 2005 to****December
                31,**
            
            **December
                31,****2006**
            
            **2005**Supplemental
                disclosure of cash flow information:Cash
                paid for:Interest
            
            $
            43,618
            
            $
            4,145Income
                taxes
            
            $
            -
            
            $
            -Supplemental
                disclosure of non-cash investing and financing activities:Issuance
                of warrants
            
            $
            275,638
            
            $
            25,570Issuance
                of Preferred A shares as compensation to officers
            
            $
            11,875
            
            $
            -Issuance
                of preferred A shares stock dividend
            
            $
            1,430
            
            $
            -Issuance
                of preferred C shares in partial conversion of bridge
                loans
            
            $
            1,540,000
            
            $
            -Acquisition
                of equipment under capital lease
            
            $
            16,804
            
            $
            -Acquisition
                of companies:Net
                assets acquired
            
            $
            8,110,117
            
            $
            2,432,119Net
                liabilities assumed
            
            $
            4,995,585
            
            $
            1,687,218Note
                issued toward consideration
            
            $
            1,157,052
            
            $
            -Common
                stock issued toward consideration
            
            $
            84,197
            
            $
            316,790Preferred
                stock issued toward consideration
            
            $
            -
            
            $
            316,790





F-8




**BPO
      MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**Year
      Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
      2005**




**(1)**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**




**Organization**




BPO
      Management Services, Inc. was incorporated in 1981 in the state of New Jersey
      and reincorporated in the state of Delaware in 1996 under the name Research
      Engineers, Inc. Effective February 18, 2000, the Company’s name was changed to
      netGuru.com and effective February 25, 2000, to netGuru, Inc. On December 15,
      2006, netGuru acquired the privately held BPO Management Services, Inc. (“Former
      BPOMS”) in a reverse merger and changed its name to BPO Management Services,
      Inc., also referred to as the “Company” or “BPOMS” throughout this document.
      BPOMS is a provider of business process outsourcing services providing
      enterprise content management (“ECM”) services, information technology
      outsourcing (“ITO”) services and human resource outsourcing (“HRO”) services to
      middle market enterprises located primarily in Canada and in the United States.




For
      accounting purposes, the acquisition has been treated as a recapitalization
      of
      Former BPOMS with Former BPOMS as the acquirer. The historical financial
      statements prior to December 15, 2006, are those of the Former BPOMS. Since
      the
      Former BPOMS began operations on July 26, 2005, pro forma information giving
      effect to the acquisition, as if the acquisition took place January 1, 2005,
      is
      not practicable and therefore not presented. Loss per share for the period
      July
      26, 2005 to December 31, 2005 (“Prior Period 2005”) and all share-related data
      have been presented giving effect to the recapitalization resulting from the
      reverse merger.




**Principles
      of Consolidation**




The
      consolidated financial statements include the accounts of BPOMS and its
      wholly-owned subsidiaries. All significant transactions among the consolidated
      entities have been eliminated upon consolidation. Each of the following entities
      is included in consolidation beginning with the respective date of
      acquisition.




**Inception/Acquisition
                Date**BPO
                Management Services, Inc.
            Inception
                date: July 26, 2005Adapsys
                Document Management LP
            July
                29, 2005Adapsys
                LP
            July
                29, 2005Digica,
                Inc.
            January
                1, 2006Novus
                Imaging Solutions, Inc.
            September
                30,2006netGuru,
                Inc.
            December
                15, 2006




**Use
      of Estimates**




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




F-9


**BPO
        MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **Year
        Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
        2005**


The
      financial statements include certain amounts that are based on management's
      best
      estimates and judgments. The most significant estimates are: allocation of
      the
      purchase price in business combinations and the related valuation of
      identifiable intangible assets and the determination of their useful lives,
      valuation of goodwill arising from a business combination, allowance for
      uncollectible accounts receivable, estimation of useful lives of fixed assets,
      test for impairment of goodwill, estimation of the severance liability,
      valuation of stock options and warrants issued, allocation of equity unit
      purchase price between preferred and common share and the determination of
      the
      valuation reserves on the United States and Canadian income tax assets. These
      estimates may be adjusted as more current information becomes available, and
      any
      adjustment could be significant.




**Fair
      Value of Financial Instruments**




Statement
      of Financial Accounting Standards (“SFAS”) No. 107, “Disclosures About Fair
      Value Of Financial Instruments,” requires management to disclose the estimated
      fair value of certain assets and liabilities defined by SFAS No. 107 as
      financial instruments. At December 31, 2006, management believed the carrying
      amounts of cash and cash equivalents, receivable and payable amounts, and
      accrued expenses approximated fair value because of the short maturity of these
      financial instruments. The Company also believed that the carrying amounts
      of
      its capital lease obligations approximated their fair value, as the interest
      rates approximated a rate that the Company could have obtained under similar
      terms at the balance sheet date.




**Foreign
      Currency Translation**




The
      financial condition and results of operations of the Company’s foreign
      subsidiaries are accounted for using the local currency as the functional
      currency. Assets and liabilities of the subsidiaries are translated into U.S.
      dollars (the reporting currency) at the exchange rate in effect at the fiscal
      year-end. Statements of operations accounts are translated at the average rate
      of exchange prevailing during the respective fiscal years. Translation
      adjustments arising from the use of differing exchange rates from period to
      period are included in accumulated other comprehensive (loss) in the
      consolidated statements of stockholders’ equity and comprehensive loss. Gains
      and losses resulting from foreign currency transactions are included in
      operations and are not material for fiscal 2006 and for the Prior Period
      2005.




**Cash
      and Cash Equivalents**




The
      Company considers all liquid investments with maturities of three months or
      less
      at the date of purchase to be cash equivalents. **** The
      Company maintains its cash balances at financial institutions that management
      believes possess high-credit quality.  As of December 31, 2006, the
      Company's cash and cash equivalents were deposited primarily in six financial
      institutions. Although a portion of the related cash balances are federally
      insured, the Company maintains amounts on deposit in excess of federally insured
      limits.




F-10


**BPO
        MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **Year
        Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
        2005**


**Property,
      Plant and Equipment**




Property,
      plant and equipment are stated at cost. Depreciation is calculated using the
      straight-line method over the following useful lives:





Computer
                equipment
            2-5
                yearsComputer
                software
            2-3
                yearsOffice
                equipment and furniture
            3-10
                years




Assets
      subject to capital lease agreements and leasehold improvements are amortized
      over the lesser of the life of the asset or the term of the lease.




**Goodwill**




The
      Company, upon its inception, adopted the provisions of SFAS No. 142 “Goodwill
      and Other Intangible Assets.” SFAS No. 142 requires that goodwill and intangible
      assets with indefinite useful lives no longer be amortized, but instead be
      tested for impairment at least annually. SFAS No. 142 also requires that
      intangible assets with estimable useful lives be amortized over their respective
      estimated useful lives to their estimated residual values, and reviewed for
      impairment in accordance with SFAS No. 144. SFAS No. 142 required the Company
      to
      perform an assessment of whether there was an indication that goodwill was
      impaired as of the date of adoption.




The
      Company is required to perform reviews for impairment annually, or more
      frequently when events occur or circumstances change that would more likely
      than
      not reduce the fair value of the net carrying amount. The evaluation of goodwill
      impairment involves assumptions about the fair values of assets and liabilities
      of each reporting unit. If these assumptions are materially different from
      actual outcomes, the carrying value of goodwill will be incorrect. In addition,
      the Company’s results of operations could be materially affected by the
      write-down of the carrying amount of goodwill to its estimated fair
      value.




The
      Company assessed the fair value of its three reporting units by considering
      their projected cash flows, using risk-adjusted discount rates and other
      valuation techniques and determined that there was no impairment to goodwill.
      As
      of December 31, 2006, the Company’ goodwill balance was $3,532,955.




**Impairment
      or Disposal of Long-Lived Assets**




The
      Company accounts for its long-lived assets under SFAS No. 144, “Accounting
      for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 requires
      that long-lived assets be reviewed for impairment whenever events or changes
      in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. Recoverability of assets to be held and used is measured by a
      comparison of the carrying amount of an asset to future net cash flows expected
      to be generated by the asset. If the carrying amount of an asset exceeds its
      estimated future cash flows, an impairment charge is recognized in the amount
      by
      which the carrying amount of the asset exceeds the fair value of the asset.
      SFAS
      No. 144 requires companies to separately report discontinued operations and
      extends that reporting to a component of an entity that either has been disposed
      of (by sale, abandonment, or in a distribution to owners) or is classified
      as
      held for sale. Assets to be disposed of are reported at the lower of the
      carrying amount or fair value less costs to sell.




F-11


**BPO
        MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **Year
        Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
        2005**


**Revenue
      Recognition**




The
      Company recognizes revenue when the following criteria are met: (1) persuasive
      evidence of an arrangement, such as agreements, purchase orders or written
      or
      online requests, exists; (2) delivery of the product or service has been
      completed and no significant obligations remain; (3) the Company’s price to the
      buyer is fixed or determinable; and (4) collection is reasonably assured. The
      Company’s revenues arise from the following segments: ECM solutions including
      collaborative software products and services and FAO, ITO services and HRO
      services.





Revenue
      from software sales is recognized upon shipment if no significant post-contract
      support obligations remain outstanding and collection of the resulting
      receivable is reasonably assured. Customers may choose to purchase maintenance
      contracts that include telephone, e-mail and other methods of support, and
      the
      right to unspecified upgrades on a when-and-if available basis. Revenue from
      these maintenance contracts is deferred and recognized ratably over the life
      of
      the contract, usually twelve months.





In
      October 1997, the Accounting Standards Executive Committee (“AcSEC”) of the
      AICPA issued Statement of Position (“SOP”) 97-2, “Software Revenue Recognition.”
SOP 97-2 distinguishes between significant and insignificant vendor obligations
      as a basis for recording revenue, with a requirement that each element of a
      software licensing arrangement be separately identified and accounted for based
      on relative fair values of each element. The Company determines the fair value
      of each element in multi-element transactions based on vendor-specific objective
      evidence (“VSOE”). VSOE for each element is based on the price charged when the
      same element is sold separately.





In
      1998,
      the AICPA issued SOP 98-9, “Modification of SOP 97-2, Software Revenue
      Recognition, With Respect to Certain Transactions,” which modifies SOP 97-2 to
      allow for use of the residual method of revenue recognition if certain criteria
      have been met. If evidence of fair value of all undelivered elements exists
      but
      evidence does not exist for one or more delivered elements, then revenue is
      recognized using the residual method. Under the residual method, the fair value
      of the undelivered elements is deferred and the remaining portion of the
      transaction fee is recognized as revenue.





The
      Company sells its collaborative software along with a maintenance package.
      This
      constitutes a multi-element arrangement. The price charged for the maintenance
      portion is the same as when the maintenance is sold separately. The fair values
      of the maintenance contracts sold in all multi-element arrangements are
      recognized over the terms of the maintenance contracts. The collaborative
      software portion is recognized when persuasive evidence of an arrangement exits,
      price is fixed and determinable, when delivery is complete, collection of the
      resulting receivable is reasonably assured and no significant obligations
      remain.




Revenues
      from providing IT services are recognized primarily on a time and materials
      basis, with time at a marked-up rate and materials and other reasonable expenses
      at cost, once the services are completed and no significant obligations remain.
      Certain IT services contracts are fixed price contracts where progress toward
      completion is measured by mutually agreed upon pre-determined milestones for
      which the Company recognizes revenue upon achieving such milestones. Fixed
      price
      IT contracts are typically for a short duration of one to nine months. The
      Company did not have any fixed price contracts at December 31, 2006. Fees for
      certain services are variable based on an objectively determinable factor such
      as usage. Those factors are included in the written contract such that the
      customer's fee is determinable. The customer's fee is negotiated at the onset
      of
      the arrangement.




F-12


**BPO
        MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **Year
        Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
        2005**




**Allowance
      for Doubtful Accounts Receivable**




The
      Company sells to its customers on credit and grants credit to those who are
      deemed credit worthy based on its analysis of their credit history. The Company
      reviews its accounts receivable balances and the collectibility of these
      balances on a periodic basis. Based on the Company’s analysis of the length of
      time that the balances have been outstanding, the pattern of customer payments,
      the Company’s understanding of the general business conditions of its customers
      and its communications with their customers, the Company estimates the
      recoverability of these balances. When recoverability is uncertain, the Company
      records bad debt expenses and increases the allowance for accounts receivable
      by
      an amount equal to the amount estimated to be unrecoverable. If the historical
      data the Company uses to calculate the allowance provided for doubtful accounts
      does not reflect its future ability to collect outstanding receivables,
      additional provisions for doubtful accounts may be needed and the Company’s
      future results of operations could be materially affected.




**Concentration
      of Risk**




The
      Company is subject to credit risk primarily through its accounts receivable
      balances. The Company does not require collateral for its accounts receivable
      balances. Two of the Company’s customers accounted for 15.87% and 10.43%,
      respectively, of the Company’s consolidated net sales in fiscal 2006.




In
      Prior
      Period 2005, one customer accounted for approximately 74% of the Company’s net
      sales. No other customer accounted for more than 10% of consolidated net
      sales.




**Deferred
      Revenues**




The
      Company defers revenues for its maintenance contracts and for its collaborative
      software sales that are not considered earned. The Company defers its
      maintenance revenues when the maintenance contracts are sold, and then
      recognizes the maintenance revenues over the term of the maintenance contracts.
      The Company defers its collaborative software sales revenues if it invoices
      or
      receives payment prior to the completion of a project, and then recognizes
      these
      revenues upon completion of the project when no significant obligations remain.




**Research
      and Development**




The
      Company’s research and development (“R&D”) costs consist mainly of software
      developers’ salaries. The Company follows the provisions of SFAS No. 86 to
      capitalize software development costs when technological feasibility has been
      established and to stop capitalization when the product is available for general
      release to customers. The Company expenses development costs when they are
      related to enhancement of existing software products.




F-13


**BPO
        MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **Year
        Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
        2005**


**Income
      Taxes**




The
      Company accounts for income taxes using 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.




**Earnings
      (Loss) Per Share**




Basic
      earnings (loss) per share (“EPS”) is calculated by dividing net income (loss) by
      the weighted-average common shares outstanding during the period. Diluted EPS
      reflects the potential dilution to basic EPS that could occur upon conversion
      or
      exercise of securities, options, or other such items, to common shares using
      the
      treasury stock method and/or if converted method based upon the weighted-average
      fair value of the Company’s common shares during the period. See Note 11 “Loss
      Per Share” for the computation of EPS.




**Comprehensive
      Income (Loss)**




The
      Company applies the provisions of SFAS No. 130, “Reporting Comprehensive
      Income,” which establishes rules for the reporting and display of comprehensive
      income (loss) and its components. SFAS No. 130 requires changes in foreign
      currency translation adjustments, which are reported separately in stockholders’
equity, to be included in other comprehensive income (loss).




**Share-Based
      Compensation**




The
      Company accounts for share-based compensation to employees pursuant to SFAS
      No.123(R), “Share Based Payment,”which requires that all share-based
      compensation to employees, including grants of employee stock options, be
      recognized as expense in the Company’s financial statements based on their
      respective grant date fair values. As SFAS No. 123(R) requires that share-based
      compensation expense be based on awards that are ultimately expected to vest,
      share based compensation for 2006 has been reduced by estimated forfeitures.




SFAS
      123(R) requires the use of a valuation model to calculate the fair value of
      share-based awards. The Company has elected to use the Black-Scholes-Merton
      option pricing model, which incorporates various assumptions including
      volatility, expected life, expected dividend and interest rates. As a private
      company, Former BPOMS did not have a history of market prices of its common
      stock, and as such, the Company used an estimated volatility in accordance
      with
      SAB No. 107 “Share Based Payment.” In 2006, the Company used the volatility of
      the stock price of netGuru, BPOMS’ predecessor company, adjusted to remove the
      effects of divestitures, cash distributions, and the reverse merger which BPOMS
      deems not representative of the events that would take place during expected
      term of the options that were valued. The expected life of awards was based
      on
      the simplified method as defined in SAB No. 107. The risk-free interest rate
      assumption was based on observed interest rates appropriate for the terms of
      the
      awards. The dividend yield assumption was based on the company’s history and
      expectation of not paying any dividends in the foreseeable future. Forfeitures
      were estimated at the time of grant and will be revised, if necessary, in
      subsequent periods if actual forfeitures differ from those estimates. The
      Company uses the straight line amortization model to record expenses under
      this
      statement and recognized share-based compensation expense for the stock options
      granted in 2006 and Prior Period 2005 in the amounts of $103,819 and $24,415,
      respectively. The Company may be required to accelerate, increase or cancel
      any
      remaining unearned share-based compensation expense if there are any
      modifications or cancellation of the underlying unvested securities. Future
      share-based compensation expense and unearned share-based compensation will
      increase to the extent that we grant additional equity awards to employees
      or we
      assume unvested equity awards in connection with acquisitions.




F-14


**BPO
        MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **Year
        Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
        2005**


The
      fair
      value of the Company’s stock options granted to employees was estimated using
      the following assumptions:




Expected
                Dividend yield
            —Expected
                volatility
            125%Risk-free
                interest rate
            4.6%
                - 5.03%Expected
                option lives (in years)
            7.0Estimated
                forfeiture rate
            7.0%




All
      share-based compensation expense was recorded in selling, general and
      administrative expense.




**Valuation
      of the Company’s Common Shares at the Time of Grant**




Prior
      to
      Merger, the Company granted its common stock as partial consideration for the
      acquisition of Digica in January 2006 and Novus Imaging Solutions, Inc., in
      October 2006. The fair values of these grants were determined based on recent
      sales of the Company’s securities.




F-15


**BPO
        MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **Year
        Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
        2005**


**Segment
      Reporting**




The
      Company applies the provisions of SFAS No. 131, “Disclosures about Segments of
      an Enterprise and Related Information.” SFAS No. 131 requires segments to be
      determined and reported based on how management measures performance and makes
      decisions about allocating resources. See Note 10 “Segment and Geographic Data”
for a description of and disclosures regarding the Company’s significant
      reportable segments.




**Reclassifications**




Certain
      reclassifications have been made to the fiscal 2005 consolidated financial
      statements to conform to the fiscal 2006 presentation. The primary
      reclassifications relate to the presentation of the three business segments
      and
      the presentation of share and per share data giving effect to the
      one-for-fifteen reverse merger.




**Impact
      of Recently Issued Accounting Standards**




***AccountingChanges
      and Error Correctionss***




In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
an amendment to Accounting Principles Bulletin Opinion (“APB”) No. 20,
“Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim
      Financial Statements.” Though SFAS No. 154 carries forward the guidance in APB
      No.20 and SFAS No.3 with respect to accounting for changes in estimates, changes
      in reporting entity, and the correction of errors, SFAS No. 154 establishes
      new
      standards on accounting for changes in accounting principles, whereby all such
      changes must be accounted for by retrospective application to the financial
      statements of prior periods unless it is impracticable to do so. SFAS No. 154
      is
      effective for accounting changes and error corrections made in fiscal years
      beginning after December 15, 2005, with early adoption permitted for changes
      and
      corrections made in years beginning after May 2005. We implemented SFAS No.
      154
      in fiscal year beginning January 1, 2006. SFAS No. 156 did not have a material
      impact on our financial position, results of operations or cash
      flows.




***Accounting
      for Certain Hybrid Financial Instruments***




In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments,” which amends SFAS No. 133, “Accounting for Derivatives
      Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers
      and Servicing of Financial Assets and Extinguishment of Liabilities.” SFAS No.
      155 amends SFAS No. 133 to narrow the scope exception for interest-only and
      principal-only strips on debt instruments to include only such strips
      representing rights to receive a specified portion of the contractual interest
      or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow
      qualifying special-purpose entities to hold a passive derivative financial
      instrument pertaining to beneficial interests that itself is a derivative
      instrument. SFAS No. 155 is effective for us beginning January 1, 2007. We
      are
      currently evaluating the impact this new Standard but believe that it will
      not
      have a material impact on our financial position, results of operations, or
      cash
      flows.




F-16


**BPO
        MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **Year
        Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
        2005**


***Accounting
      for Servicing of Financial Assets***




In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets,” which provides an approach to simplify efforts to obtain hedge-like
      (offset) accounting. This Statement amends FASB Statement No. 140, “Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities,” with respect to the accounting for separately recognized servicing
      assets and servicing liabilities. The Statement (1) requires an entity to
      recognize a servicing asset or servicing liability each time it undertakes
      an
      obligation to service a financial asset by entering into a servicing contract
      in
      certain situations; (2) requires that a separately recognized servicing asset
      or
      servicing liability be initially measured at fair value, if practicable; (3)
      permits an entity to choose either the amortization method or the fair value
      method for subsequent measurement for each class of separately recognized
      servicing assets or servicing liabilities; (4) permits at initial adoption
      a
      one-time reclassification of available-for-sale securities to trading securities
      by an entity with recognized servicing rights, provided the securities
      reclassified offset the entity’s exposure to changes in the fair value of the
      servicing assets or liabilities; and (5) requires separate presentation of
      servicing assets and servicing liabilities subsequently measured at fair value
      in the balance sheet and additional disclosures for all separately recognized
      servicing assets and servicing liabilities. SFAS No. 156 also describes the
      manner in which it should be initially applied. SFAS No. 156 is effective for
      all separately recognized servicing assets and liabilities as of the beginning
      of an entity’s fiscal years beginning after September 15, 2006, and is effective
      for us beginning January 1, 2007. We do not believe that SFAS No. 156 will
      have
      a material impact on its financial position, results of operations or cash
      flows.




***Accounting
      for Uncertainty in Income Taxes***




In
      June
      2006, the FASB issued Interpretation (“FIN”) 48, “Accounting for Uncertainty in
      Income Taxes - an interpretation of FASB Statement No. 109,” which clarifies the
      accounting for uncertainty in income taxes recognized in an enterprise’s
      financial statements in accordance with SFAS No. 109, “Accounting for Income
      Taxes.” The interpretation prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return. FIN 48 requires
      recognition of tax benefits that satisfy a greater than 50% probability
      threshold. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure, and
      transition. FIN 48 is effective for us beginning January 1, 2007. We are is
      currently assessing the potential impact that adoption of FIN 48 will have
      on
      our financial position, results of operations or cash flows.




***Fair
      Value Measurements***




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. SFAS No. 157 does not require any new fair value
      measurements, but provides guidance on how to measure fair value by providing
      a
      fair value hierarchy used to classify the source of the information. This
      statement is effective for us beginning January 1, 2008. We are currently
      assessing the potential impact that adoption of SFAS No. 157 will have on our
      financial position, results of operations or cash flows.




F-17


**BPO
        MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **Year
        Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
        2005**


***Effects
      of Prior Year Misstatements When Quantifying Current Year
      Misstatements***




In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements
      when Quantifying Current Year Misstatements.” SAB No. 108 requires analysis of
      misstatements using both an income statement (rollover) approach and a balance
      sheet (iron curtain) approach in assessing materiality and provides for a
      one-time cumulative effect transition adjustment. SAB No. 108 is effective
      for
      our fiscal year 2007 annual financial statements. We are currently assessing
      the
      potential impact that adoption of SAB No. 108 will have on our financial
      position, results of operations or cash flows.




***Accounting
      for Defined Benefit Pension and Other Postretirment
      Plans***




In
      September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined
      Benefit Pension and Other Postretirement Plans - an amendment of SFAS No. 87,
      88, 106, and 132(R).” SFAS No. 158 requires the full recognition, as an asset or
      liability, of the overfunded or underfunded status of a company-sponsored
      postretirement benefit plan. SFAS No. 158 will be effective for us beginning
      January 1, 2007. We are currently assessing the potential impact that adoption
      of SFAS No. 158 will have on our financial position, results of operations
      or
      cash flows.




***Fair
      Value Option for Financial Assets and Financial
      Liabilities***




In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities." Under the provisions of SFAS 159,
      Companies may choose to account for eligible financial instruments, warranties
      and insurance contracts at fair value on a contract-by-contract basis. Changes
      in fair value will be recognized in earnings each reporting period. SFAS 159
      is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. We are
      required to and plan to adopt the provisions of SFAS 159 beginning in the first
      quarter of 2008. We are currently assessing the impact of the adoption of SFAS
      159 on our financial position, results of operations or cash flows.




**(2)**
            **BUSINESS
                COMBINATIONS**




In
      August
      2005, the Company completed the purchase of all the voting equity interest
      of
      ADAPSYS Transaction Processing, Inc. and ADAPSYS Document Management, Inc.,
      (the
      "Adapsys entities"), privately held providers of data and document management
      solutions by acquiring all of their outstanding capital stock for a total
      purchase price of $1,319,048. The Adapsys entities' results of operations have
      been included in the consolidated financial statements since the date of
      acquisition. In addition to adding the Adapsys data and document management
      solutions capability with its long term Canada-based customer relationships,
      this acquisition enabled the company to offer a high quality, cost-effective
      service utilizing its near shore delivery model to its US
      customers.




The
      purchase price consisted of cash in the amount of $659,899 and preferred stock,
      common stock and options valued at $659,149. The value of the 2 million shares
      of preferred Series B stock, 2 million shares of common stock and options to
      purchase 168,000 common shares issued all at fair value based on the cash price
      paid for a comparable number of shares of Company's common stock at formation
      in
      July 2005.




F-18


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


The
      following table presents the allocation of the acquisition price, including
      professional fees and other related acquisition costs, to the assets acquired
      and liabilities assumed, based on their fair values as of the date of
      acquisition:




Cash
                and cash equivalents
            
            
            574,147Accounts
                receivable
            
            
            454,931Acquired
                contract
            
            
            964,508Other
                current assets
            
            
            424Property,
                plant and equipment
            
            
            60,888Other
                assets
            
            
            125,297Goodwill
            
            
            826,071Total
                assets acquired
            
            
            3,006,266Note
                payable to bank
            
            
            79,011Accounts
                payable and other accrued liabilities
            
            
            525,158Estimated
                termination liability
            
            
            1,083,049Total
                liabilities assumed
            
            
            1,687,218Net
                assets acquired
            
            
            1,319,048




Customer
      contract at December 31, 2005, represents the unrealized portion of the purchase
      price allocated to the customer contract. This customer contract had 6.5 months
      remaining when it was acquired in August 2005 and expired in February 2006.
      Under this agreement, the Company determined the fair value of the customer
      contract based upon an income approach in which an estimated gross profit margin
      of 60% was utilized. The gross profit estimate was based on the SIC average
      computer service industry gross profit margins over a 5 year period. During
      Prior Period 2005, the Company expensed $719,243 of this amount based on the
      actual revenue recognized on the contract during the period.




The
      purchase price and costs associated with the Adapsys entities acquisition
      exceeded the Company's allocation of the fair value of net assets acquired
      by
      $826,071, which was assigned to goodwill. The
      $826,071 of goodwill is not expected to be deductible for United States income
      tax, state income tax or Canadian income tax purposes.




In
      January 2006, the Company completed its acquisition of all of the outstanding
      equity interests of Digica, Inc. (“Digica”), a privately-held provider of
      information technology outsourcing services based in Branchburg, New Jersey.
      Under the terms of the purchase agreement, the Company paid $400,000 in cash
      and
      issued 362,300 shares of the Company’s common stock in exchange for all
      outstanding equity of Digica.




The
      fair
      value of the shares of the Company’s common stock issued in this acquisition was
      determined using sales of shares of the Company’s common stock and the estimated
      value of common shares previously issued in other acquisitions. The following
      table summarizes estimated fair values of the assets acquired and liabilities
      assumed from Digica at the date of acquisition:




F-19


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


Current
                assets
            
            $
            210,212Property,
                plant and equipment
            
            
            179,638Other
                non current assets
            
            
            33,115Goodwill
            
            
            333,689Identifiable
                intangible assets
            
            
            145,231Total
                assets acquired
            
            
            901,885Current
                liabilities
            
            
            377,659Other
                non current liabilities
            
            
            33,115Long-term
                debt
            
            
            11,914Total
                liabilities assumed
            
            
            422,688Net
                assets acquired
            
            $
            479,197




Acquired
      identifiable intangible assets in the amount of $145,231 were assigned to
      customer contracts, with an estimated useful life of three years with no
      residual value. The purchase price and costs associated with the Digica
      acquisition exceeded the Company's allocation of the fair value of net assets
      acquired by $333,689, which was assigned to goodwill. The $333,689 assigned
      to
      goodwill is not expected to be deductible for United States income tax
      purposes.




In
      October 2006, the Company completed its acquisition of all of the outstanding
      equity interests of Novus Imaging Solutions (“Novus”), a provider of document
      imaging, microfilming and records management solutions located in Winnipeg,
      Canada. As consideration for the acquisition of Novus, the Company agreed to
      pay
      the shareholders of Novus, approximately $865,234 in cash, 144,920 shares of
      BPOMS common stock valued at approximately $5,000. In addition, the sellers
      of
      Novus are entitled to an earnout cash payment of approximately $291,819, of
      which 112,238 is payable within the first 12 months after acquisition and the
      remainder $179,579 is payable within the second 12 months after acquisition,
      subject to certain conditions. The following table summarizes estimated fair
      values of the assets acquired and liabilities assumed from Novus at the date
      of
      acquisition:




Current
                assets
            
            $
            342,042Property,
                plant and equipment
            
            
            132,710Goodwill
            
            
            852,241Total
                assets acquired
            
            
            1,326,993Current
                liabilities
            
            
            102,237Total
                liabilities assumed
            
            
            102,237Net
                assets acquired
            
            $
            1,224,756




F-20


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


The
      purchase price and costs associated with the Novus acquisition exceeded the
      Company's allocation of the fair value of net assets acquired by $852,241,
      which
      was assigned to goodwill. The $4852,241 assigned to goodwill is not expected
      to
      be deductible for United States income tax, state income tax or Canadian income
      tax purposes.




The
      stock
      purchase agreement pursuant to which the Company acquired Novus provides for
      the
      cash portion of the purchase price to be paid upon the earlier of March 1,
      2007
      and the closing of a one million dollars investment in the Company by persons
      other than the Company’s then current shareholders. If the cash portion of the
      purchase price is not paid when due, then the sellers of Novus will have the
      right to rescind their sale of Novus to the Company and to purchase for $1.00
      from the Company all of the assets and liabilities of ADAPSYS’ Deines business.
      As of December 31, 2006, the total amount payable to the sellers of Novus was
      approximately $1,157,052. On February 28, 2007, the sellers agreed to extend
      the
      due date of the cash payment to April 30, 2007.




On
      December 15, 2006, the Company completed a reverse merger with netGuru, in
      which
      it exchanged its outstanding common and preferred shares for the outstanding
      common and preferred shares of netGuru. The Company consolidated netGuru’s two
      business units, Web4, a provider of document management and enterprise
      collaboration technology, with the Company’s document management business
      headquartered in Winnipeg Canada, and netGuru Systems, a provider of contract
      computer programming staff and solutions to corporate enterprises, with the
      Company’s Information Technology business headquartered in Branchburg, NJ. The
      following table summarizes estimated fair values of the assets acquired and
      liabilities assumed from netGuru at the date of acquisition:




Current
                assets
            
            $
            3,278,200Property,
                plant and equipment
            
            
            80,273Other
                non current assets
            
            
            59,706Identifiable
                intangible assets
            
            
            827,172Goodwill
            
            
            1,635,888Total
                assets acquired
            
            
            5,881,239Current
                liabilities
            
            
            4,421,464Other
                non current liabilities
            
            
            49,196Total
                liabilities assumed
            
            
            4,470,660Net
                assets acquired
            
            $
            1,410,579




The
      purchase price includes the value of a 7-year stock purchase warrant that the
      Company issued as finder’s fee for the transaction. The warrant is exercisable
      into 47,619 shares of the Company’s common stock and was valued at $119,271
      using the Black-Scholes-Merton option pricing model. A value of $827,172 was
      assigned to the eReview collaborative software technology as an identifiable
      intangible asset with an estimated useful life of five years and no residual
      value. Purchase price in excess of the net assets acquired in the amount of
      $1,635,888 was assigned to goodwill, which is not expected to be deductible
      for
      United States income tax, state income tax purposes. The allocation of purchase
      price is based on preliminary dates and could change when final valuation is
      determined.





F-21


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


**(3)**
            **PROPERTY,
                PLANT AND EQUIPMENT**




Property,
      plant and equipment, at cost, as of December 31, 2006 consisted of the
      following:





Furniture
                and fixtures
            
            
            43,416Office
                equipment
            
            
            530,661Assets
                under capital lease
            
            
            16,804Leasehold
                improvements
            
            
            20,561611,442Less
                accumulated depreciation and amortization
            
            
            (101,513
            )Property,
                plant and equipment, net
            
            $
            509,929




The
      Company acquired the remaining balance of deferred gain on sale and leaseback
      of
      a facility on December 15, 2006, along with the acquisition of netGuru, Inc.
      This deferred gain was recognized in its entirety in December 2006, when the
      Company terminated the lease and moved its corporate headquarters to a new
      location.




**(4)**
            **DEBT**




***Long-term
      debt***




Long-term
      debt, including capital lease obligations, consisted of the following at
      December 31, 2006:




a.
                Credit facility from Bank of Nova Scotia, secured by assets of the
                Company, variable annual interest rate of 7% at December 31,
                2006
            
            $
            256,804b.
                Operating line of credit from Bank of Nova Scotia, secured by assets
                of
                the Company, variable annual interest rate of 7.25% at December 31,
                2006
            
            
            47,505c.
                Loan from Business Development Bank of Canada, expiring May 21, 2010,
                variable annual interest rate of 11.25% at December 31,
                2006
            
            
            58,754d.
                Collateralized loan payable to Chrysler Financial, expiring March
                2008,
                fixed interest rate of 13.9%
            
            
            8,984e.
                Capital lease obligations maturing at dates ranging from November
                30, 2009
                to December 31, 2011, secured by the leased assets
            
            
            541,094Total
                long-term debt before unamortized discount
            
            
            913,141Less:
                Unamortized discount
            
            
            -Long-term
                debt
            
            
            913,141Less:
                current portion
            
            
            (418,183
            )$
            494,958




F-22


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


***a.***
            ***Credit
                facility from Bank of Nova
                Scotia***




Adapsys
      LP has a credit facility with Bank of Nova Scotia. The credit facility is an
      operating line of credit with a maximum availability of approximately $258,000,
      secured by all present and future personal property of the Company and carries
      an annual interest rate of Canadian prime rate plus 1%, which amounted to 7%
      at
      December 31, 2006. The credit facility is subject to two covenants, the
      borrowing base covenant and the tangible net worth covenant. The borrowing
      base
      covenant limits the Company’s operating loans not to exceed the lesser of
      $258,000 or the operating limit of the borrowing base, defined as an amount
      equivalent to 75% of the Company’s certain accounts receivables less security
      interest or charges or specific payables which have or may have priority over
      the bank’s security. The tangible net worth covenant requires the Company to
      maintain a tangible net worth in excess of approximately $429,000. Tangible
      net
      worth is defined by the bank as stockholders’ equity less amounts due from
      related parties, investment in affiliates and intangible assets as defined
      by
      the bank. At December 31, 2006, the Company was not in compliance with the
      tangible net worth or the borrowing base covenants, and had an outstanding
      balance of approximately $ 256,804.




***b.***
            ***Operating
                line of credit from Bank of Nova
                Scotia***




Adapsys
      Document Management LP (“ADM”) has a operating line of credit with the Bank of
      Nova Scotia. The operating line of credit has a maximum availability of
      approximately $129,000, secured by all present and future personal property
      of
      the Company and carries an annual interest rate of Canadian prime rate plus
      1.25% which amounted to 7.25% at December 31, 2006. The operating line is
      subject to two covenants, the borrowing base covenant and the tangible net worth
      covenant. The borrowing base covenant limits ADM’s operating loans not to exceed
      the lesser of $129,000 or the operating limit of the borrowing base, defined
      as
      an amount equivalent to 75% of ADM’s certain accounts receivables less security
      interest or charges or specific payables which have or may have priority over
      the bank’s security. The tangible net worth covenant requires ADM to maintain a
      tangible net worth in excess of approximately $129,000. Tangible net worth
      is
      defined by the bank as stockholders’ equity less amounts due from related
      parties, investment in affiliates and intangible assets as defined by the bank.
      At December 31, 2006, ADM was not in compliance with the tangible net worth
      covenant but was in compliance with the borrowing base covenant and had an
      outstanding balance of approximately $47,505 under this operating line.




***c.***
            ***Term
                Loan from Business Development Bank of
                Canada***




ADM
      has a
      term loan with the Business Development Bank of Canada that expires on May
      21,
      2010. The interest rate on this loan is bank’s floating rate plus 3.25% and
      monthly principal re-payments are approximately $1,433. At December 31, 2006,
      the annual rate of interest on this loan was 11.25% and the balance outstanding
      was approximately $58,754. The loan is secured by a general security agreement
      from ADM and joint and several personal guarantees in the amount of
      approximately $43,000 by two former principals of ADM who were also the
      Company’s 5% shareholders. The Company issued a 7-year warrant to purchase 5,435
      shares of the Company’s common stock (7,500 pre-merger shares) at an exercise
      price of $0.03 per share to each of these shareholders in return for their
      loan
      guarantees.




F-23


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


***d.***
            ***Loan
                Payable to Chrysler
                Financial***




Digica
      has a loan payable to Chrysler Financial collateralized by a vehicle with a
      net
      book value of $12,000. The loan has a fixed annual interest rate of 13.9% and
      matures in March 2008. At December 31, 2006, the loan balance was
      $8,984.




***e.***
            ***Capital
                leases***




Capital
      leases consist primarily of equipment leases for the U.S. entities. The Company
      added approximately $17,000 to capital leases in fiscal 2006.




Long-term
      debt, excluding unamortized discount, and capital lease obligations mature
      in
      each of the following years ending December 31 (in thousands):





**Long-Term
                Debt**
            
            **Capital
                Lease Obligations**2007
            
            $
            325,645
            
            $
            172,7672008
            
            
            17,160
            
            
            7,1202009
            
            
            14,756
            
            
            5,4042010
            
            
            14,486
            
            
            -2011
            
            
            -
            
            
            -Thereafter
            
            
            -
            
            
            -Total
                minimum payments
            
            $
            372,047
            
            $
            185,291Less:
                amount representing interest
            
            
            
            
            
            (3,987
            )Present
                value of minimum capital lease payments
            
            
            
            
            $
            181,304




**(5)**
            **ESTIMATED
                SEVERANCE LIABILITY**




As
      part
      of the acquisition of the ADAPSYS entities, the Company acquired the remaining
      term of a contract to provide services to IATA. This contract expired in
      February 2006. As a result of the expiration of this contract, the Company
      terminated 36 employees. The Company believes that it has a termination
      obligation to certain of these terminated employees. The Company recorded the
      estimated liability as part of the allocation of the purchase price of the
      ADAPSYS entities in August 2005, and reduces the liability as individual prior
      employees and the Company reach agreement on the amount of termination payment
      due. The Company believes that the balance of $543,291 at December 31, 2006
      of
      the termination liability is sufficient to satisfy the remaining amounts
      due.




**(6)**
            **STOCKHOLDERS’
                EQUITY**




In
      connection with the Merger, on December 15, 2006, the Company issued an
      aggregate 7,336,575 shares of its common stock to the holders of the common
      stock of Former BPOMS and 1,567,095 of its Series A preferred shares, 1,449,200
      of its Series B preferred shares, and 916,666 of its Series C preferred shares
      to the holders of shares the respective series of preferred stock of Former
      BPOMS, in exchange for their shares of common and preferred stock, respectively,
      of Former BPOMS. For each share of the common stock of Former BPOMS, the holder
      thereof received 0.7246 of the Company’s common shares. For each share of the
      Series A and Series B convertible preferred stock of Former BPOMS, the holder
      thereof received 0.7246 shares of the Company’s preferred stock in the
      corresponding series. For each share of the Series C non-convertible preferred
      stock of Former BPOMS, the holder thereof received one share of the Company’s
      preferred stock in the corresponding series.




F-24


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


Exemption
      from the registration provisions of the Securities Act of 1933 for the
      transactions described above is claimed under Section 4(2) of the Securities
      Act
      of 1933, among others, on the basis that such transactions did not involve
      any
      public offering and the purchaser was accredited and had access to the kind
      of
      information registration would provide. Appropriate investment representations
      were obtained, and the securities were issued with restricted securities
      legends.




**Warrants**




The
      Company has issued warrants in the past relating to certain acquisitions,
      issuances of stock, financing activities and as consideration for services
      to
      the Company.




In
      August
      2005, the Company issued a 7-year warrant that vested upon issuance, to purchase
      121,733 shares of the Company’s common stock at an exercise price of $0.0345 per
      share. The warrant was issued towards finder’s fee for the acquisition of the
      ADAPSYS entities and was valued at $25,570, using the Black-Scholes-Merton
      valuation model, with the value included in the purchase price of the ADAPSYS
      entities.





In
      August
      2006, September 2006, October 2006, November 2006 and December 2006, the Company
      issued 7-year warrants to purchase an aggregate of 71,254; 60,384; 48,307;
      9,662
      and 443,253 shares of the Company’s common stock, respectively, at an exercise
      price of $0.0345 per share, pursuant to the bridge loan agreement (See Note
      7).
      The warrants vested upon issuance. The total warrant value determined using
      the
      Black-Scholes-Merton option pricing model, a volatility of 125%, risk-free
      interest rates ranging from 4.16% to 5.03%, and the expected term of 7 years
      was
      $154,037. The warrant value has been recorded as a discount to the bridge loan
      and is being amortized to interest expense over the term of the bridge loan.
      At
      December 31, 2006, the unamortized loan discount was $115,465.





In
      December 2006, the Company issued a 7-year warrant to purchase an aggregate
      of
      47,619 shares of the Company’s common stock, at an exercise price of $0.63 as
      finder’s fee in the acquisition of netGuru. The warrant is exercisable into
      47,619 shares of the Company’s common stock and was valued at $119,271 using the
      Black-Scholes-Merton option pricing model, a volatility of 125%, risk-free
      interest rate of 5.03%, and the expected term of 7 years.





As
      a
      result of the Merger, the Company acquired from its predecessor, netGuru, an
      obligation to issue shares under fully vested warrants to purchase an aggregate
      of 49,003 shares of the Company’s common stock. The warrants were issued by
      netGuru in financing transactions or as compensation for services rendered
      by
      non-employees. The weighted average exercise price of these warrants is $11.95
      and the warrants expire at various dates through December 23, 2009.





F-25


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


The
      following table summarizes the fair value of warrant issuances and the
      assumptions used in determining fair value:





Grant
                date
            
            Shares
                underlying under warrants
            
            Exercise
              price
                per share
            
            Estimated
                life
              (in
                years)
            
            Volatility
            
            Risk-free
                rate
            
            Fair
                value of warrants(a)August
                2005
            
            
            121,733
            
            $
            0.03
            
            
            7.0
            
            
            125
            %
            
            4.2
            %
            $
            25,570August
                2006
            
            
            71,254
            
            $
            0.03
            
            
            7.0
            
            
            125
            %
            
            4.2
            %
            $
            15,271September
                2006
            
            
            60,384
            
            $
            0.03
            
            
            7.0
            
            
            125
            %
            
            4.2
            %
            $
            12,942October
                2006
            
            
            48,307
            
            $
            0.03
            
            
            7.0
            
            
            125
            %
            
            4.2
            %
            $
            10,343November
                2006
            
            
            9,662
            
            $
            0.03
            
            
            7.0
            
            
            125
            %
            
            4.2
            %
            $
            2,071December
                2006
            
            
            443,253
            
            $
            0.03
                to $0.63
            
            
            6.0
                to 7.0
            
            
            125
            %
            
            5.03
            %
            $
            235,001Total
            
            
            754,593




(a)
            Fair
                value was determined using the Black-Scholes-Merton option-pricing
                model.




The
      following table summarizes the warrant activity:





**Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Term (years)**
            
            **Aggregate
                Intrinsic Value**Outstanding
                at July 26, 2005
            
            
            -
            
            $
            -Issued
            
            
            121,733
            
            
            0.03Exercised
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Outstanding
                at December 31, 2005
            
            
            121,733
            
            
            0.03Issued
            
            
            632,860
            
            
            0.08Acquired
                in Merger
            
            
            49,003
            
            
            11.95Exercised
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Outstanding
                at December 31, 2006
            
            
            803,596
            
            $
            0.80
            
            
            8.4
            
            $
            0.72Exercisable
                at December 31, 2006
            
            
            803,596
            
            $
            0.80
            
            
            8.4
            
            $
            0.72




F-26


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


**Stock
      Option Plans**




The
      Company has adopted the following employee stock option plans:




**Adopted**
            
            **Terminates**
            
            **Shares**
              **Authorized**BPO
                Management Services, Inc.Stock Option Plan (the “BPOMS Plan”)
            
            
            August
                2005
            
            
            August
                2015
            
            
            1,956,420NetGuru,
                Inc. 2003 Stock Option Plan (the “2003 Plan”)
            
            
            December
                2003
            
            
            December
                2013
            
            
            1,000,000NetGuru,
                Inc. 2000 Stock Option Plan (the “2000 Plan”)
            
            
            December
                2000
            
            
            November
                2010
            
            
            1,000,000Research
                Engineers, Inc. 1998 Stock Option Plan (the “1998 Plan”)
            
            
            December
                1998
            
            
            November
                2008
            
            
            1,000,000Research
                Engineers, Inc. 1997 Stock Option Plan (the “1997 Plan”)
            
            
            February
                1997
            
            
            February
                2007
            
            
            600,000




Each
      plan
      provides for the granting of shares as either incentive stock options or
      non-qualified stock options. Options under all plans generally vest over three
      to four years, though the vesting periods may vary from option to option, and
      are exercisable subject to continued employment and other conditions. As of
      December 31, 2006, there were no shares available for grant under the BPOMS
      Plan. There were 1,000,000 shares available for grant under the 2003 Plan,
      999,000 shares available for grant under the 2000 Plan, 883,000 shares available
      for grant under the 1998 Plan, and 377,000 shares available for grant under
      the
      1997 Plan.




The
      following is a summary of stock option activity:




**Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Term (years)**
            
            **Aggregate
                Intrinsic Value**Outstanding
                at July 26, 2005
            
            
            -
            
            $
            -Issued
            
            
            1,521,660
            
            
            0.03Exercised
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Outstanding
                at December 31, 2005
            
            
            1,521,660
            
            
            0.03Issued
            
            
            434,760
            
            
            0.03Acquired
                in Merger *
            
            
            22,570
            
            
            46.13Exercised
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Outstanding
                at December 31, 2006
            
            
            1,978,990
            
            $
            0.56
            
            
            8.8
            
            $
            288,850Exercisable
                at December 31, 2006
            
            
            566,020
            
            $
            1.87
            
            
            8.7
            
            $
            111,525




*
      Non-employee options acquired as part of Merger.




F-27


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


As
      a
      result of the Merger, the Company acquired from its predecessor, netGuru, an
      obligation to issue shares under fully vested non-qualified stock options to
      purchase an aggregate of 22,570 shares of the Company’s common stock. These
      options were issued to non-employees for services provided to the predecessor.
      The weighted average exercise price of these options is $46.13 and the options
      expire at various dates through February 18, 2010.





No
      options were exercised in fiscal 2006 or in the Prior Period 2005.




The
      weighted average grant-date fair value of options granted during fiscal 2006
      was
      $0.21.




The
      Company accounts for share-based compensation to employees pursuant to SFAS
      No.123(R), “Share Based Payment,” which requires that all share-based
      compensation to employees, including grants of employee stock options, be
      recognized as expense in the Company’s financial statements based on their
      respective grant date fair values. As SFAS No. 123(R) requires that share-based
      compensation expense be based on awards that are ultimately expected to vest
      stock based compensation for 2006 has been reduced by estimated forfeitures.




The
      Company has elected to use the Black-Scholes-Merton option pricing model to
      determine the fair value of the Company’s stock options granted to employees. It
      uses the straight line amortization model to record expenses under this
      statement and recognized share-based compensation expense in its consolidated
      statements for 2006 and Prior Period 2005 in the amounts of $103,819 and
      $24,415, respectively. Total compensation cost related to non-vested stock
      option awards not yet recognized as of December 31, 2006 was $255,122, which
      is
      expected to be recognized over the weighted average period of 2.74 years. The
      Company may be required to accelerate, increase or cancel any remaining unearned
      share-based compensation expense if there are any modifications or cancellation
      of the underlying unvested securities. Future share-based compensation expense
      and unearned share-based compensation will increase to the extent that we grant
      additional equity awards to employees or we assume unvested equity awards in
      connection with acquisitions.





**(7)**
            **RELATED
                PARTY TRANSACTIONS**




On
      August
      18, 2006, the Company entered into a bridge loan agreement with Patrick Dolan
      and James Cortens. Pursuant to the bridge loan agreement, Messrs. Dolan and
      Cortens and/or their assigns may, in their discretion, provide personal
      guarantees for a portion of or all of a bridge loan of up to $3,000,000 that
      may
      be arranged in favor of BPOMS. The personal guarantees are subject to the bridge
      loan meeting the conditions specified in the bridge loan agreement, which
      include but are not limited to the granting of a first lien on all the assets
      of
      BPOMS. As of December 31, 2006, the Company has drawn a total of $2,340,000
      from
      this bridge loan facility.




Under
      the
      terms of the bridge loan agreement, Messrs. Dolan and Cortens received
      seven-year warrants to purchase shares of the Company’s common stock equal to
      one-third of the amount drawn on the bridge loan, at an exercise price of $0.03
      per share (adjusted for the merger exchange ratio). In addition, BPOMS also
      agreed to pay Messrs. Dolan and Cortens a cash fee of 3% of the amounts drawn
      on
      the bridge loan. As of December 31, 2006, of the total $70,200 in loan fees,
      $21,000 has been paid and $49,200 has been accrued.




F-28


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


The
      following table lists the bridge loans made available to the Company by Messrs.
      Dolan and Cortens, 3% fees on each tranche and warrants issued to them by the
      Company pursuant to the bridge loan agreement (See Note 6):





**Date**
            
            **Loan
                amount**
            
            **3%
                fees**
            
            **Post-merger
                shares issuable under warrants**Patrick
                Dolan
            
            
            August
                25, 2006
            
            
            250,000
            
            $
            7,500
            
            
            60,384Patrick
                Dolan
            
            
            September
                20, 2006
            
            
            250,000
            
            
            7,500
            
            
            60,384Patrick
                Dolan
            
            
            October
                10, 2006
            
            
            200,000
            
            
            6,000
            
            
            48,307Patrick
                Dolan
            
            
            December
                14, 2006
            
            
            1,400,000
            
            
            42,000
            
            
            338,147James
                Cortens
            
            
            September
                11, 2006
            
            
            40,000
            
            
            1,200
            
            
            9,662James
                Cortens
            
            
            December
                14, 2006
            
            
            100,000
            
            
            3,000
            
            
            24,154James
                Cortens
            
            
            December
                20, 2006
            
            
            100,000
            
            
            3,000
            
            
            33,334**Totals**
            
            
            
            
            
            2,340,000
            
            $
            70,200
            
            
            574,372




The
      total
      warrant value of $154,037 has been reduced as a discount to the bridge loan
      and
      is being amortized to interest expense over the term of the bridge loan. 
At December 31, 2006, the unamortized loan discount was $115,465.




Subsequent
      to the Merger and pursuant to the provisions of the bridge loan agreement,
      Messrs. Dolan and Cortens purchased shares of Series C of BPOMS. The purchase
      price was $1,540,000 or the amount of additional equity required to meet the
      $1,500,000 capital surplus requirement. The number of shares of Series C
      preferred stock issued for this purchase price was equal to 916,667 shares
      at
      $1.68 per share. The per share price was the price equal to 50% of the volume
      weighted average closing price of netGuru common stock, using the closing prices
      for the five days prior to the consummation of the transaction.




The
      bridge loan agreement provides that if a bridge loan is outstanding, BPOMS
      will
      not prepay any other debt of the company, other than a stockholder loan, trade
      payables, the existing operating capital line of credit and other specified
      loans and leases. In addition, BPOMS has agreed that 25% of the net proceeds
      from any debt or equity financing transactions will be applied to the balance
      of
      any stockholder loan and then to the balance of the bridge loan.




Concurrently
      with the bridge loan agreement, BPOMS entered into a participation agreement
      with Patrick Dolan, James Cortens, Brian Meyer and Donald West pursuant to
      which
      BPOMS agreed that, at any time prior to the closing of the merger, Messrs.
      Meyer
      and West may choose to participate in the rights and obligations under the
      bridge loan agreement on a pro rata basis up to their respective proportionate
      stockholdings in BPOMS. In accordance with the participation agreement, when
      we
      and BPOMS signed the merger agreement, Messrs. Meyer and West each received
      a
      seven-year warrant to purchase up to 5,435 shares of the common stock of BPOMS
      at a purchase price of $0.03 per share in consideration for their personal
      guarantee of an existing loan made to ADAPSYS Document Management LP by Business
      Development Bank of Canada. The participation agreement also provides that
      if
      BPOMS at any time repays any portion of the bridge loan or a stockholder loan,
      it must also concurrently make a proportionate repayment of the existing bank
      loan made to ADAPSYS Document Management LP.





F-29


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


**(8)**
              **RETIREMENT
                    PLANS**


The
      Company and certain of its subsidiaries have adopted qualified cash or deferred
      401(k) retirement savings plans. The domestic plan covers substantially all
      domestic employees who have attained age 21 and have had one year of service.
      Employees may contribute up to 15% of their compensation. The Company does
      not
      make matching contributions to the plan, except in one domestic subsidiary,
      where it matches 100% of the employee contribution up to a maximum of 4%. For
      the year ended December 31, 2006, the Company contributions to the plan amounted
      to $27,043.




**(9)**
            **COMMITMENTS
                AND CONTINGENCIES**




***Operating
      Leases***





The
      Company leases certain facilities and equipment under non-cancelable operating
      leases. The facility leases include options to extend the lease terms and
      provisions for payment of property taxes, insurance and maintenance
      expenses.




At
      December, 2006, future minimum annual rental commitments under these lease
      obligations were as follows (in thousands):





Year
                ending December 31:2007
            
            $
            413,9512008
            
            
            257,3662009
            
            
            258,5672010
            
            
            207,2702011
            
            
            31,140Thereafter
            
            
            1,375$
            1,169,670




Rent
      expense was $451,425 and $81,637 for the year ended December 31, 2006 and Prior
      Period 2005, respectively.




***Litigation***




***Morrison
      et al. v. Skytrack Systems, Inc. et al*** .
      (File
      No. CI 06-01-47005) was filed against BPOMS, ADAPSYS, and Adapsys Transaction
      Processing, Inc. (formerly Skytrack Systems, Inc.) and certain affiliates of
      BPOMS on May 12, 2006 in the Court of Queen’s Bench of Manitoba in the City of
      Winnipeg by a total of 28 former employees of ADAPSYS L.P., a partnership of
      which ADAPSYS Transaction Processing, Inc. serves as general partner. As of
      the
      date of this document the Company has reached settlements with 5 of the original
      28 plaintiffs leaving 23 plaintiffs (the “Remaining Plaintiffs”). The Remaining
      Plaintiffs allege that their employment was terminated in February of 2006
      without either reasonable notice or compensation in lieu of reasonable notice,
      and that the defendants acted unfairly and improperly in effecting the
      termination. The Remaining Plaintiffs seek unspecified damages for severance
      payments and lost employment benefits allegedly arising out of the termination.




F-30


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


As
      of the
      date of this disclosure the Company has filed a statement of defense. On March
      8, 2007, the Remaining Plaintiffs filed a Motion for summary judgment and a
      Motion to strike the statement of defense. The Company is contesting those
      Motions. In addition, in June 2006, the Company filed a Motion to have BPOMS
      removed as a defendant in this action on the basis that it was not the employer
      of the plaintiffs. That Motion was adjourned to enable the parties to negotiate
      a possible settlement. At the time of this disclosure, no dates have been set
      for hearings on these Motions.






A
      separate action was filed on May 12, 2006 by two other former employees of
      ADAPSYS L.P., but has since been settled.






The
      Company believes that ADAPSYS L.P. had a termination obligation to certain
      of
      these prior employees and recorded the estimated liability as part of the
      allocation of the purchase price of the ADAPSYS entities in August 2005. The
      liability continues to be reduced as the Company reaches agreements with the
      Remaining Plaintiffs regarding the amount due and believes that the $504,677
      balance at December 31, 2006 of the termination liability is sufficient to
      satisfy the remaining amounts due. However, due to uncertainty regarding the
      litigation process, the outcome of each of these matters is unpredictable and
      could be unfavorable in which event we could be required to pay damages and
      other expenses in amounts that could adversely affect our financial
      condition.




**Other
      Litigation**




The
      Company is a party to various litigations arising in the normal course of
      business. Management believes the disposition of these matters will not have
      a
      material impact on the Company’s consolidated financial condition or results of
      operations.




**(10)**
            **INCOME
                TAXES**




The
      components of loss from continuing operations before income taxes are as follows
      for the years ended December 31, (in thousands):




**2006**
            
            **2005**United
                States
            
            $
            (2,210
            )
            $
            -Foreign
            
            
            (407
            )
            
            -Total
            
            
            (2,617
            )
            
            -




The
      (benefit) provision for taxes on income from continuing operations is comprised
      of the following for the years ended December 31, (in thousands):




**2006**
            
            **2005**Current:Federal
            
            $
            -
            
            $
            -State
            
            
            8
            
            
            -Foreign
            
            
            -
            
            
            -8
            
            
            -Deferred:Federal
            
            
            -
            
            
            -State
            
            
            -
            
            
            -Foreign
            
            
            -
            
            
            --
            
            
            -Total
            
            $
            8
            
            $
            -




F-31




The
      reported (benefit) provision for taxes on income from continuing operations
      differs from the amount computed by applying the statutory federal income tax
      rate of 34% to loss before income taxes as follows for the years ended December
      31, (in thousands):







**2006**
            
            **2005**Income
                tax benefit at statutory rate
            
            $
            (889
            )
            $
            -State
                taxes, net of federal benefits
            
            
            (137
            )
            
            -Change
                in valuation allowance
            
            
            918
            
            
            -Research
                and development credits
            
            
            
            
            
            -Other
            
            
            108
            
            
            -Total
            
            $
            -
            
            $
            -




F-32


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


The
      Company provides deferred income taxes for temporary differences between assets
      and liabilities recognized for financial reporting and income tax purposes.
      The
      tax effects of temporary differences for continuing operations at
      December 31 are as follows (in thousands):




**2006**
            
            **2005**Deferred
                tax assets:Accruals
                and Reserves
            
            $
            68
            
            
            -Depreciation
            
            
            5Net
                operating loss carryforwards
            
            
            1,844
            
            
            -Research
                and development creditcarryforwards
            
            
            172
            
            
            -Other
            
            
            3
            
            
            -Total
                deferred tax assets
            
            
            2,122
            
            
            -Less:
                valuation allowance
            
            
            (1,625
            )
            
            -Net
                deferred tax assets
            
            
            467
            
            
            -Deferred
                tax liabilities:Amortization
                of intangibles
            
            
            (467
            )Other
            
            
            -
            
            
            -Total
                deferred tax liabilities
            
            
            (467
            )
            
            -Net
                Deferred Tax Asset / Liability
            
            $
            -
            
            
            -




At
      December 31, 2006, the Company had tax net operating loss carryforwards of
      approximately $4.8 million for federal income tax purposes and $1.5 million
      for
      state income tax purposes, and $0.4 million for foreign tax purposes which
      expire at varying dates beginning in 2019, 2007, and 2011 respectively. Due
      to the “change in ownership” provisions of the Tax Reform Act of 1986, the
      Company’s net operating loss carryforwards may be subject to an annual
      limitation on the utilization of these carryforwards against taxable income
      in
      future periods if a cumulative change in ownership of more than 50% occurs
      within any three-year period.




In
      addition to the net operating loss carryforwards, the Company has, for federal
      income tax purposes, approximately $138,000 of research and development credit
      carryforwards, which expire at varying dates beginning in 2013 and $34,000
      of
      federal alternative minimum tax credit carryforwards which have an indefinite
      life.




In
      assessing the realizability of the net deferred tax assets, management considers
      whether it is more likely than not that some or all of the deferred tax assets
      will not be realized. The ultimate realization of deferred tax assets depends
      upon either the generation of future taxable income during the periods in which
      those temporary differences become deductible or the carryback of losses to
      recover income taxes previously paid during the carryback period. As of March
      31, 2006, the Company had provided a valuation allowance of approximately $1.6
      million to reduce the net deferred tax assets due in part to the potential
      expiration of certain tax credits and net operating loss carryforwards prior
      to
      their utilization.




F-33


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


**(11)**
            **SEGMENT
                AND GEOGRAPHIC DATA**




The
      Company is a business process outsourcing services provider. The Company’s
      operating segments are:




·
              ECM




·
              ITO
                  and




·
              HRO




The
      Company applies the provisions of SFAS No. 131, “Disclosures about Segments of
      an Enterprise and Related Information.” SFAS No. 131 requires segments to be
      determined and reported based on how management measures performance and makes
      decisions about allocating resources. The Company’s management monitors
      unallocable expenses related to the Company’s corporate activities in a separate
“Corporate,” which is reflected in the tables below.




The
      significant components of worldwide operations by reportable operating segment
      are:




**For
                the year ended December 31, 2006**
            
            **July
                26, 2005 to December 31, 2005****Net
                revenues**ECM
            
            $
            2,713,769
            
            $
            2,321,834ITO
            
            
            1,833,052
            
            
            -HRO
            
            
            164,318
            
            
            25,700Consolidated
            
            $
            4,711,139
            
            $
            2,347,534**Operating
                loss**ECM
            
            $
            (650,551
            )
            $
            (462,915
            )ITO
            
            
            (355,393
            )
            
            -HRO
            
            
            (777,336
            )
            
            (233,016
            )Corporate
            
            
            (678,358
            )
            
            (112,698
            )Consolidated
            
            $
            (2,461,638
            )
            $
            (808,629
            )**Depreciation
                and amortization expense**ECM
            
            $
            41,787
            
            $
            13,945ITO
            
            
            108,109
            
            
            -HRO
            
            
            -
            
            
            -Corporate
            
            
            10,824
            
            
            288Consolidated
            
            $
            160,720
            
            $
            14,233







F-34


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


The
      Company’s operations are based in foreign and domestic subsidiaries and branch
      offices in the U.S., Canada and Germany. The following are significant
      components of worldwide operations by geographic location:




**For
                the Year Ended December 31,**
            
            **July
                26, 2005 to**
              **December
                31,****2006**
            
            **2005****Net
                revenue**United
                States & Canada
            
            $
            4,833,936
            
            $
            2,347,534Europe
            
            
            1,024
            
            
            -Consolidated
            
            $
            4,834,960
            
            $
            2,347,534**Export
                sales**United
                States
            
            $
            -
            
            $
            -





**At**
                **December
                  31,****Long-lived
                  assets**
              
              **2006**United
                  States
              
              $
              5,638,220Europe
              
              
              25,874Consolidated
              
              $
              5,664,094


F-35


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


**(12)**
            **LOSS
                PER SHARE**




Basic
      earnings (loss) per share (“EPS”) is calculated by dividing net income (loss) by
      the weighted-average common shares outstanding during the period. Diluted EPS
      reflects the potential dilution to basic EPS that could occur upon conversion
      or
      exercise of securities, options, or other such items, to common shares using
      the
      treasury stock method based upon the weighted-average fair value of the
      Company’s common shares during the period.





The
      following table illustrates the computation of basic and diluted net loss per
      share for the year ended December 31, 2006 and for the Prior Period
      2005:





**Year
                Ended December 31, 2006**
            
            **July
                26, 2005 to December 31, 2005**Numerator:Net
                loss -- numerator for basic and diluted net loss per share
            
            $
            (2,617,080
            )
            $
            (800,520
            )Denominator:Denominator
                for basic and diluted net loss per share - weighted average number
                of
                common shares outstanding during the year
            
            
            8,496,119
            
            
            6,682,788Basic
                and diluted net loss per share
            
            $
            (0.31
            )
            $
            (0.12
            )




Options,
      warrants and convertible preferred stock to purchase 4,392,932 shares
      outstanding at December 31, 2006 were excluded from the computation of diluted
      EPS because the effect would have been antidilutive. Options, warrants and
      their
      equivalents amounting to 2,716,923 were excluded from the computations of
      diluted loss per share for fiscal 2005 because the effect would have been
      antidilutive **.**




**(13)**
            **LIQUIDITY**




The
      Company incurred net losses from operations of $2,461,638 and $808,629 and
      used
      cash in operations of $1,958,731 and $49,536 in 2006 and Prior Period 2005,
      respectively. The Company has funded its operations from the private placement
      of shares of its common stock and preferred stock and through the founders
      bridge loan facility established in August 2006. During the next twelve months,
      the Company anticipates raising capital necessary to grow its business and
      complete additional acquisitions by issuing its securities and/or debt in one
      or
      more private transactions. The Company has retained C. E. Unterberg, Towbin
      as
      its investment banker to lead this effort.




In
      the
      event that such transaction(s) do not take place at all and/or are unreasonably
      delayed, the Company’s future
      capital requirements will depend upon many factors. These factors include but
      are not limited to sales and marketing efforts, the development of new products
      and services, possible future corporate mergers or strategic acquisitions or
      divestitures, the progress of research and development efforts, and the status
      of competitive products and services.  If the Company’s anticipated
      financing transactions do not take place at all and/or are unreasonably delayed,
      the Company may not have adequate funds to extinguish all remaining liabilities
      of the Company and fund its current operations going forward.




F-36


**BPO
          MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **Year
          Ended December 31, 2006 and For the Period July 26, 2005 to December 31,
          2005**


Although
      the Company expects to meet its operating capital needs by additional equity
      and/or debt transactions, additional draw down on the founders’ bridge loan
      facility, and current economic resources, there can be no assurance that funds
      required will be available on terms acceptable to the Company, if at all. If
      the
      Company is unable to raise sufficient funds on acceptable terms, it may be
      not
      be able to complete its business plan. If equity financing is available to
      the
      Company on acceptable terms, it could result in additional dilution to the
      Company’s existing stockholders.




This
      uncertainty, recurring losses from operations, limited cash resources, and
      an
      accumulated deficit, among other factors, raised doubt about the Company’s
      ability to continue as a going concern and led the Company’s independent
      registered public accounting firm to include an explanatory paragraph related
      to
      the Company’s ability to continue as a going concern in their report that
      accompanies these financial statements. Reports of independent auditors
      questioning a company's ability to continue as a going concern generally are
      viewed unfavorably by analysts and investors. This report may make it difficult
      for the Company to raise additional debt or equity financing to the extent
      needed for the Company’s continued operations or for planned expansion,
      particularly if the Company is unable to attain and maintain profitable
      operations in the future. Consequently, future losses may adversely affect
      the
      Company’s business, prospects, financial condition, results of operations and
      cash flows.




F-37





**SIGNATURES**





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


BPO
              MANAGEMENT
              SERVICES, INCDated:
                April 17, 2007
            
            /s/ Patrick
              A. DolanPatrick
                A. Dolan, Chief Executive Officer




In
      accordance with the Exchange Act, this report has been signed by the following
      persons on behalf of the Registrant and in the capacities and on the dates
      indicated.




Name
              
              Title
              
              Date/s/
                  Patrick A. Dolan
              
              Chairman
                  of the Board, Chief Executive Officer
              
              April
                  17, 2007Patrick
                  A. Dolan
              
              (principal
                executive
                officer), and Director/s/
                  James Cortens
              
              President,
                  Secretary and Director
              
              April
                  17, 2007James
                  Cortens/s/
                  Donald Rutherford
              
              Chief
                  Financial Officer
              
              April
                  17, 2007Donald
                  Rutherford
              
              (principal
                financial
                and accounting officer)/s/
                  Dale Paisley
              
              Director
              
              April
                  17, 2007Dale
                  Paisley




54




**INDEX
      TO EXHIBITS FILED WITH THIS FORM 10-KSB**





**Exhibit
                No.**
            **Description**21
            Subsidiaries
                of the Registrant31.1
            Certification
                of Principal Executive Officer Required by Rule 13a-14(a) of the
                Securities Exchange Act of 1934, as amended, as Adopted Pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 200231.2
            Certification
                of Principal Financial Officer Required by Rule 13a-14(a) of the
                Securities Exchange Act of 1934, as amended, as Adopted Pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 200232
            Certification
                of Chief Executive Officer and Chief Financial Officer Pursuant to
                18
                U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002







55