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, 2007




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 200, 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 Exchange Act:


Title
      of each class
            Name
      of exchange on which registeredNone
            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 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, 2007 were
$16,469,001.




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 April 8, 2008 was $3,167,759. 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 12,671,034 on April 14, 2008.




DOCUMENTS
INCORPORATED BY REFERENCE:


None




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










TABLE
OF CONTENTS





PagePART
      IItem
      1.
            Description
      of Business.
            3Item
      2.
            Description
      of Property.
            12Item
      3.
            Legal
      Proceedings.
            13Item
      4.
            Submission
      of Matters to a Vote of Security Holders.
            13PART
      IIItem
      5.
            Market
      for Common Equity, Related Stockholder Matters and Small Business Issuer
      Purchases of Equity Securities.
            13Item
      6.
            Management’s
      Discussion and Analysis or Plan of Operation
            14Item
      7.
            Financial
      Statements.
            30Item
      8.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.
            30Item
      8A.
            Controls
      and Procedures.
            30Item
      8B.
            Other
      Information.
            32PART
      IIIItem
      9.
            Directors
      and Executive Officers, Promoters and Control Persons and Corporate
      Governance; Compliance With Section 16(a) of the Exchange
    Act.
            33Item
      10.
            Executive
      Compensation.
            35Item
      11.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
            42Item
      12.
            Certain
      Relationships and Related Transactions and Director
      Independence.
            48Item
      13.
            Exhibits.
            50Item
      14.
            Principal
      Accountant Fees and Services.
            52Index
      to Consolidated Financial Statements
            F-1Signatures
            53Index
      to Exhibits Filed with this Form 10 KSB
            54




2




BPO
MANAGEMENT SERVICES, INC.





CAUTIONARY
STATEMENT





All
statements included or incorporated by reference in this Report, other than
statements or characterizations of historical fact, are forward-looking
statements. Forward-looking statements can often be identified by their use of
words such as “may”, “will”, “expects”, “plans”, “estimates”, “intends”,
“believes” or “anticipates”, and variations or negatives of these
words.  In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances,
including any underlying assumptions, are forward-looking statements. Examples
of forward-looking statements include, but are not limited to, statements
concerning anticipated sources of revenue, and our estimates, assumptions and
judgments. All forward-looking statements involve risks and uncertainties that
are difficult to predict. Those risks and uncertainties include, among others,
the matters discussed below under the caption “Risk Factors” and elsewhere in
this Report.  All forward-looking statements speak only as of the date
of this Report, and are based on the information available to us at that time.
Such information is subject to change, and we will not necessarily inform you of
such changes. The forward-looking statements are not guarantees of future events
and, therefore, the Company’s performance could differ materially and adversely
from those contemplated by any forward-looking statements as a result of various
factors, some of which are discussed in this Report and the other filings that
we make from time to time with the Securities and Exchange Commission, which you
should carefully review. We undertake no obligation to publicly revise or update
any forward-looking statement for any reason.





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 (“Former BPOMS”).  Former BPOMS
was incorporated in July 2005.  We are a Delaware corporation. Our
principal business address is 1290 North Hancock, Suite 200, Anaheim, California
92807 and telephone number is (714) 974-2670.





We
provide business process outsourcing (BPO) services to middle-market enterprises
in North America.  BPO refers to the outsourcing of entire business
processes, typically to reduce cost and/or improve the performance of that
process.  Our objective is to provide a comprehensive suite of BPO
functions 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 thereafter
grew  principally through acquisitions.  For the purposes of
this section we refer to the current publicly-held BPO Management Services, Inc.
as “BPOMS,” the “Company”,  “we,” “our,” or “us,” and the former
privately-held BPO Management Services, Inc. as the “Former BPOMS.”




In August
2005, Former BPOMS acquired all of the outstanding stock of 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 at the time of acquisition,
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.




3




In
January 2006, Former BPOMS acquired all of the outstanding stock 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 outstanding stock 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.




On June
21, 2007, we purchased all of the issued and outstanding capital stock of
DocuCom Imaging Soulutions Inc. (“DocuCom”)  DocuCom is a provider of
digital and film-based document management solutions, offering document
management products and services to government and middle-market enterprises
located throughout Canada.




On June
29, 2007, we acquired all of the outstanding stock of Human Resource
Micro-Systems, Inc. (“HRMS”).  HRMS combines best practice human
resource and technical expertise to design, develop, and implement Human
Resource Information System (“HRIS”) products and services that provides
comprehensive HRIS software solutions to human resource departments across a
broad range of middle-market industries with an installed base of more than 100
middle-market companies located throughout the United States.




On
October 10, 2007, we acquired all of the outstanding stock of Blue Hill Data
Services, Inc. (“Blue Hill”).  Blue Hill is a full-service data center
outsourcing provider with customers located throughout the United States
representing a wide range of industries.  We intend to consolidate the
operations of our existing Information Technology Outsourcing business unit with
Blue Hill’s operations to create additional capability for both new and existing
customers and generate additional economic
efficiencies.  Additionally, Blue Hill’s SAS70 Type II data center
facility will allow us to expand our IT outsourcing footprint with existing
customers as well as enable us to target new and larger enterprises, yielding
important future growth opportunities with significantly larger contract
values.




In
December 2007 Digica was merged with Blue Hill such that at December 31, 2007
our principal subsidiaries were the two ADAPSYS entities, Digica, Novus, Netguru
Systems, DocuCom, HRMS, and Blue Hill.  On January 1, 2008 the
two ADAPSYS entities. Novus and DocuCom were amalgamated into one ECM subsidiary
BPO Management Services, Ltd.





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 North America.  “BPO” refers to the outsourcing
of entire business processes, typically to reduce cost and/or to improve
the performance of that process.  Our objective is to provide a
comprehensive suite of BPO functions 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 was 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.




4




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 our 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.




We
anticipate that as the Company grows 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 leased 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”)





We offer
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 our domain expertise are our
HR information systems and a centralized technology hosting
capability.




5




Our HR
Advocate product delivers customizable software solutions for domestic and
global mid-market organizations seeking to optimize their human resources
service delivery.  HR Advocate can be deployed as a licensed web-based
application, desktop application, or it can be delivered on demand as a hosted
service.  The fully integrated and flexible structure accommodates
sophisticated data collection and reporting in a secure
environment.  The modular design of HR Advocate, with user-defined
configuration and customization options, allows organizations to implement an
HRIS that best meets their business needs.




Modules
include training, position control, succession planning, organization chart, and
interfaces to payroll, time and attendance, and benefit carriers and
administrators.  Our web products include a portal application for
content management, and employee/manager self-service with configurable workflow
processes for increasing employee communication and reducing HR
administration.  Web based recruiting tools include web site job
posting, on-line application and hiring manager access to requisition and
applicant data.




Enterprise
Content Management (“ECM”)





We
provide 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.  Our
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.  Our document collaboration technology,
specifically our 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.




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 us or implemented and
supported at customer locations.





As part
of our ECM offering, we provide accounts payable invoice processing solutions
for enterprises in multiple business sectors and an enhanced loan processing
solution for financial service providers.  Our 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.  Our 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”)





Through
our existing ITO offering, we support, host, and manage all related
information technology infrastructure components, networks and applications on a
24/7 basis from a secure data center facility located in Pearl River, New York,
with high-speed, redundant fiber-based connectivity to a MCI mega-center
providing instantaneous backup and recovery capability.  This enables
us to standardize, support, and integrate with other customer enterprise
applications all of our customer information systems required to support the
customer’s back-office business functions.  We also offer 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.  Hosting and managed
application support services offered by us 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.




6




In
addition, we have obtained additional capabilities as a result of our recently
completed acquisition of Blue Hill.  Blue Hill has been recognized by
industry analysts as a quality provider of data center outsourcing services for
middle-market enterprises.  Its core services include enterprise-scale
mainframe/server hosting, wide-area network management and dedicated business
recovery solutions provided under long-term, recurring-revenue-based
contracts.  Services are delivered from its Class A, SAS70 Type II
audited data center facility encompassing important support and
high-availability features such as redundant feeds to utility power and telecom
grids, virtually unlimited fiber-based telecom bandwidth, stand-alone back-up
power generation and state of the art security and environmental
controls.  The facility and 24/7 data center operation are capable of
supporting its customers’ critical Sarbanes-Oxley and HIPAA
requirements.





We intend
to consolidate the operations of our existing ITO business unit with Blue Hill’s
operations to create additional capability for both new and existing customers
and generate additional economic efficiencies.  Additionally, Blue
Hill’s SAS70 Type II data center facility will allow us to expand our IT
outsourcing footprint with existing customers as well as enable us to target new
and larger enterprises, yielding important future growth opportunities with
significantly larger contract values.




Distribution
Methods




We
believe 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.




Our
back-office BPO solutions are designed to allow our customers to:




·
            achieve
      significant bottom line cost
savings;




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




·
            take
      advantage of business performance improvements in individual back-office
      business functions through our 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.




Our
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 our 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, New Jersey.  After
implementation, customers continue to have access to our 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




7




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




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
on-shore, near-shore (Canada) and off-shore (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 primarily 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 us 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.  We have an aggressive sales culture and our 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 we are
in a position that 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, 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.




Customer
Service and Support




We
provide 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.




Our
current revenue base is well distributed across our existing customer
base.  We have an existing customer base of approximately 1,240
enterprises.




The buyer
of our services 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 we seek 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, our domain experts seek to build greater
confidence in our end-to-end service capabilities and to establish us as a
“trusted advisor” to the customer’s chief financial officer.  From
this initial engagement, we lead 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.  We believe 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, we believe this
approach allows us 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 we
have successfully transitioned a specific business function to an outsourced
relationship, we seek to expand our customer relationship by offering other
back-office support services, which can quickly increase our revenue base within
each particular customer engagement.  We anticipate that our 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 we
believe exceeds 95%, and the historic reluctance to changing service providers
for important business functions, we anticipate that once obtained,
substantially all contracts should mature into long-term
engagements.  We believe that our expected typical per customer
contract revenues will be well below the typical revenues for Tier 1
providers.  Accordingly, we do 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.




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 as it is often 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.




9




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 our deep domain
expertise;




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




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




In
summary, we believe that we compete 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;




·
            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 off-shore research and development resources in India are
used to provide technical support and customer services for our ECM and HRO
clients, 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 off-shore technical resources
provide a significant competitive advantage.




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 - 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 providers in this middle market compete on the basis
of quality of service and price for a selected BPO function.  We
believe that the depth and breadth of our BPO offerings differentiate us 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, we do not expect to encounter significant competition from Tier 1
providers, who have built their organizations to sell and service Global 1000
enterprises and are generally not responsive to, or cost competitive with
middle-market enterprises.




10




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.




Acquisitions




In August
2005, Former BPOMS acquired all of the outstanding stock 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, ADP has had no ongoing operations since that time.  All of our
new document management business is being provided by 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 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, Former BPOMS acquired all of the outstanding stock of Digica,
Inc., a provider of information technology outsourcing services based in
Branchburg, New Jersey.




In
October 2006, Former BPOMS purchased all of the outstanding stock 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.




On
December 15, 2006, we completed the merger of Former BPOMS with netGuru, Inc.
(“netGuru”) and have consolidated netGuru’s two business units into our
operations:  One of those business units,  Web4, a provider
of document management and enterprise collaboration technology, was consolidated
with our document management business headquartered in Winnipeg Canada. The
other business unit, netGuru Systems, a provider of contract computer
programming staff and solutions to corporate enterprises, was consolidated with
our Information Technology business headquartered in Branchburg, New
Jersey.




On June
21, 2007, we purchased all of the issued and outstanding capital stock of
DocuCom Imaging Solutions, Inc. (“DocuCom”).  DocuCom is a provider of
digital and film-based document management solutions, offering document
management products and services to government and middle-market enterprises
located throughout Canada.  We plan to merge DocuCom with our existing
ECM/document management division based in Winnipeg, Canada.  The net
aggregate purchase price, after closing adjustments by the parties, was
Cdn$2,761,097 (approximately US$2.58 million), of which amount we paid the
selling shareholders Cdn$961,097 (approximately US$900,000), at closing on June
22, 2007.  The purchase agreement provided that we are to pay the
selling shareholders Cdn$900,000 (approximately US$840,000) three months after
closing and Cdn$900,000 (approximately US$840,000) nine months after
closing.  We secured the subsequent payments through a bank-issued
irrevocable standby letter of credit in favor of the selling shareholders in the
aggregate amount of Cdn$1,800,000 (approximately US$1.68
million).   In connection with the closing, we paid Cdn$450,000
(US$420,000) to retire DocuCom’s credit facility, which also extinguished
certain personal guarantees of Raymond Patterson and Martin Mollot, the former
senior officers, directors, and, directly and through their family trusts,
shareholders of DocuCom.




11




On June
29, 2007, we acquired all of the outstanding shares of Human Resource
Micro-Systems, Inc. (“HRMS”).  HRMS, founded in 1983 and
headquartered in San Francisco, California, is an organization of human resource
professionals that combine best practice human resource and technical expertise
to design, develop, and implement Human Resource Information System (“HRIS”)
products and services.  It provides comprehensive HRIS software
solutions to human resource departments across a broad range of middle-market
industries with an installed base of more than 100 middle-market companies
located throughout the United States.  Our plan is to integrate HRMS
with our existing human resources outsourcing services based in San Francisco,
California.  The aggregate purchase price, subject to a potential
post-closing adjustment, was $2,000,000, of which amount we paid the selling
shareholders $1,100,000 at closing on June 29, 2007, and issued them 384,968
shares of our restricted common stock valued at $400,000 (based upon the
volume-weighted average closing bid price of our common stock during the ten
consecutive trading days immediately preceding the closing).  The
Stock Purchase Agreement provided that we are to pay the selling shareholders
the remaining $500,000 12 months after closing through an escrow account with
U.S. Bank, subject to offset in our favor with respect to any claims for
indemnity by us under the terms of the Stock Purchase
Agreement.




Through a
Stock Purchase Agreement, entered into as of October 10, 2007, we purchased all
of the stock of Blue Hill Data Services, Inc. (“Blue Hill”), a privately-held
data center outsourcing services company, based in Pearl River, New
York.  Blue Hill is a full-service data center outsourcing provider
with customers located throughout the United States representing a wide range of
industries.  We intend to consolidate the operations of our existing
Information Technology Outsourcing business unit with Blue Hill’s operations to
create additional capability for both new and existing customers and generate
additional economic efficiencies.  At or about the closing date, we
transferred approximately $11 million of value, as follows:  (i) cash
payments to the current selling stockholders of approximately $6.6 million; (ii)
our 15-month promissory note in the initial principal amount of $1 million,
subject to offset in our favor with respect to any claims for indemnity by us
under the terms of the Stock Purchase Agreement; (iii) cash payment through Blue
Hill in the amount of approximately $1.4 million to its former stockholder; and
(iv) 2,666,666 shares of our restricted common stock valued at approximately
$1.8 million (based upon the volume-weighted average closing bid price of our
common stock during the ten consecutive trading days immediately preceding the
closing).  The promissory note bears interest from and after January
1, 2009, at the rate of 9% per annum and is “secured” by a document to be held
in escrow, styled as a confession of judgment.  The principal of the
note, less any offsets, is, at the selling stockholders’ option, convertible
into restricted shares of our common stock, the number of which is to be
calculated in the same manner as the shares issued at closing were
calculated.




In
December 2007 Digica was merged with Blue Hill such that at December 31, 2007
our principal subsidiaries were the two ADAPSYS entities, Digica, Novus, Netguru
Systems, DocuCom, HRMS, and Blue Hill.  On January 1, 2008 the
two ADAPSYS entities, Novus and DocuCom were amalgamated into one ECM subsidiary
BPO Management Services, Ltd. Our principal business address is 1290 North
Hancock, Suite 202, Anaheim, California 92807 and telephone number is (714)
974-2670.




Employees




As of
December 31, 2007, we had 151 employees, of whom 146 were full-time
employees and 5 were part-time employees, including 6 in product
development and related support services, 13 in IT consulting, 18 in
sales and marketing, 75 in service and support, and 39 in finance and
administration.  As of that date, 70 of our employees were
located in the U.S. and 81 were located in international
locations.




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;




·
            30,000 square
      feet of office space/data center facility in Pearl River, New York,
      which lease expires in 2012;




12




·
            8,961
      square feet of office space in Winnipeg, Canada, which is leased on a
      month-to-month basis;




·
            10,316
      square feet of office space in Winnipeg, Canada, which lease expires in
      2008;




·
            15,000
      square feet of office and production space in Winnipeg, Canada, which
      lease expires in 2018;




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




·
            5,871 square
      feet of office space in Anaheim, CA, which lease expires in
      2013;




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




·
            3,530
      square feet of office space in San Francisco, California, which lease
      expires in 2008;




·
            14,960
      square feet of office space in Toronto, Canada, which lease expires in
      2009; and




·
            1,049
      square feet of office space in Montreal, Canada, which lease expires in
      2009.




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.





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.


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





None




PART II


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





Our
common stock trades on the OTC Bulletin Board under the ticker symbol “BPOM.” As
of December 31, 2007, there were approximately 28 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 following tables sets forth (a) the high and low
closing sale prices of a share of our common stock, as reported by The Nasdaq
Capital Market for each of the first three quarters of 2006 and the fourth
quarter of 2006 up until December 15, 2006, and (b) the high and low bid price
of a share of our common stock, as reported by the OTC Bulletin Board, for the
balance of the fourth quarter of 2006 and each quarter of 2007 as
follows:





Year
      Ended December 31,2007
            
            2006High
            
            Low
            
            High
            
            Low1
      st
      Quarter (January 1 - March 31)
            
            $
            3.55
            
            
            $
            0.75
            
            
            $
            0.33
            
            
            $
            0.262
      nd
      Quarter (April 1 - June 30)
            
            
            1.43
            
            
            
            0.92
            
            
            
            0.51
            
            
            
            0.173
      rd
      Quarter (July 1 - September 30)
            
            
            0.95
            
            
            
            0.55
            
            
            
            0.35
            
            
            
            0.144
      th
      Quarter (October 1 - December 31)
            
            
            1.10
            
            
            
            0.32
            
            
            
            2.60
            
            
            
            0.21




Amounts
have been adjusted to reflect the 1-for-15 reverse stock split in December
2006.




13




Dividend
Policy


Our
present policy is to retain earnings, if any, for the operation and expansion of
our business.  Except in connection with the Merger, we have not paid
cash dividends on our stock and do not anticipate that we will do so in the
foreseeable future.





As long
as any shares of Series D and Series D-2 Preferred Stock are outstanding, the
Company may not declare, pay or set apart for payment any dividend or make any
distribution on any Junior Stock (other than dividends or distributions payable
in additional shares of Junior Stock), unless at the time of such dividend or
distribution the Company shall have paid all accrued and unpaid dividends on the
outstanding shares of Series D and Series D-2 Preferred Stock.


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”).  These forward-looking statements are
based on our current expectations, assumptions, estimates, and projections about
us and our industry and generally include the plans and objectives of management
for future operations, including plans and objectives relating to our future
economic performance.




You can
identify certain forward-looking statements by our use of forward-looking
terminology such as the words “may,” “will,” “believes,” “expects,”
“anticipates,” “intends,” “plans,” “estimates,” “forecasts,” “projects,”
“should,” “could,” “seek,” “pro forma,” “goal,” “continues,” “anticipates,” or
similar expressions.




These
forward-looking statements involve risks and uncertainties and include, in
particular, statements about our plans, strategies, and prospects under the
headings “Management’s Discussion and Analysis or Plan of Operation” and
“Business.”  In addition, 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;




·
            Our
      ability to integrate recent and future
  acquisitions;




·
            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 (including but not limited to the
factors described in the “Risk Factors” section and elsewhere in this report)
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 in any
way, including but not limited to reflecting new events or
circumstances.




14




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 and to BPO Management Services, Inc. (“BPOMS” or
the “Company”) on December 15, 2006 immediately following our reverse merger
(the “Merger”) with privately-held BPO Management Services (“Former
BPOMS”).  Former BPOMS was incorporated in July 2005. On December 15,
2006, we acquired all of the outstanding common stock of publicly-held
NetGuru, Inc. in a reverse merger (“Merger”).  Upon the closing of the
Merger, we adopted an accounting year end of December 31, which was the
accounting year end of Former BPOMS”, as for accounting purposes, Former BPOMS
was the accounting acquirer.




We
provide business process outsourcing (BPO) services to enterprises in the United
States and Canada.  “BPO” refers to the outsourcing
of entire business processes, typically to reduce cost and/or to improve
the performance of that process.  Our objective is to provide a
comprehensive suite of BPO functions 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 Services Outsourcing or
      “FAO”;




·
            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.




15




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




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, 2007.




16





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
ECM, HRO and ITO 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, 2007,  there was no
impairment to goodwill. As of December 31, 2007, goodwill balance was
$9,029,142.  In conjunction with the acquisitions of DocuCom, HRMS and
Blue Hill during fiscal 2007, the purchase price exceeded the Company’s
preliminary allocation of the fair value of net assets acquired by $1,462,693,
$758,268 and $1,697,891, respectively, all of which has been temporary assigned
to goodwill pending review by an independent valuation group.





Goodwill
activity was as follows:




At
      December 31, 2006
              
              $
              4,083,822Additions
      from acquisitions
              
              
              4,945,320At
      December 31, 2007
              
              $
              9,029,142
  17




Intangible
assets activity was as follows:




At
      December 31, 2006
              
              $
              1,114,698Additions
      from acquisitions
              
              
              9,600,000Amortization
              
              
              (849,367
              )Exchange
      differences
              
              
              32,888At
      December 31, 2007
              
              $
              9,898,219




Amortization
of intangible assets expected to be charged to the results of operations in
upcoming years:




Fiscal
years ending December 31,





2008
              
              $
              1,853,3432009
              
              
              1,522,2332010
              
              
              1,247,2332011
              
              
              1,247,2332012
              
              
              1,081,7982013
      and beyond
              
              
              2,946,380


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:




Company
              
              Inception/Acquisition
  DateBPO
      Management Services, Inc. (the "Company")
              
              Inception
      date:  July 26, 2005Adapsys
      Document Management LP ("ADM")
              
              Acquired:  July
      29, 2005Adapsys
      LP ("ADP")
              
              Acquired:  July
      29, 2005Digica,
      Inc. ("Digica")
              
              Acquired:  January
      1, 2006Novus
      Imaging Solutions, Inc. ("Novus")
              
              Acquired:  September
      30, 2006NetGuru
      Systems, Inc. ("netGuru")
              
              Acquired:  December
      15, 2006Research
      Engineers, GmbH ("GmbH")
              
              Acquired:  December
      15, 2006DocuCom
      Imaging Solutions, Inc. ("DocuCom")
              
              Acquired:  June
      21, 2007Human
      Resource Micro-Systems, Inc. ("HRMS")
              
              Acquired:  June
      29, 2007Blue
      Hill Data Services, Inc. ("Blue Hill")
              
              Acquired:  October
      10, 2007




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.




18





Net
Revenues




The
following table presents our net revenues by operating segment:




For
      The Year EndedDecember
      31,Net
      revenues
              
              2007
              
              
              2006ECM
              
              $
              10,141,210
              
              
              $
              2,713,769%
      of total net revenues
              
              
              61.6
              %
              
              
              57.6
              %ITO
              
              
              5,616,239
              
              
              
              1,833,052%
      of total net revenues
              
              
              34.1
              %
              
              
              38.9
              %HRO
              
              
              711,552
              
              
              
              164,318%
      of total net revenues
              
              
              4.3
              %
              
              
              3.5
              %Total
      net revenues
              
              $
              16,469,001
              
              
              $
              4,711,139


Total net
revenues increased by $11,757,862 (250%) to $16,469,001 during the year ended
December 31, 2007 from $4,711,139 in the year ended December 31, 2006. 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 during the year ended December 31, 2007
increased by $7,427,441 or 274% to $10,141,210 from $2,713,769 during the year
ended December 31, 2006. The increase in net revenues during the year ended
December 31, 2007 was primarily due to approximately $5,546,222 contributed by
the acquisition of DocuCom, a reduction of revenues from ADP and ADM of
approximately $462,900 and  increases of approximately $2,012,108 from
Novus and netGuru collaborative software products and services whose results
were included only for three months and 15 days respectively during the year
ended December 31, 2006 compared to a full year of results of operations during
the year ended December 31, 2007. The majority of our collaborative software
revenues are 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 206% to $5,616,239 during the year ended December
31, 2007 from $1,833,052 during the year ended December 31, 2006 primarily from
the acquisition of Blue Hill contributing $1,995,574 and a full year of
operations from our ITO operations in Massachusetts compared to fifteen days of
revenue from this entity during the year ended December 31, 2006.




Human
Resource Outsourcing Services (“HRO”)




Net
revenues from HRO increased 333% to $711,552 during the year ended December 31,
2007 from $164,318 during the year ended December 31, 2006. The increase is the
result of $697,440 from HRMS that was purchased approximately mid-year in 2007,
offset by approximately $150,000 reduction in revenue from the existing HRO
segment over the year ended December 31, 2006.




19




Operating
Expenses




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




For
      The Year Ended
                  December
      31,Operating
      Expenses
              
              2007
              
              
              2006Cost
      of services provided expenses
              
              $
              8,045,756
              
              
              $
              1,523,983%
      of total net revenues
              
              
              48.9
              %
              
              
              32.3
              %Selling,
      general and administrative expenses
              
              $
              11,965,666
              
              
              $
              5,576,615%
      of total net revenues
              
              
              72.7
              %
              
              
              118.4
              %Research
      and development expenses
              
              $
              298,211
              
              
              $
              19,491%
      of total net revenues
              
              
              1.8
              %
              
              
              0.4
              %Depreciation
      and amortization
              
              $
              1,466,767
              
              
              $
              160,720%
      of total net revenues
              
              
              6.6
              %
              
              
              2.1
              %Share-based
      compensation expense
              
              $
              360,721
              
              
              $
              598,031%
      of total net revenues
              
              
              2.2
              %
              
              
              12.7
              %Change
      in estimated severance liability
              
              $
              -
              
              
              $
              (223,726
              )%
      of total net revenues
              
              
              0.0
              %
              
              
              -4.7
              %Total
      operating expenses
              
              $
              22,137,121
              
              
              $
              7,655,114%
      of total net revenues
              
              
              134.4
              %
              
              
              162.5
              %


Cost
of services provided expenses





Cost of
services provided expenses increased by $6,521,773 or 428% to $8,045,756 from
$1,523,983 primarily due to acquisitions of DocuCom, HRMS and Blue Hill during
2007 and the Novus and NetGuru entities acquired during the fourth quarter of
fiscal 2006.




Selling,
general and administrative expenses




Selling,
general and administrative (“SG&A”) expenses increased by $6,389,051 (115%)
to $11,965,666 during the year ended December 31, 2007 from $5,576,615 during
the year ended December 31, 2006 primarily due to $4,029,876 in SG&A
expenses from the acquisitions of DocuCom, HRMS and Blue Hill during the year
and a full year of operations for Novus and the netGuru entities that were
included for 3 months and 15 days respectively during the year ended December
31, 2006. Additionally, the corporate SG&A expenses during the year ended
December 31, 2007 increased by $818,737 over those of the preceding year
primarily due to the increase in the corporate structure increasing professional
fees and services.





Research
and development expenses




Research
and development (“R&D”) expenses consist primarily of software developers’
wages. Fiscal 2007 includes a full year’s activities while the year ended
December 31, 2006 results included only 15 days of R&D
expenses.





Depreciation
and amortization expenses





Depreciation
and amortization expenses increased by $1,306,047 (813%) to $1,466,767 during
the year ended December 31, 2007 from $160,720 during the year ended December
31, 2006 primarily due to the valuation allocations of fixed assets and
intangible assets acquired in the acquisitions of DocuCom, HRMS and Blue Hill
during fiscal 2007.





20





Share-based
compensation expense




We
recorded share-based compensation expense of $360,721 during the year ended
December 31, 2007 compared to $598,031 during the year ended December 31, 2006.
Share-based compensation expense during the year ended December 31, 2006
included $353,478 in shares of Series A Preferred Stock issued as compensation
to officers.




Operating
Loss by Segment




Consolidated
operating loss in the ECM segment increased to $1,617,826 from $650,551 due to
the additional expenses during the year ended December 31, 2007 as a result of
transitioning the current year acquisitions, in addition to Novus and the
NetGuru entities acquired in the fourth quarter of fiscal 2006. The increase in
operating loss in the ITO segment to $730,621 during the year ended December 31,
2007 from $355,393 during the year ended December 31, 2006 is primarily due to
the acquisition of Blue Hill during fiscal 2007. The increase in operating loss
in the HRO segment during the year ended December 31, 2007 to $800,146 from
$777,336 is primarily due to the acquisition of HRMS in fiscal 2007. Corporate
expenses increased to $2,519,527 during the year ended December 31, 2007 from
$1,160,695 during the year ended December 31, 2006 primarily due to increased
professional fees and share based compensation expense. The following table
details operating loss by segment:




For
      The Year Ended December 31,Operating
      loss
              
              2007
              
              
              %
      of Total
              
              
              2006
              
              
              %
      of TotalECM
              
              $
              (1,617,826
              )
              
              
              28.5
              %
              
              $
              (650,551
              )
              
              
              22.1
              %ITO
              
              
              (730,621
              )
              
              
              12.9
              %
              
              
              (355,393
              )
              
              
              12.1
              %HRO
              
              
              (800,146
              )
              
              
              14.1
              %
              
              
              (777,336
              )
              
              
              26.4
              %Corporate
              
              
              (2,519,527
              )
              
              
              44.5
              %
              
              
              (1,160,695
              )
              
              
              39.4
              %Consolidated
              
              $
              (5,668,120
              )
              
              
              100.0
              %
              
              $
              (2,943,975
              )
              
              
              100.0
              %
  Other
expense (income)




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





For
      The Year EndedDecember
      31,Other
      Expense (Income)
              
              2007
              
              
              2006Related
      parties interest
              
              $
              117,168
              
              
              $
              93,420%
      of total net revenues
              
              
              0.7
              %
              
              
              2.0
              %Amortization
      of relatedparty
      debt discount
              
              $
              594,029
              
              
              $
              241,670%
      of total net revenues
              
              
              3.6
              %
              
              
              5.1
              %Other
      interest, net
              
              $
              90,903
              
              
              $
              31,853%
      of total net revenues
              
              
              0.6
              %
              
              
              0.7
              %Other
      income
              
              $
              (2,011
              )
              
              $
              (10,732
              )%
      of total net revenues
              
              
              0.0
              %
              
              
              -0.2
              %Total
      other expense
              
              $
              800,089
              
              
              $
              356,211%
      of total net revenues
              
              
              4.9
              %
              
              
              7.6
              %




21




Other
expense (income)




Other
expense increased by $443,878 (125%) during the year ended December 31, 2007 to
$800,089 from $356,211 during the same period in the preceding year primarily
due to the amortization of related party debt discount that originated in
December 2006 and was fully amortized by April of 2007 which related to the
value of warrants issued pursuant to bridge loans and loan guarantees by two
individuals who are also officers and significant shareholders in the
Company.  Interest increased during 2007 due to the acquisition of
capital leases and interest on the bridge loans for the entire
year.




Income
taxes




In the
years ended December 31, 2007 and 2006, 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, 2007 consisted of $888,043 in
cash and cash equivalents, an increase of $181,846 over the $706,197 cash and
cash equivalents at December 31, 2006. We incurred net losses from operations of
$5,668,120 and $2,943,975 and used cash in operations of $3,786,972 and
$1,947,682 in the years ended December 31, 2007 and 2006,
respectively.




The
primary reasons for cash used in operations during the year ended December 31,
2007 were net loss of $6,468,209 that included non-cash charges related to
recognition of cost related to depreciation and amortization expense of
$1,466,767, share-based compensation expense of $360,721, bad debt expense of
$148,236, and amortization of related party debt discount of $594,029. 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 reasons for cash used in operations during the year ended December 31,
2006 were net loss of $3,300,186 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 $598,031, bad debt expense of $109,005, and amortization of loan
discount of $241,670. 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.





Net cash
used in investing activities during the year ended December 31, 2007 was
$10,856,210, primarily due to cash used for the acquisitions of DocuCom, HRMS
and Blue Hill.  In the year ended December 31, 2006 cash provided by
investing activities was $2,324,827, primarily due to cash acquired from Digica,
Novus and netGuru acquisitions, net of $400,000 in cash payments.





Net cash
provided by financing activities during the year ended December 31, 2007 was
$15,378,614, which primarily resulted from the issuance of Preferred Series D
and D-2 Convertible Stock. Net cash used in financing activities during the year
ended December 31, 2006 was $915,637, 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 of $267,525 from a
bank line.





During
the year ended December 31, 2007 we funded our operations through the founders’
bridge loan facility and through the placement of convertible preferred shares
and a subsequent exercise of warrants attached thereto. During the year ended
December 31, 2006 we 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 the additional capital necessary to grow our business and
complete additional acquisitions by issuing our equity securities and/or debt in
one or more private transactions.




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.




22





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 our 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, 2007:




Less
      Than
              
              
              
              
              
              
              
              
              AfterTotal
              
              
              1
      Year
              
              
              1-3
      Years
              
              
              4-5
      Years
              
              
              5
      YearsLong-term
      debt
              
              $
              836,273
              
              
              $
              812,156
              
              
              $
              24,117
              
              
              $
              -
              
              
              $
              -Capital
      lease obligations*
              
              
              542,595
              
              
              
              149,653
              
              
              
              265,919
              
              
              
              127,023
              
              
              
              -Operating
      leases
              
              
              6,839,935
              
              
              
              1,531,140
              
              
              
              2,739,806
              
              
              
              1,259,199
              
              
              
              1,309,790Purchase
      price payable -former
      shareholders
              
              
              2,101,771
              
              
              
              2,101,771
              
              
              
              -
              
              
              
              -
              
              
              
              -Bridge
      loan payable
              
              
              1,200,000
              
              
              
              1,200,000
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      contractual obligations
              
              $
              11,520,574
              
              
              $
              5,794,720
              
              
              $
              3,029,842
              
              
              $
              1,386,222
              
              
              $
              1,309,790*
      Excludes imputed interest of $112,927




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 principal 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.  SFAS No. 155 was implemented during 2007 and did not have a
material impact on our financial position, results of operations, or cash
flows.




23




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 implemented SFAS No. 156
during 2007 which did not have a material impact on our 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 the Company beginning January 1, 2007. Due
to our net losses in 2007 and 2006, adoption of FIN 48 did not have a material
impact 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 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 and 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 adoption of SAB No. 108
did not have a material impact on our financial position, results of operations
or cash flows.




24




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 is effective for the Company beginning
January 1, 2007. The adoption of SFAS No. 158 did not have a material impact 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. 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 on its financial position, results of operations and cash
flows.





Business
Combinations, and Non-controlling Interests





In
December 2007, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141R, Business
Combinations, and Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51. Statement
No. 141R modifies the accounting and disclosure requirements for business
combinations and broadens the scope of the previous standard to apply to all
transactions in which one entity obtains control over another business.
Statement No. 160 establishes new accounting and reporting standards for
noncontrolling interests in subsidiaries. We will be required to apply the
provisions of the new standards in the first quarter of 2009 and are currently
assessing whether it will have an impact on our financial position, results of
operations or cash flows.





Off-Balalnce
Sheet Arrangements





We do not
have any off-balance sheet arrangements





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 possible future strategic acquisitions, sales and marketing
efforts, and the development of new products and services.  As of
December 31, 2007, we had negative working capital of $5,789,419 and an
accumulated deficit of $10,568,915.  As of that date, we had $888,043
in cash and cash equivalents and $4,768,618 in accounts receivable, net of
allowance for doubtful accounts.




We
recorded a net operating loss of $5,668,120 and used $3,786,972 of cash in
operating activities during the year ended December 31, 2007.   Even
after the closing of the DocuCom Imaging Solutions Inc. ("DocuCom"), Human
Resource MicroSystems, Inc. ("HRMS") and Blue Hill Data Services, Inc. (“Blue
Hill”) acquisitions, there is no assurance that we will be able to generate
sufficient operating cash in future quarters.




25





We
have a history of losses and an accumulated deficit that may continue in the
future even after the recent completion of three acquisitions and that may
adversely affect our business, prospects, financial condition, results of
operations, cash flow, and stock price.




We have
incurred net losses since our inception in July 26, 2005.  Our
accumulated deficit through December 31, 2007 was $10,568,915, and as of that
date we had a total stockholders’ equity of $17,561,158.




We
recorded a net operating loss of $5,668,120 and used $3,786,972 of cash in
operating activities during fiscal 2007. 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.





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. Additionally, the price of our common stock could
further decline due to the impact of any of the following factors:




·
            failure
      to meet sales goals or operating
budgets;




·
            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;




·
            failure
      to integrate acquired entities;




·
            investor
      perception of our industry or prospects;
or




·
            general
      economic trends.




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





26




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




Chairman
and Chief Executive Officer, Patrick A. Dolan, and our President and Secretary,
James Cortens, are an integral part of our operations and, until the sale of the
Series D Preferred Stock have been the primary 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 that 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.





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 January 29, 2008, the high and low sale prices of a share of our
common stock were $1.50 and $0.32, 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.




27




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 31, 2008, our executive officers and directors and their family members
together beneficially owned approximately 44.1% of the issued and outstanding
shares of our common stock, as well as 100% of the issued and outstanding shares
of our Series A Preferred Stock and 100% of the issued and outstanding shares of
our Series C Preferred Stock.  In addition, as of March 31, 2008, the
seven institutional investors who participated in the purchase of the Series D
Preferred Stock (“Share Sale”), if they elected to exercise all of the warrants
issued to them and convert the Series D and Series D-2 Convertible Preferred
Stock issued or issuable to them, would beneficially own approximately 90.9% of
the issued and outstanding shares of our common stock (assuming that no Series A
or Series C Preferred Stock is converted and no stock options or other warrants
are exercised).




In
addition, each class of our preferred stock is entitled to certain rights,
including the following:




·
            Series
      A - Shares of Series A Preferred Stock vote together with shares of common
      stock on an as-converted basis, with any fractional votes rounded to the
      nearest share, on matters submitted to a vote of stockholders
      generally.  Series A holders, voting as a separate class, are
      entitled to elect two members of our board of directors at each meeting or
      pursuant to each written consent. The two directors elected by the
      Series A Preferred stockholders are Messers. Dolan and Cortens. The
      affirmative vote of a majority of the outstanding shares of Series A
      Preferred Stock is required prior
to:




o
            the
      sale, lease, or other transfer of all or substantially all of our
      assets;




o
            the
      merger or consolidation of us into or with any other corporation that
      results in the transfer of more than 50% of our voting power;
      or




o
            the
      acquisition in any manner or form, including through the issuance of debt
      and/or stock and/or payment of cash, of all or substantially all of the
      assets or business or capital stock or ownership interest of another
      entity or business




Also, the
affirmative vote of holders of not less than two-thirds of the outstanding
shares of Series A Preferred Stock is required for:




o
            the
      creation of a new class or series of stock that is entitled to dividends
      or shares in the distribution of assets on a parity with or in priority to
      the Series A Preferred Stock (other than the Series C Preferred Stock);
      and




o
            the
      amendment of the terms of the Series A Preferred Stock in a manner that
      would materially alter or change their powers, preferences, or special
      rights.




·
            Series
      B - Shares of Series B Preferred Stock vote together with shares of common
      stock on an as-converted basis, with any fractional votes rounded to the
      nearest share, on matters submitted to a vote of stockholders
      generally.  Holders of a majority of outstanding shares of
      Series B Preferred Stock have the right to appoint an observer to attend
      all the meetings of our board of directors in a nonvoting capacity, except
      during any period in which any holder of Series B Preferred Stock serves
      as a director of ours.




·
            Series
      C - Shares of Series C Preferred Stock have one vote per share and vote
      together with shares of common stock on matters submitted to a vote of
      stockholders generally.  In addition, the affirmative vote of a
      majority of the outstanding shares of Series C Preferred Stock is required
      prior to any of the following events:  a voluntary or
      involuntary liquidation, dissolution, or winding up; a merger or
      consolidation with or into any other corporation or corporations as a
      result of which our stockholders immediately prior to the consummation of
      the merger or consolidation hold less than 50% of the voting securities of
      the surviving entity; and the sale, transfer or lease of all or
      substantially all of our assets.  Also, the affirmative vote of
      holders of not less than two-thirds of the outstanding shares of Series C
      Preferred Stock is required for:




o
            the
      creation of a new class or series of stock that is entitled to dividends
      or shares in the distribution of assets on a parity with or in priority to
      the Series C Preferred Stock or that provides for mandatory
      redemption;




28




o
            the
      redemption of shares of capital stock other than Series C Preferred Stock;
      and





o
            the
      amendment of the terms of the Series C Preferred Stock in a manner that
      would materially alter or change their powers, preferences, or special
      rights.




·
            Series
      D Convertible Preferred Stock - Except for certain transactions upon which
      the Series D Convertible Preferred Stock is entitled to vote separately as
      a class and except as required by the Delaware General Corporation Law,
      the Series D Convertible Preferred Stock has no voting
      rights.  The following transactions require the approval of
      holders of at least 66% of the then-outstanding shares of Series D
      Convertible Preferred Stock:  authorizing, creating, issuing, or
      increasing the authorized or issued amount of any class of stock;
      amending, altering or repealing the provisions of the Series D Convertible
      Preferred Stock in a way that would adversely affect any right,
      preference, privilege or voting power of the Series D Convertible
      Preferred Stock; repurchasing, redeeming or paying dividends or
      distributions on our common stock or any stock junior to the Series D
      Convertible Preferred Stock; amending our Certificate of Incorporation or
      Bylaws in a way that would materially and adversely affect the rights,
      preferences, privileges and voting power of the Series D Convertible
      Preferred Stock; reclassifying our outstanding securities; voluntarily
      filing for bankruptcy, liquidating our assets or making an assignment for
      the benefit of our creditors; materially changing the nature of our
      business; and authorizing, approving or entering into a change in control
      transaction.  For as long as any shares of Series D Convertible
      Preferred Stock and Series D-2 Convertible Preferred Stock remain
      outstanding, the holders of such stock, voting together as a single class,
      are entitled to elect one member of our board of directors.  Mr.
      Cleveland is currently such
director.





·
            Series
      D-2 – Shares of our Series D-2 Convertible Preferred Stock possess the
      same rights as summarized above for shares of our Series D Convertible
      Preferred Stock.




As a
result, our executive officers, directors and these seven institutional
investors 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 exert significant influence over certain of our
business 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.  Further, the
concentration of voting power in the hands of those individuals and investors
could have the effect of delaying or preventing a change of control of our
company, even if the change of control would benefit our other 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.





Our
common stock may be considered a “penny stock” and may thereby be
subject to additional sale and trading regulations that may make it more
difficult to sell.




Shares of
our common stock are subject to rules adopted by the Securities and Exchange
Commission that regulate broker-dealer practices in connection with transactions
in “penny stocks.”  Penny stocks are generally equity securities with
a price of less than $5.00 (other than securities registered on certain national
securities exchanges or quoted on the Nasdaq system, provided that current price
and volume information with respect to transactions in those securities is
provided by the exchange or system).  The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
those rules, deliver a standardized risk disclosure document prepared by the
Securities and Exchange Commission, which contains the following:


·
              A
      description of the nature and level of risk in the market for penny stocks
      in both public offerings and secondary
  trading;




·
              A
      description of the broker’s or dealer’s duties to the customer and of the
      rights and remedies available to the customer with respect to violation to
      such duties or other requirements of securities’
    laws;


·
              A
      brief, clear, narrative description of a dealer market, including “bid”
      and “ask” prices for penny stocks, and the significance of the spread
      between the “bid” and “ask”
price;


·
              A
      toll-free telephone number for inquiries on disciplinary
      actions;


29
  ·
                Definitions
      of significant terms in the disclosure document or in the conduct of
      trading in penny stocks;
and


·
                Such
      other information and in such form(including language, type, size and
      format), as the Securities and Exchange Commission shall require by rule
      or
regulation.




Prior to
effecting any transaction in penny stock, the broker-dealer also must provide
the customer the following:


·
                The
      bid and offer quotations for the penny
  stock;


·
                The
      compensation of the broker-dealer and its salesperson in the
      transaction;
 ·
                    The
      number of shares to which such bid and ask prices apply, or other
      comparable information relating to the depth and liquidity of the market
      for such stock; and
 ·
                        Monthly
      account statements showing the market value of each penny stock held in
      the customer’s
account.




In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser’s written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitably
statement.  These disclosure requirements may have the effect of
reducing the trading activity in the secondary market for a stock that becomes
subject to the penny stock rules.  Holders of shares of our common
stock may have difficulty selling those shares because our common stock will
probably be subject to the penny stock rules.




Conversion
of Preferred Stock or exercise of outstanding warrants will increase the number
of issued shares of common stock, reduce each then existing stockholder’s
percent of ownership, and may dilute our share value.




In
connection with the Share Sale, we issued 1,458,333.8 shares of our Series D
Convertible Preferred Stock, which shares are convertible into approximately
23.3 million shares of our common stock.  In addition, we granted
warrants to purchase up to 1,458,333.8 shares Series D-2 Convertible Preferred
Stock (which shares are convertible into approximately 23.3 million shares of
our common stock) and warrants to purchase up to approximately 71.2 million
shares of our common stock if such warrants are exercised in
full.  The conversion of any of the shares of our Series D Convertible
Preferred Stock, the conversion of any of the shares of our Series D-2
Convertible Preferred Stock after exercise of the Series J Warrants to purchase
our Series D-2 Convertible Preferred Stock, or exercise of any of the warrants
to purchase common stock granted in connection with the purchase will result in
the issuance of shares of our common stock and may result in substantial
dilution in the percentage of our common stock held by our then existing
stockholders.  The issuance of common stock upon any such conversion
or exercise may have the effect of diluting the value of the shares held by our
stockholders and might have an adverse effect on any trading market for our
common stock.


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.




Evaluation
of Disclosure Controls and Procedures





Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as
of December 31, 2007. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. In addition, the design of disclosure
controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating
the benefits of possible controls and procedures relative to their
costs.




30


Based on
our evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures are designed at a
reasonable assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required
disclosure.





Management’s
Annual Report on Internal Control over Financial Reporting





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Exchange Act Rule
13a-15(f). The Company’s internal control system is a process designed by, or
under the supervision of, the Company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
Company’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles (U.S. GAAP). The Company’s
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect transactions and dispositions of assets; provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with U.S. GAAP, and that receipts and
expenditures are being made only in accordance with the authorization of its
management and directors; and provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on its financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2007. In making this assessment, the Company used
the control criteria framework of the Committee of Sponsoring Organizations of
the Treadway Commission published in its report entitled Internal Control — Integrated
Framework.As a result of its assessment, management identified a
material weakness in the Company’s internal control over financial reporting.
Based on the weakness identified as described below, management concluded that
the Company’s internal control over financial reporting was not effective as of
December 31, 2007.





A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that, there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis. As a result of
its assessment, management identified the following material weaknesses in
internal control over financial reporting as of December 31, 2007:





• The
Company lacked sufficient internal resources to adequately implement segregation
of duties within the financial reporting system.


• During
2007 the Company made three major acquisitions, the reporting controls and
procedures of which had not been fully integrated with those of the
Company


• While
there were internal controls and procedures in place that relate to financial
reporting and the prevention and detection of material misstatements, these
controls did not meet the required documentation and effectiveness requirements
under the Sarbanes-Oxley Act (“SOX”) and therefore, management could not certify
that these controls were correctly implemented. As a result, it was management’s
opinion that the lack of documentation did warrant a material weakness in the
financial reporting process.





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.




31




Remediation
of Material Weakness


During
2008, the Company will implement the following remediation activities to
materially improve, or are reasonably likely to improve, the Company’s internal
control over financial reporting:


•
Continue the refinement, expansion, and communication of Accounting Policies and
Procedures, particular in areas involving complex or technical accounting,
and


•
Continue to utilize external consultants to assist in the implementation and
design of policies and procedures to meet the required documentation and
effectiveness requirements for internal controls over financial reporting under
the Sarbanes-Oxley Act (“SOX”) and adequately address the lack of segregation of
duties within the financial reporting process.


Even with
these changes, due to the increasing number and complexity of pronouncements,
emerging issues and releases, and reporting requirements and regulations, we
expect there will continue to be some risk related to financial disclosures. We
believe that such risks have been reasonably mitigated following our
implementation of the Sarbanes-Oxley Act requirements in late 2007 and our
remediation plans that will be implemented during 2008. However, the process of
identifying risk areas and implementing financial disclosure controls and
internal controls over financial reporting required under the Sarbanes-Oxley Act
continues to be complex and subject to significant judgment and may result in
the identification in the future of areas where we may need additional
resources.


Additionally,
due to the complexity and judgment involved in this process, we cannot guarantee
we may not find or have pointed out to us either by internal or external
resources, or by our auditors following the implementation of the external
auditor requirement for their independent assessment of our controls, additional
areas needing improvement or resulting in a future assessment that our controls
are or have become ineffective as a result of overlooked or newly created
significant deficiencies or unmitigated risks.





Changes
in Internal Control Over Financial Reporting


During
the year ended December 31, 2007 there were no changes in internal control that
materially affected or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.




ITEM
8B.   OTHER
INFORMATION.




None




32





PART
III




ITEM
      9.
            DIRECTORS AND EXECUTIVE
      OFFICERS, PROMOTERS AND CONTROL PERSONS AND CORPORATE GOVERNANCE
      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, 2007, were as
follows:





Name
            
            Age
            
            PositionPatrick
      Dolan
            
            50
            
            Chairman
      of the Board, Chief Executive Officer, and DirectorJames
      Cortens
            
            51
            
            Chief
      Operating Officer, President, Secretary, DirectorDonald
      Rutherford
            
            68
            
            Chief
      Financial OfficerDale
      Paisley (1)
            
            66
            
            DirectorRussell
      Cleveland
            
            68
            
            DirectorKoushik
      Dutta
            
            44
            
            Chief
      Technology Officer




(1)
Chairman of Audit Committee.




Directors
and Executive Officers




Patrick Dolanfounded Former
BPOMS and has served as its Chief Executive Officer and Chairman of the Board
from its inception in July 2005 until the Merger, and since the Merger has
served as our Chief Executive Officer and Chairman of the
Board.  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 Cortensfounded Former
BPOMS and has served as its Chief Financial Officer, President, and a Director
from its inception in July 2005 until the Merger, and since the Merger has
served as our Chief Operating Officer, President, Director and ,
Secretary.  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.




Donald Rutherfordjoined BPOMS
as Chief Financial Officer on January 29, 2007, 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 Paisleyhas 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., from February 2003 until
December 2003, he served as Chief Executive Officer and Chief Financial Officer
of USA Biomass Corporation, and from October 2006 to the present he has served
as Chief Financial Officer of Amish Naturals, Inc.  He was appointed
as a director of the Company in December 2006. 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.




33




Russell Cleveland is the
founder, president, chief executive officer, sole director, and majority
shareholder of RENN Capital Group, Inc. (“RENN”).  RENN is the
investment adviser to or the manager of all or part of three closed-end mutual
funds: (i) Renaissance Capital Growth & Income Fund III, Inc. (AMEX: RCG),
(ii) Renaissance US Growth Investment Trust PLC (LSE: RUG), and (iii) US Special
Opportunities Trust PLC (LSE: USPU, USPC, USPI, USPZ), and one open-end mutual
fund, Premier RENN US Emerging Growth Limited. He also serves on the boards of
directors of Renaissance Capital Growth & Income Fund III, Inc. (since
1994), and Renaissance US Growth Investment Trust PLC (since 1996), as well as
Access Plans USA, formerly Precis, Inc. (since 2003), a Texas-based,
Nasdaq-listed (AUSA), national developer and distributor of quality affordable
consumer driven health care programs for individuals, families, affinity groups
and employer groups across the nation; CaminoSoft, Corp. (since 2004), a
California-based, OTCBB-quoted (CMSF), developer and manufacturer of software
solutions that store, manage, and safeguard large quantities of data created in
a business and application settings; Cover-All Technologies, Inc. (since 2001),
a New Jersey-based, OTCBB-quoted (COVR), provider of state-of-the-art software
products, services and solutions to the property and casualty insurance
industry; Integrated Security Systems, Inc. (since 2001), a Texas-based,
OTCBB-quoted (IZZI), designer, developer, manufacturer, distributor of service
security and traffic control products used in the commercial, industrial and
government sectors; and Tutogen Medical, Inc. (since 1997), a Florida-based,
American Stock Exchange-listed (TTG), designer, developer, processor,
manufacturer, and marketer of sterile biological implant products made from
human (allograft) and animal (xenograft) tissue. Mr. Cleveland is a chartered
financial analyst (CFA) with more than 35 years experience as a specialist in
investments in smaller capitalization companies.  A graduate of the
Wharton School of Business, he is a past president of the Dallas Association of
Investment Analysts and has also authored a number of books, including Finding Midas: Investing in
Entrepreneurial CEOs with the Golden Touch, which was released in June,
2007.




Koushik Duttahas 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.





There are
no family relationships among our directors or among our executive
officers.




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.





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”).




34




Audit
Committee Matters




Our Audit
Committee consists of Mr. Dale Paisley who holds the position of chairman of
that committee and Mr. Russell Cleveland. 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.





Independence
of Mr. Russell Cleveland




Except in
connection with his status with one of the investors in the Share Sale, Mr.
Cleveland has never entered into a transaction with us in which he had, or would
have, a material direct or indirect interest and there are no material plans,
contracts, or arrangements with us in which he is
participating.  Except as detailed in the footnotes to the table set
forth in “Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters”, Mr. Cleveland is not related to any (i) of our
directors or executive officers, (ii) persons nominated or chosen by us to
become directors or executive officers, (iii) beneficial owner of more than 5%
of our securities, or (iv) immediate family members to any such
persons.




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 SEC. 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, 2007 and thereafter, or any written representations
received by us from reporting persons that no other reports were required, we
believe that, during our the year ended December 31, 2007, all Section 16(a)
filing requirements applicable to our reporting persons were met on a timely
basis.




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”) .





Name
      and
              PrincipalPosition
            
            Fiscal
      Year Ended
              December
      31
            
            Salary
              ($)
            
            
            Bonus
              ($)
            
            
            Stock
      Awards
              (2)
              ($)
            
            
            Option
              Awards
              (3)
              ($)
            
            
            Non-Equity
      Incentive
              Plan
              Compensation
              ($)
            
            
            Non-Qualified
      Deferred Compensation Earnings
              ($)
            
            
            All
      Other Compensation
              (1)
              ($)
            
            
            Total
              ($)Patrick
      A. Dolan,
            
            2007
            
            
            225,000
            (4)
            
            
            ---
            
            
            
            ---
            
            
            
            618,757
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            843,757Chairman,
      Chief Executive
            
            2006
            
            
            ---
            
            
            
            ---
            
            
            
            186,041
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            186,041Officer
      (5)




James
      Cortens,
            
            2007
            
            
            200,000
            (4)
            
            
            ---
            
            
            
            ---
            
            
            
            618,757
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            818,757President,
      Chief Operating
            2006
            
            
            ---
            
            
            
            ---
            
            
            
            167,437
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            167,437Officer,
      Secretary,Director
      (5)





Donald
      Rutherford,
            
            2007
            
            
            128,239
            
            
            
            ---
            
            
            
            ---
            
            
            
            366,094
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            494,333Chief
      Financial Officer (10)
            2006
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---




Koushik
      Dutta, (6)
            
            2007
            
            
            140,000
            
            
            
            50,000
            
            
            
            ---
            
            
            
            73,809
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            263,809Chief Technology
      Officer
            
            2006
            
            
            110,130
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            3,269
            
            
            
            113,399





Amrit
      K. Das, (7)
            
            2007
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Former
      Chairman,
            
            2006
            
            
            259,121
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            13,518
            (8)
            
            
            272,639Former
      Chief Executive,Former
      President





Bruce
      K. Nelson, (9)
            
            2007
            
            
            20,723
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            20,723Former
      Chief Financial
            
            2006
            
            
            127,000
            
            
            
            150,975
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            3,810
            
            
            
            281,785Officer,
      Former Secretary




35


______________________


(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)
            Includes
      the dollar amount recognized for financial statement reporting purposes
      for fiscal year 2006 relating to shares of Series A Preferred Stock
      computed in accordance with Financial Accounting Standards Board Statement
      of Financial Accounting Standards No. 123 (revised 2004), Share-Based
      Payment (“FAS 123R”) applying the same valuation model and assumptions
      applied for financial reporting
purposes.





(3)
            Includes
      the dollar amount recognized for financial statement reporting purposes
      for fiscal year 2007 relating to stock options computed in accordance with
      FAS 123R applying the same valuation model and assumptions applied for
      financial reporting purposes, but disregarding any estimate of forfeitures
      related to service-based vesting conditions.  The values
      included within this column have not been, and may never be realized. The
      options might never be exercised and the value received by the executive
      officer, if any, will depend on the share price on the exercise
      date.  The fair value of stock options granted to the Company’s
      employees was estimated using the following
      assumptions:  expected dividend yield 0; expected volatility
      125-127.7%; risk-free interest rate 3.87-4.62%; and expected option
      lives (in years) 5.  There were no forfeitures during the
      year.





(4)
            Includes
      $225,000 of accrued base salary for which payment has been deferred for
      Mr. Dolan and $200,000 of accrued base salary for which payment has been
      deferred for Mr. Cortens.





(5)
            Messrs.
      Dolan and Cortens do not receive any separate compensation for service as
      directors.





(6)
            Mr.
      Dutta served as our Chief Operating Officer prior to December 15,
      2006.




(7)
            Mr.
      Das resigned from his position of Chairman, Chief Executive Officer, and
      President upon the Merger.





(8)
            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.





(9)
            Mr.
      Nelson resigned from his position of Secretary upon the Merger and from
      the position of Chief Financial Officer on January 26,
    2007.






(10)
            Mr.
      Rutherford was appointed Interim Chief Financial Officer on January 26,
      2007 on a part-time basis and full-time Chief Financial Officer on June 1,
      2007..




Option Grants In Last Fiscal
Year




During
the year ended December 31, 2007, stock options covering 2,841,344 shares of
common stock were granted to named executive officers as shown in the following
table:





Vesting
      Period Years
            
            Year
      of Expiry
            
            Number
      of Options
            
            Exercise
      PricePatrick
      Dolan
            
            2
            
            2017
            
            
            1,166,666
            
            $
            0.55James
      Cortens
            
            2
            
            2017
            
            
            1,166,666
            
            $
            0.55Koushik
      Dutta
            
            2
            
            2012
            
            
            75,000
            
            $
            1.15Dale
      Paisley
            
            1
            
            2012
            
            
            33,012
            
            $
            1.15Don
      Rutherford
            
            4
            
            2012
            
            
            400,000
            
            $
            1.15





Aggregated
Option Exercises in Last Fiscal Year





No
options were exercised during the year ended December 31,
2007.




Long-Term
Incentive Plan Awards




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




36




Outstanding
Equity Awards at the End of The year ended December 31, 2007




Option
      Awards
            
            Stock
      AwardsName
      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
              Valueof
              Shares
      or
              Units
      of
              StockThat
      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
              Valueof
      Unearned
              Shares,
              Unitsor
      Other
              Rights
      That
              Have
      Not
              VestedPrincipal
      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,DirectorDonald
      Rutherford
            
            
            50,0000
            
            350,000
            
            
            ---
            
            $1.15
            
            
            4/16/2012
            
            ---
            
            
            ---
            
            ---
            
            
            ---Chief
      FinancialOfficerKoushik
      Dutta
            
            
            18,750
            
            56,250
            
            
            ---
            
            $1.15
            
            
            4/16/2012
            
            ---
            
            
            ---
            
            ---
            
            
            ---Chief
      TechnologyOfficerAmrit
      K. Das
            
            
            ---
            
            ---
            
            
            ---
            
            ---
            
            
            ---
            
            ---
            
            
            ---
            
            ---
            
            
            ---Former
      Chairman,Former
      Chief ExecutiveFormer
      PresidentBruce
      K. Nelson
            
            
            ---
            
            ---
            
            
            ---
            
            ---
            
            
            ---
            
            ---
            
            
            ---
            
            ---
            
            
            ---Former
      Chief FinancialOfficer,
      Former Secretary




Directors’
Compensation





The
following table sets forth the compensation received during the year ended
December 31, 2007 for services rendered as members of the board of
directors.




Director
      CompensationName
      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
            
            TotalPrincipal
      Position
            
            ($)
            
            ($)
            
            ($)
            
            ($)
            
            ($)
            
            ($)
            
            ($)Russell
      Cleveland
            
            
            ---
            
            ---
            
            
            ---
            
            ---
            
            
            ---
            
            ---
            
            
            55,275James
      Cortens
            
            
            ---
            
            ---
            
            
            ---
            
            ---
            
            
            ---
            
            ---
            
            
            53,750Patrick
      Dolan
            
            
            ---
            
            ---
            
            
            ---
            
            ---
            
            
            ---
            
            ---
            
            
            48,000Dale
      Paisley
            
            
            42,000
            
            ---
            
            
            32,488
            
            ---
            
            
            ---
            
            ---
            
            
            48,000




Mr.
Paisley is an independent director and receives a remuneration of $3,500 per
month for his services to the Company’s board. Mr. Cleveland is an independent
director and received no compensation for his services to the Company’s
board.




37




Repricing
of Options and SARs




No
adjustments to or repricing of stock options previously awarded to named
executives occurred in 2007.




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 provided that Mr. Dolan 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 agreement, 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
agreement, 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;




38




·
            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 provided that Mr. Cortens 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 agreement, Mr. Cortens 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
agreement, 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;




·
            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.




39




In 2007
Mr. Dolan and Mr. Cortens received as dividends on their Series A Convertible
Preferred Stock 143,491 shares (82,362 shares were issued and 61,129 shares were
accrued pending amendment of the Company’s Certificate of Incorporation) and
53,508 shares (47,395 shares were issued and 6,113 shares were accrued pending
amendment of the Company’s Certificate of Incorporation), respectively, of
BPOMS’ Series A Convertible Preferred Stock.




Donald
Rutherford




We have
an employment agreement with Donald W. Rutherford, dated January 26,
2007.  The employment agreement provides that Mr. Rutherford will
serve as BPOMS’ Chief Financial Officer effective as of January 29,
2007.  The employment agreement includes the following
provisions:




·
            Initial
      base salary of not less than $104,167 and he will devote approximately 50%
      of his time to the business and affairs of the
      Company.  Effective on June 1, 2007, or sooner if required by
      the Company, Mr. Rutherford’s salary is to increase to $166,667 and he
      will then devote all of his time to the business and affairs of the
      Company.·
            Annual
      cash bonus in an amount to be determined by the Company within 30 days of
      February 28, 2007.





·
            Options
      for the purchase of 400,000 shares of our common stock under the Company’s
      2003 Stock Option Plan, vesting ratably every six months during the four
      years following their grant.




In the
event of Mr. Rutherford’s employment with BPOMS is terminated during the during
the initial 90 days for any other reason or for no reason, Mr. Rutherford shall
be entitled to receive a severance payment equal to two month’s salary;
thereafter, Mr. Rutherford shall be entitled to receive a severance payment
equal to three months’ salary.




In
addition, commencing after such 90-day period, for each period of six months of
employment, Mr. Rutherford shall be entitled to receive an additional month’s
salary, up to a maximum of six months.




Lastly,
upon a termination by the Company for any reason other than for cause or for no
reason or without providing Mr. Rutherford with required notice, or for a
termination by Mr. Rutherford for cause, Mr. Rutherford shall be entitled to
receive the payments disclosed above, plus all cash bonuses, equity, and other
compensation covered by the employment agreement will vest immediately and
become payable upon the date of termination.




Mr.
Rutherford is a limited partner with Tatum LLC (“Tatum”) in Orange County,
California, which he joined in January 2000.  During the term of the
employment agreement, Mr. Rutherford is expected to remain a partner with
Tatum.  In connection with such employment of Mr. Rutherford, the
Company entered into an agreement (the “Tatum Agreement”) with Tatum, whereby
Tatum is to provide certain resources to the Company, and, in addition to the
compensation to be paid to Mr. Rutherford under the employment agreement, the
Company is to pay to Tatum a fee equal to 20% of Mr. Rutherford’s salary during
the term of the employment agreement.  Further, the Company will
tender directly to Tatum 20% of any cash bonuses otherwise payable to Mr.
Rutherford during the term of the Tatum Agreement.  The Company has
acknowledged to Tatum that Mr. Rutherford is obligated to share with Tatum 20%
of any cash proceeds realized by Mr. Rutherford from any equity bonus that the
Company may grant to him.  The Tatum Agreement will terminate upon the
earlier of Mr. Rutherford ceasing to be an employee of the Company or a partner
of Tatum.




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.




40




·
            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 agreement, 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:




·
            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, which
failure is not cured 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 any location 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.




41




ITEM
      11.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.




Beneficial
Ownership Table




SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS




The
following table sets forth certain information concerning the beneficial
ownership of our capital stock, as of January 29, 2008 by (i) each
person known by us to beneficially own 5% or more of our outstanding capital
stock, (ii) each of our directors, (iii) each of our executive officers, and
(iv) all of our executive officers and directors as a group.  Unless
otherwise indicated, the address for each of the stockholders in the table below
is c/o BPO Management Services, Inc., 1290 North Hancock, Suite 202, Anaheim,
California 92807.  Unless otherwise indicated in the footnotes to this
table and except in cases where community property laws apply, we believe that
each stockholder identified in the table possesses sole voting and investment
power over all shares of capital stock shown as beneficially owned by the
stockholder.





As of
March 31, 2008, we had 12,671,034 shares of common stock, 1,605,598 shares of
Series A Preferred Stock, 1,449,204 shares of Series B Preferred Stock, 916,666
shares of Series C Preferred Stock, 1,427,083.8 shares of Series D Convertible
Preferred Stock and 729,167.4 shares of Series D-2 Convertible Preferred Stock
issued and outstanding and had granted certain common stock and Series D-2
Convertible Preferred Stock purchase warrants and stock options that were
exercisable then or within 60 days thereafter.  Russell Cleveland, a
director of ours who was appointed as a result of a financing (as described in
the Stock Purchase Agreement as defined below), disclaims beneficial ownership
of all shares of Series D Convertible Preferred Stock that were issued in such
financing, shares of Series D-2 Convertible Preferred Stock that underlie
certain warrants granted in such financing, all shares of common stock into
which such preferred shares may be converted, and the common stock underlying
certain common stock purchase warrants (See footnotes 7, 8, 22, and 30,
below).





Title
      of Class
            Name
      and Address
              of
      Beneficial Owner
            Amount
      and Nature of Beneficial Ownership (1)
            Percent
      of lassExecutive
      Officers and Directors:Common
      Stock
            Patrick
      A. Dolan
            4,988,321(2)
            34.0%Common
      Stock
            James
      Cortens
            3,144,424(3)
            23.2%Common
      Stock
            Donald
      Rutherford
            50,000(4)
            *Common
      Stock
            Koushik
      Dutta
            18,750(5)
            *Common
      Stock
            Dale
      Paisley
            33,012(6)
            *Common
      Stock
            Russell
      Cleveland
            33,333,347(7)
            72.5%Common
      Stock
            All
      Directors and Executive Officers (6 persons) as a group
            41,567,854(8)
            84.8%5%
      Beneficial Owners:Common
      Stock
            Don
      West
            1,925,313(9)
            14.2%Common
      Stock
            Brian
      Meyer
            954,282(10)
            7.2%Common
      Stock
            Vision
      Opportunity Master Fund, Ltd.**
            56,666,670(11)
            81.7%Common
      Stock
            Renaissance
      US Growth Investment Trust PLC
            10,416,670(12)
            45.1%Common
      Stock
            Renaissance
      Capital Growth & Income Fund III, Inc.
            8,333,336(13)
            39.6%Common
      Stock
            US
      Special Opportunities Trust PLC
            10,416,670(14)
            45.1%Common
      Stock
            Premier
      RENN US Emerging Growth Fund Ltd.
            4,166,670(15)
            24.7%Common
      Stock
            BridgePointe
      Master Fund Ltd.**
            16,666,670(16)
            57.8%Common
      Stock
            Heller
      Capital Investments LLC**
            10,000,006(17)
            44.1%Common
      Stock
            Everett
      Huntoon
            1,333,333(18)
            10.6%Common
      Stock
            Howard
      Andrews
            1,333,333(19)
            10.6%Executive
      Officers and Directors:Series
      A Preferred Stock
            Patrick
      A. Dolan
            1,019,135
            63.5%Series
      A Preferred Stock
            James
      Cortens
            586,463
            36.5%Series
      A Preferred Stock
            All
      Directors and Executive Officers (6 persons) as a group
            1,605,598
            100%5%
      Beneficial Owners:Series
      B Preferred Stock
            Don
      West
            907,784(20)
            62.6%Series
      B Preferred Stock
            Brian
      Meyer
            439,813(21)
            30.3%Executive
      Officers and Directors:Series
      C Preferred Stock
            Patrick
      A. Dolan
            833,333
            90.9%Series
      C Preferred Stock
            James
      Cortens
            83,333
            9.1%Series
      C Preferred Stock
            All
      Directors and Executive Officers (6 persons) as a group
            916,666
            100%Executive
      Officers and Directors:Series
      D Convertible Preferred Stock
            Russell
      Cleveland
            416,666.9(22)
            29.2%Series
      D Convertible Preferred Stock
            All
      Directors and Executive Officers (6 persons) as a group
            416,666.9
            29.2%




42




Title
      of Class
            Name
      and Address
              of
      Beneficial Owner
            Amount
      and Nature of Beneficial Ownership (1)
            Percent
      of   Class5%
      Beneficial Owners:Series
      D Convertible Preferred Stock
            Vision
      Opportunity Master Fund, Ltd.**
            708,333.4(23)
            49.6%Series
      D Convertible Preferred Stock
            Renaissance
      US Growth Investment Trust PLC
            130,208.4(24)
            9.1%Series
      D Convertible Preferred Stock
            Renaissance
      Capital Growth & Income Fund III, Inc.
            104,166.7(25)
            7.3%Series
      D Convertible Preferred Stock
            US
      Special Opportunities Trust PLC
            130,208.4(26)
            9.1%Series
      D Convertible Preferred Stock
            Premier
      RENN US Emerging Growth Fund Ltd.
            52,083.4(27)
            3.6%Series
      D Convertible Preferred Stock
            BridgePointe
      Master Fund Ltd.**
            208,333.4(28)
            14.6%Series
      D Convertible Preferred Stock
            Heller
      Capital Investments LLC**
            93,750.1(29)
            6.6%Executive
      Officers and Directors:Series
      D-2 Convertible Preferred Stock
            Russell
      Cleveland
            416,666.9(30)
            28.6%Series
      D-2 Convertible Preferred Stock
            All
      Directors and Executive Officers (6 persons) as a group
            416,666.9
            28.6%5%
      Beneficial Owners:Series
      D-2 Convertible Preferred Stock
            Vision
      Opportunity Master Fund, Ltd.**
            708,333.4(31)
            48.6%Series
      D-2 Convertible Preferred Stock
            Renaissance
      US Growth Investment Trust PLC
            130,208.4(32)
            8.9%Series
      D-2 Convertible Preferred Stock
            Renaissance
      Capital Growth & Income Fund III, Inc.
            104,166.7(33)
            7.1%Series
      D-2 Convertible Preferred Stock
            US
      Special Opportunities Trust PLC
            130,208.4(34)
            8.9%Series
      D-2 Convertible Preferred Stock
            Premier
      RENN US Emerging Growth Fund Ltd.
            52,083.4(35)
            3.6%Series
      D-2 Convertible Preferred Stock
            BridgePointe
      Master Fund Ltd.**
            208,333.4(36)
            14.3%Series
      D-2 Convertible Preferred Stock
            Heller
      Capital Investments LLC**
            124,500.1(37)
            8.6%




*
Constitutes less than 1%


** The
stockholder has agreed that at no time may it exercise a warrant or convert any
shares of Series D Convertible Preferred Stock or Series D-2 Convertible
Preferred Stock into common stock if, as a result, it would beneficially own in
excess of 9.99% of our then issued and outstanding shares of common
stock.  However, on 61 days’ notice to us, the stockholder may waive
this limitation.




43




(1)
            As
      used in this table, the term beneficial ownership with respect to a
      security is defined by Rule 13d-3 under the Securities Exchange Act of
      1934, as amended, as consisting of sole or shared voting power (including
      the power to vote or direct the vote) and/or sole or shared investment
      power (including the power to dispose of or direct the disposition of)
      with respect to the security through any contract, arrangement,
      understanding, relationship or otherwise, subject to community property
      laws where applicable, and does not necessarily indicate ownership for any
      other purpose.  In addition, for purposes of this table, a
      person is deemed, as of any date, to have “beneficial ownership” of any
      security that such person has the right to acquire within 60 days
      after January 29, 2008.




(2)
            Includes
      2,988,975 shares of common stock, 1,019,135 shares of Series A convertible
      preferred stock, 640,555 shares of common stock underlying warrants and
      339,656 shares of common stock underlying
  options.




(3)
            Includes
      2,264,375 shares of common stock, 586,463 shares of Series A convertible
      preferred stock, 67,149 shares of common stock underlying warrants and
      226,437 shares of common stock underlying
  options.




(4)
            Includes
      50,000 shares of common stock underlying
  options.





(5)
            Includes
      18,750 shares of common stock underlying
  options.




(6)
            Includes
      33,012 shares of common stock underlying
  options.




(7)
            Includes
      416,666.9 shares of Series D Convertible Preferred Stock (which are
      initially convertible into 6,666,669 shares of common stock), 208,333.4
      shares of Series D-2 Convertible Preferred Stock (which are initially
      convertible into 3,333,334 shares of common stock), warrants to purchase
      20,000,008 shares of common stock, and warrants to purchase 208,333.5
      shares of Series D-2 Convertible Preferred Stock (which, if fully
      exercised and converted, are initially convertible into 3,333,336 shares
      of common stock), all held by Renaissance Capital Growth & Income Fund
      III, Inc., US Special Opportunities Trust PLC, Renaissance US Growth
      Investment Trust PLC, and Premier RENN US Emerging Growth Fund Limited,
      for which RENN Capital Group, Inc. acts as Investment
      Advisor.  Russell Cleveland is President of RENN Capital Group,
      Inc. and, therefore, may be considered a beneficial owner of such
      shares.  Mr. Cleveland disclaims such beneficial
      ownership.  The address of Mr. Cleveland is 8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.




(8)
            Includes
      all shares referenced in footnotes 2, 3, 4, 5, 6, and 7,
      above.




(9)
            Includes
      565,459 shares of common stock held by Don West, 313,481 shares of common
      stock held by his wife Sharon West, and 133,154 shares of common held
      stock by West LTP Trust; 461,149 shares of Series B Preferred Stock held
      by Don West, 313,481 shares of Series B Preferred Stock held by Sharon
      West, and 133,154 shares of Series B 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.(10)
            Includes
      166,401 shares of common stock held by Brian Meyer and 169,103 shares of
      common stock held by his wife Lynne Meyer; 270,710 shares of Series B
      Preferred Stock held by Brian Meyer and 169,103 shares of Series B
      Preferred Stock held by Lynne Meyer; and 5,435 shares of common stock
      underlying warrants held by Brian Meyer; and 173,530 shares of common
      stock underlying options held by Brian
Meyer.




44




(11)
            Includes
      708,333.4 shares of Series D Convertible Preferred Stock (which are
      initially convertible into 11,333,334 shares of common stock), 458,334
      shares of Series D-2 Convertible Preferred Stock (which are initially
      convertible into 7,333,344 shares of common stock), warrants to purchase
      34,000,002 shares of common stock, and warrants to purchase 249,999.4
      shares of Series D-2 Convertible Preferred Stock (which, if fully
      exercised and converted, are initially convertible into 3,999,990
      shares of common stock).  Adam Benowitz, Portfolio Manager of
      Vision Opportunity Master Fund, Ltd., is the person who has voting and
      investment control over the shares listed in the table.  The
      address of Mr. Benowitz is 20 W. 55th
      Street, 5th
      floor, New York, New York, 10019.(12)
            Includes
      130,208.4 shares of Series D Convertible Preferred Stock (which are
      initially convertible into 2,083,334 shares of common stock), 65,104.2
      shares of Series D-2 Convertible Preferred Stock (which are initially
      convertible into 1,041,667 shares of common stock), warrants to purchase
      6,250,002 shares of common stock, and warrants to purchase 65,104.2 shares
      of Series D-2 Convertible Preferred Stock (which, if fully exercised and
      converted, are initially convertible into 1,041,667 shares of common
      stock).  Russell Cleveland, President and Director of
      Renaissance US Growth Investment Trust PLC, is the person who has voting
      and investment control over the shares listed in the table and, therefore,
      may be considered a beneficial owner of such
      shares.  Mr. Cleveland disclaims such beneficial
      ownership.  The address of Mr. Cleveland is 8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.(13)
            Includes
      104,166.7 shares of Series D Convertible Preferred Stock (which are
      initially convertible into 1,666,667 shares of common stock), 52,083.3
      shares of Series D-2 Convertible Preferred Stock (which are initially
      convertible into 833,333 shares of common stock), warrants to purchase
      5,000,002 shares of common stock, and warrants to purchase 52,083.4 shares
      of Series D-2 Convertible Preferred Stock (which, if fully exercised and
      converted, are initially convertible into 833,334 shares of common
      stock).  Russell Cleveland, President of Renaissance Capital
      Growth & Income Fund III, Inc., is the person who has voting and
      investment control over the shares listed in the table and, therefore, may
      be considered a beneficial owner of such
      shares.  Mr. Cleveland disclaims such beneficial
      ownership.  The address of Mr. Cleveland is 8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.(14)
            Includes
      130,208.4 shares of Series D Convertible Preferred Stock (which are
      initially convertible into 2,083,334 shares of common stock), 65,104.2
      shares of Series D-2 Convertible Preferred Stock (which are initially
      convertible into 1,041,667 shares of common stock). warrants to purchase
      6,250,002 shares of common stock, and warrants to purchase 65,104.2
      shares of Series D-2 Convertible Preferred Stock (which, if fully
      exercised and converted, are initially convertible into 1,041,667 shares
      of common stock).  Russell Cleveland, U.S. Portfolio Manager of
      US Special Opportunities Trust PLC, is the person who has voting and
      investment control over the shares listed in the table and, therefore, may
      be considered a beneficial owner of such
      shares.  Mr. Cleveland disclaims such beneficial
      ownership.  The address of Mr. Cleveland is 8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.(15)
            Includes
      52,083.4 shares of Series D Convertible Preferred Stock (which are
      initially convertible into 833,334 shares of common stock), 26,041.7
      shares of Series D-2 Convertible Preferred Stock (which are initially
      convertible into 416,667 shares of common stock), warrants to purchase
      2,500,002 shares of common stock, and warrants to purchase 26,041.7 shares
      of Series D-2 Convertible Preferred Stock (which, if fully exercised and
      converted, are initially convertible into 416,667 shares of common
      stock).  Russell Cleveland, President of RENN Capital Group,
      Inc., the investment advisor of Premier RENN US Emerging Growth Fund Ltd.,
      is the person who has voting and investment control over the shares listed
      in the table and, therefore, may be considered a beneficial owner of such
      shares.  Mr. Cleveland disclaims such beneficial
      ownership.  The address of Mr. Cleveland is 8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.(16)
            Includes
      500,000 shares of common stock, 208,333.4 shares of Series D Convertible
      Preferred Stock (which are initially convertible into 3,333,334 shares of
      common stock), 62,500 shares of Series D-2 Convertible Preferred Stock
      (which are initially convertible into 1,000,000 shares of common stock),
      warrants to purchase 9,500,002 shares of common stock, and warrants
      to purchase 145,833.4 shares of Series D-2 Convertible Preferred Stock
      (which, if fully exercised and converted, are initially convertible into
      2,333,334 shares of common stock).  Eric S. Swartz, Director of
      BridgePointe Master Fund Ltd., is the person who has voting and investment
      control over the shares listed in the table.  The address of Mr.
      Swartz is 1120 Sanctuary Parkway, Suite 325, Alpharetta, Georgia,
      30004.




45




(17)
            Includes
      500,000 shares common stock, 93,750.1 shares of Series D Convertible
      Preferred Stock (which are initially convertible into 1,500,001 shares of
      common stock), warrants to purchase 6,000,004 shares of common stock, and
      warrants to purchase 125,000.1 shares of Series D-2 Convertible Preferred
      Stock (which, if fully exercised and converted, are initially convertible
      into 2,000,001 shares of common stock).  Ronald I. Heller, Chief
      Investment Officer of Heller Capital Investments LLC, is the person who
      has voting and investment control over the shares listed in the
      table.  The address of Mr. Heller is 700 East Palisade Avenue,
      Englewood Cliffs, New Jersey, 07632.(18)
            The
      address of Mr. Huntoon is 111 Orchard Road, Mt. Kisco, New York
      10549.(19)
            The
      address of Mr. Andrews is 10 Quail Hollow Lane, West Nyack, New York
      10994.(20)
            Includes
      461,149 shares of Series B Preferred Stock held by Don West, 313,481
      shares of Series B Preferred Stock held by Sharon West, and 133,154 shares
      of Series B Preferred Stock held by West LTP Trust.  The address
      of Mr. West is 1800-181 Bay Street, Toronto, Ontario, M5J
    2T9.(21)
            Includes
      270,710 shares of Series B Preferred Stock held by Brian Meyer and 169,103
      shares of Series B Preferred Stock held by Lynne Meyer.(22)
            Includes
      416,666.9 shares of Series D Convertible Preferred Stock held by
      Renaissance Capital Growth & Income Fund III, Inc., US Special
      Opportunities Trust PLC, Renaissance US Growth Investment Trust PLC, and
      Premier RENN US Emerging Growth Fund Limited, for which RENN Capital
      Group, Inc. acts as Investment Advisor.  Russell Cleveland is
      President of RENN Capital Group, Inc. and, therefore, may be considered a
      beneficial owner of such shares.  Russell Cleveland disclaims
      such beneficial ownership.  The address of Mr. Cleveland is
      8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.(23)
            Includes
      708,333.4 shares of Series D Convertible Preferred Stock.  Adam
      Benowitz, Portfolio Manager of Vision Opportunity Master Fund, Ltd., is
      the person who has voting and investment control over the shares listed in
      the table.  The address of Mr. Benowitz is 20 W 55th
      Street, 5th
      floor, New York, New York, 10019.(24)
            Includes
      130,208.4 shares of Series D Convertible Preferred
      Stock.  Russell Cleveland, President and Director of Renaissance
      US Growth Investment Trust PLC, is the person who has voting and
      investment control over the shares listed in the table and, therefore, may
      be considered a beneficial owner of such
      shares.  Mr. Cleveland disclaims such beneficial
      ownership.  The address of Mr. Cleveland is 8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.(25)
            Includes
      104,166.7 shares of Series D Convertible Preferred
      Stock.  Russell Cleveland, President of Renaissance Capital
      Growth & Income Fund III, Inc., is the person who has voting and
      investment control over the shares listed in the table and, therefore, may
      be considered a beneficial owner of such
      shares.  Mr. Cleveland disclaims such beneficial
      ownership.  The address of Mr. Cleveland is 8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.(26)
            Includes
      130,208.4 shares of Series D Convertible Preferred
      Stock.  Russell Cleveland, U.S. Portfolio Manager of US Special
      Opportunities Trust PLC, is the person who has voting and investment
      control over the shares listed in the table and, therefore, may be
      considered a beneficial owner of such
      shares.  Mr. Cleveland disclaims such beneficial
      ownership.  The address of Mr. Cleveland is 8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.(27)
            Includes
      52,083.4 shares of Series D Convertible Preferred
      Stock.  Russell Cleveland, President of RENN Capital Group,
      Inc., the investment advisor of Premier RENN US Emerging Growth Fund Ltd.,
      is the person who has voting and investment control over the shares listed
      in the table and, therefore, may be considered a beneficial owner of such
      shares.  Mr. Cleveland disclaims such beneficial
      ownership.  The address of Mr. Cleveland is 8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.(28)
            Includes
      208,333.4 shares of Series D Convertible Preferred Stock.  Eric
      S. Swartz, Director of BridgePointe Master Fund Ltd., is the person who
      has voting and investment control over the shares listed in the
      table.  The address of Mr. Swartz is 1120 Sanctuary Parkway,
      Suite 325, Alpharetta, Georgia,
30004.




46




(29)
            Includes
      93,750.1 shares of Series D Convertible Preferred Stock.  Ronald
      I. Heller, Chief Investment Officer of Heller Capital Investments LLC, is
      the person who has voting and investment control over the shares listed in
      the table.  The address of Mr. Heller is 700 East Palisade
      Avenue, Englewood Cliffs, New Jersey, 07632.(30)
            Includes 208,333.4
      shares of Series D-2 Convertible Preferred Stock and 208,333.5 shares of
      Series D-2 Convertible Preferred Stock underlying warrants held by
      Renaissance Capital Growth & Income Fund III, Inc., US Special
      Opportunities Trust PLC, Renaissance US Growth Investment Trust PLC, and
      Premier RENN US Emerging Growth Fund Limited, for which RENN Capital
      Group, Inc. acts as Investment Advisor.  Russell Cleveland is
      President of RENN Capital Group, Inc. and, therefore, may be considered a
      beneficial owner of such shares.  Russell Cleveland disclaims
      such beneficial ownership.  The address of Mr. Cleveland is
      8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.(31)
            Includes 458,334
      shares of Series D-2 Convertible Preferred Stock and 249,999.4 shares
      of Series D-2 Convertible Preferred Stock underlying
      warrants.  Adam Benowitz, Portfolio Manager of Vision
      Opportunity Master Fund, Ltd., is the person who has voting and investment
      control over the shares listed in the table.  The address of Mr.
      Benowitz is 20 W. 55th
      Street, 5th
      floor, New York, New York, 10019.(32)
            Includes 65,104.2
      shares of Series D-2 Convertible Preferred Stock and 65,104.2 shares of
      Series D-2 Convertible Preferred Stock underlying
      warrants.  Russell Cleveland, President and Director of
      Renaissance US Growth Investment Trust PLC, is the person who has voting
      and investment control over the shares listed in the table and, therefore,
      may be considered a beneficial owner of such
      shares.  Mr. Cleveland disclaims such beneficial
      ownership.  The address of Mr. Cleveland is 8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.(33)
            Includes 52,083.3
      shares of Series D-2 Convertible Preferred Stock and 52,083.4 shares of
      Series D-2 Convertible Preferred Stock underlying
      warrants.  Russell Cleveland, President of Renaissance Capital
      Growth & Income Fund III, Inc. is the person who has voting and
      investment control over the shares listed in the table and, therefore, may
      be considered a beneficial owner of such
      shares.  Mr. Cleveland disclaims such beneficial
      ownership.  The address of Mr. Cleveland is 8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.(34)
            Includes 65,104.2
      shares of Series D-2 Convertible Preferred Stock and 65,104.2 shares of
      Series D-2 Convertible Preferred Stock underlying
      warrants.  Russell Cleveland, U.S. Portfolio Manager of US
      Special Opportunities Trust PLC, is the person who has voting and
      investment control over the shares listed in the table and, therefore, may
      be considered a beneficial owner of such
      shares.  Mr. Cleveland disclaims such beneficial
      ownership.  The address of Mr. Cleveland is 8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.(35)
            Includes 26,041.7
      shares of Series D-2 Convertible Preferred Stock and 26,041.7 shares
      of Series D-2 Convertible Preferred Stock underlying
      warrants.  Russell Cleveland, President of RENN Capital Group,
      Inc., the investment advisor of Premier RENN US Emerging Growth Fund Ltd.,
      is the person who has voting and investment control over the shares listed
      in the table and, therefore, may be considered a beneficial owner of such
      shares.  Mr. Cleveland disclaims such beneficial
      ownership.  The address of Mr. Cleveland is 8080 N. Central
      Expressway,Suite210,Dallas,Texas,75206.(36)
            Includes 62,500
      shares of Series D-2 Convertible Preferred Stock and 145,833.4 shares
      of Series D-2 Convertible Preferred Stock underlying
      warrants.  Eric S. Swartz, Director of BridgePointe Master Fund
      Ltd., is the person who has voting and investment control over the shares
      listed in the table.  The address of Mr. Swartz is 1120
      Sanctuary Parkway, Suite 325, Alpharetta, Georgia,
  30004.(37)
            Includes
      124,500.1 shares of Series D-2 Convertible Preferred Stock underlying
      warrants.  Ronald I. Heller, Chief Investment Officer of Heller
      Capital Investments LLC, is the person who has voting and investment
      control over the shares listed in the table.  The address of Mr.
      Heller is 700 East Palisade Avenue, Englewood Cliffs, New Jersey,
      07632.




47




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, 2007. 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
      beIssued
      Upon
              Exercise
      ofOutstanding
      Options andWarrants
      (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
      compensationplans
      approved bysecurity
      holders
            
            -
            
            
            -
            
            3,658,000Equity
      compensationplans
      not approved bysecurity
      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.




Options
outstanding under equity compensation plans that were not approved by security
holders at December 31, 2007, were 5,002,954 at a weighted average exercise
price per share of $0.61.




Warrants
outstanding under equity compensation plans that were not approved by security
holders at December 31, 2007, were 2,332,779 at a weighted average exercise
price per share of $1.35 issued as consideration for finder’s fees, business
advisory services, investor relations and in conjunction with the sale of Series
D and Series D-2 Convertible Preferred Stock.




There
were no options outstanding under equity compensation plans approved by security
holders at December 31, 2007 (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 AND DIRECTOR
      INDEPENDENCE.




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 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 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%.




48




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 was paid in
2006 and the remainder was paid during 2007.




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 was paid during 2007.




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, 2007 and 2006, the unamortized balance in loan discount
was $0 and $408,843, respectively.




The
bridge loan agreement also provides that if Former BPOMS required additional
equity in order to meet the condition under the merger agreement that Former
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 Former
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
Former 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 Former 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 Consolidated
Financial Statements. At December 31, 2007 and 2006, the balance owed on the
bridge loan was $1,200,000 and $800,000, respectively.




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.




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.




49




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. (15)2.3
            Stock
      Purchase Agreement dated December 30, 2005, between the Registrant
      and Sellers of Digica, Inc. (15)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, between 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)




10.7
            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) (#)


10.16
            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 (15) (#)10.19
            Employment
      Agreement dated July 28, 2005 by and between the Registrant and James
      Cortens (15) (#)10.20
            Employment
      Agreement dated October 2, 2006 by and between the Registrant and James
      Buchanan (15) (#)10.21
            Employment
      Agreement dated December 13, 2006 by and between the Registrant
      and Koushick Dutta (15) (#)10.22
            Letter
      of Agreement Dated January 19, 2007 to Extend Purchase Payment for the
      Purchase of Novus Imaging Solutions, Inc. (15) (#)10.23
            Letter
      of Agreement Dated February 28, 2007 to Extend Purchase Payment for the
      Purchase of Novus Imaging Solutions, Inc. (15) (#)21
            Subsidiaries
      of the registrant (*)31.1
            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 2002 (*)31.2
            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 2002 (*)32
            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 (*)




50





(#)
            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.




(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.




(14)
            Filed
      as an exhibit to the registrant’s 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.




(15)
            Filed
      as an exhibit to the registrant’s annual report on Form 10-KSB
      for December 31, 2006 that was filed with the SEC on April 18, 2007 (File
      No. 0-28560, and incorporated herein by
  reference.




51




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, 2007 and
2006:




2007
            
            
            2006Audit
      Fees (1)
            
            $
            211,620
            
            
            $
            175,000Audit-Related
      Fees (2)
            
            
            -
            
            
            
            -Tax
      Fees (3)
            
            
            -
            
            
            
            -All
      Other Fees (4)
            
            
            -
            
            
            
            -Total
            
            $
            211,620
            
            
            $
            175,000




(1)
            Audit
      Fees: Includes fees for professional services performed by Kelly & Co
      in the year ended December 31, 2007, 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.




52




BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES




Index
to Consolidated Financial Statements





Report
      of Independent Registered Public Accounting Firm
            F-2
      - F3Consolidated
      Financial Statements: Consolidated Balance Sheet as of December 31,
      2007
            F-4Consolidated
      Statements of Operations and Comprehensive Loss for the years ended
      December 31, 2007 and 2006
            F-5Consolidated
      Statements of Stockholders’ Equity for the years ended December 31,
      2007 and 2006
            F-6Consolidated
      Statements of Cash Flows for the years ended December 31, 2007 and
      2006
            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, 2007 and the related
consolidated statements of operations and comprehensive loss, stockholders’
equity, and cash flows for the year ended December 31, 2007. These financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audit.  The consolidated financial statements of BPO Management
Services, Inc. as of December 31, 2006, were audited by other auditors whose
report dated April 16, 2007, on those statements included an explanatory
paragraph that described the Company had incurred net losses since inception,
and had incurred negative cash flows from operations since inception, discussed
in Note 13 to those financial statements.
 
 We
conducted our audit 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 audit provides 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, 2007 and the results of its operations and its cash flows for the year then
ended 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. As discussed in Note 1 to the consolidated
financial statements, the Company has recurring operating losses, a working
capital deficit and an accumulated deficit of $10.6 million as of December 31,
2007. These factors, among others, as discussed in Note 1 to the consolidated
financial statements, raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans regarding these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
 
 
 
 /s/ Moore
Stephens Wurth Frazer and Torbet, LLP
 
 Orange,
California
 April 15,
2008






F-2




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 BPO
Management Services, Inc. (a Delaware corporation) consolidated statements of
operations, shareholders’ equity and accumulated other comprehensive income
(loss) and cash flows for the year ended 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 audit.
  We conducted our audit 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 audit provides a reasonable basis for our opinion.
  In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the Company’s results of operations and its cash flows for the year ended
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 incurred a net loss for the year
ended December 31, 2006 of $(4,629,006).  Despite its negative cash
flows from operations of $(1,967,653) for the year ended December 31, 2006 the
Company has been able to obtain operating capital through private equity funding
sources. Management's plans, which are described in Note 13 to the December 31,
2006 financial statements, included the continued development and eventual
implementation of the Company’s business plan. From inception through December
31, 2006 the Company relied upon private equity funding. 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-3




BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEET
 AS
OF DECEMBER 31, 2007




2007ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              888,043Restricted
      cash
              
              
              922,888Accounts
      receivable, net of allowance for doubtful accounts of
    $347,797
              
              
              4,768,618Inventory
      consisting of finished goods
              
              
              268,160Prepaid
      expenses and other current assets
              
              
              417,041Total
      current assets
              
              
              7,264,750Equipment,
      net of accumulated depreciation of $718,913
              
              
              4,834,941Goodwill
              
              
              9,029,142Intangible
      assets, net of accumulated amortization of $931,268
              
              
              9,898,219Other
      assets
              
              
              38,449$
              31,065,501LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Current
      portion of long-term debt, net of discount of $3,405
              
              $
              812,156Current
      portion of capital lease obligations
              
              
              149,653Accounts
      payable
              
              
              3,540,827Accrued
      expenses
              
              
              1,927,451Accrued
      interest-related party
              
              
              36,672Accrued
      dividend payable-related party
              
              
              446,464Amount
      due former shareholders of acquired companies
              
              
              2,101,771Deferred
      revenues
              
              
              2,509,885Related
      party notes payable
              
              
              1,200,000Severance
      obligations payable
              
              
              72,199Other
      current liabilities (Income taxes payable)
              
              
              257,091Total
      current liabilities
              
              
              13,054,169Long-term
      debt, net of current portion and net of discount of $4,825
              
              
              24,117Capital
      lease obligations, net of current portion
              
              
              392,942Purchase
      price payable-long term
              
              
              -Other
      long-term liabilities
              
              
              33,115Total
      liabilities
              
              
              13,504,343Commitments
      and contingencies  (Note 9)Stockholders'
      equityConvertible
      preferred stock, Series A, par value $.01; authorized2,308,612
      shares;  1,703,874  shares issued and
      outstanding
              
              
              17,039Convertible
      preferred stock, Series B, par value $.01; authorized1,449,204
      shares;  1,449,204 shares issued and outstanding
              
              
              14,492Non-convertible
      preferred stock, Series C, par value $.01; authorized21,378,000
      shares;  916,667 shares issued and outstanding
              
              
              9,167Convertible
      preferred stock, Series D, par value $.01; authorized1,500,000
      shares;  1,458,334 shares issued and outstanding
              
              
              14,583Convertible
      preferred stock, Series D-2, par value $.01; authorized1,500,000
      shares;  729,167 shares issued and outstanding
              
              
              7,292Common
      stock, par value $.01; authorized 150,000,000 shares;12,171,034
      shares issued and outstanding
              
              
              121,711Additional
      paid-in capital
              
              
              27,499,524Accumulated
      deficit
              
              
              (10,568,915
              )Accumulated
      other comprehensive income, foreign currency translation
      adjustments
              
              
              446,265Total
      stockholders' equity
              
              
              17,561,158$
              31,065,501See
      accompanying notes to consolidated financial
  statements.




F-4




BPO MANAGEMENT SERVICES, INC. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006




2007
              
              
              2006Revenues:Enterprise
      content management
              
              $
              10,141,210
              
              
              $
              2,713,769IT
      outsourcing services
              
              
              5,616,239
              
              
              
              1,833,052Human
      resource outsourcing servicing
              
              
              711,552
              
              
              
              164,318Total
      revenues
              
              
              16,469,001
              
              
              
              4,711,139Operating
      expenses:Cost
      of services provided
              
              
              8,045,756
              
              
              
              1,523,983Selling,
      general and administrative
              
              
              11,965,666
              
              
              
              5,576,615Research
      and development
              
              
              298,211
              
              
              
              19,491Depreciation
      and amortization
              
              
              1,466,767
              
              
              
              160,720Change
      in estimated severance liability
              
              
              -
              
              
              
              (223,726
              )Share-based
      compensation
              
              
              360,721
              
              
              
              598,031Total
      operating expenses
              
              
              22,137,121
              
              
              
              7,655,114Loss
      from operations
              
              
              (5,668,120
              )
              
              
              (2,943,975
              )Interest
      expense (income)Related
      parties
              
              
              117,168
              
              
              
              93,420Amortization
      of related party debt discount
              
              
              594,029
              
              
              
              241,670Other,
      net
              
              
              90,903
              
              
              
              31,853Other
      income
              
              
              (2,011
              )
              
              
              (10,732
              )Total
      interest and other expense, net
              
              $
              800,089
              
              
              $
              356,211Net
      loss
              
              $
              (6,468,209
              )
              
              $
              (3,300,186
              )Foreign
      currency translation gain (loss)
              
              
              553,586
              
              
              
              (115,614
              )Comprehensive
      loss
              
              $
              (5,914,623
              )
              
              $
              (3,415,800
              )Basic
      and diluted net loss per share
              
              $
              (0.67
              )
              
              $
              (0.39
              )Basic
      and diluted weighted average commonshares
      outstanding
              
              
              9,513,749
              
              
              
              8,496,119See
      accompanying notes to consolidated financial
  statements.




F-5




BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006




Preferred
                Series
      A
              
              Preferred
                Series
      B
              
              Preferred
                Series
      C
              
              Preferred
                Series
      D
              
              Preferred
                Series
      D-2
              
              Common
      Stock
              
              
              
              
              
              
              
              
              Accum.
                Other#
      of
              
              
              Par
              
              #
      of
              
              Par
              
              #
      of
              
              Par
              
              #
      of
              
              Par
              
              #
      of
              
              Par
              
              #
      of
              
              Par
              
              
              
              
              
              Retained
              
              
              CompShares
              
              
              Value
              
              Shares
              
              Value
              
              Shares
              
              Value
              
              Shares
              
              Value
              
              Shares
              
              Value
              
              Shares
              
              Value
              
              
              APIC
              
              
              Earnings
              
              
              Income
              
              
              TotalBalance,
      December 31, 2005
              
              
              1,086,900
              
              
              $
              10,869
              
              1,449,204
              
              $
              14,492
              
              -
              
              $
              -
              
              -
              
              $
              -
              
              -
              
              $
              -
              
              6,829,360
              
              $
              68,294
              
              
              $
              2,117,629
              
              
              $
              (800,520
              )
              
              $
              8,294
              
              
              $
              1,419,058Amortization
      of share
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              244,553based
      compensaation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              244,553Acquisition
      of Digica
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              362,300
              
              
              3,623
              
              
              
              75,574
              
              
              
              
              
              
              
              
              
              
              
              79,197Acquisition
      of Novus
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              144,920
              
              
              1,449
              
              
              
              147,384
              
              
              
              
              
              
              
              
              
              
              
              148,833Share
      based compensation
              
              
              344,185
              
              
              
              3,442
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              350,036
              
              
              
              
              
              
              
              
              
              
              
              353,478Stock
      dividend
              
              
              143,031
              
              
              
              1,430
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,430
              )
              
              
              
              
              
              
              
              
              
              
              -Conversion
      of officers' loans
              
              
              
              
              
              
              
              
              
              
              
              
              
              916,667
              
              
              9,167
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,530,833
              
              
              
              
              
              
              
              
              
              
              
              1,540,000Reverse
      merger with netGuru
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,282,820
              
              
              12,828
              
              
              
              1,293,097
              
              
              
              
              
              
              
              
              
              
              
              1,305,925Stock
      purchase warrants issued
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              779,851
              
              
              
              
              
              
              
              
              
              
              
              779,851Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,300,186
              )
              
              
              
              
              
              
              (3,300,186
              )Currency
      translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (115,614
              )
              
              
              (115,614
              )Balance,
      December 31, 2006
              
              
              1,574,116
              
              
              $
              15,741
              
              1,449,204
              
              $
              14,492
              
              916,667
              
              $
              9,167
              
              -
              
              $
              -
              
              -
              
              $
              -
              
              8,619,400
              
              $
              86,194
              
              
              $
              6,537,527
              
              
              $
              (4,100,706
              )
              
              $
              (107,320
              )
              
              $
              2,455,095Amortization
      of sharebased
      compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              360,721
              
              
              
              
              
              
              
              
              
              
              
              360,721Stock
      dividend onPreferred
      A shares
              
              
              129,758
              
              
              
              1,298
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,298
              )
              
              
              
              
              
              
              
              
              
              
              -Warrants
      issued
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              185,187with
      bridge loans
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              185,187Issued
      Preferred Series D shares
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,458,334
              
              
              14,583
              
              
              
              
              
              
              
              
              
              
              
              
              
              12,395,447
              
              
              
              
              
              
              
              
              
              
              
              12,410,030Acquisition
      of HRMS
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              384,968
              
              
              3,850
              
              
              
              396,150
              
              
              
              
              
              
              
              
              
              
              
              400,000Preferred
      Series C dividend
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (165,971
              )
              
              
              
              
              
              
              
              
              
              
              (165,971
              )Issued
      Preferred Series D-2 shares
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              729,167
              
              
              7,292
              
              
              
              
              
              
              
              
              6,397,650
              
              
              
              
              
              
              
              
              
              
              
              6,404,942Issued
      common stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              500,000
              
              
              5,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,000Acquisition
      of Blue Hill
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,666,666
              
              
              26,667
              
              
              
              1,773,333
              
              
              
              
              
              
              
              
              
              
              
              1,800,000Preferred
      Series D dividend
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (309,918
              )
              
              
              
              
              
              
              
              
              
              
              (309,918
              )Preferred
      Series D-2 dividend
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (69,304
              )
              
              
              
              
              
              
              
              
              
              
              (69,304
              )Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,468,209
              )
              
              
              
              
              
              
              (6,468,209
              )Foreign
      currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              553,586
              
              
              
              553,586Balance,
      December 31, 2007
              
              
              1,703,874
              
              
              $
              17,039
              
              1,449,204
              
              $
              14,492
              
              916,667
              
              $
              9,167
              
              1,458,334
              
              $
              14,583
              
              729,167
              
              $
              7,292
              
              12,171,034
              
              $
              121,711
              
              
              $
              27,499,524
              
              
              $
              (10,568,915
              )
              
              $
              446,265
              
              
              $
              17,561,158See
      accompanying notes to consolidated financial
  statements.




F-6




BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006






2007
              
              
              2006Cash
      flows from operating acitvities:Net
      loss
              
              $
              (6,468,209
              )
              
              $
              (3,300,186
              )Adjustments
      to reconcile loss from continuing operationsto
      net cash provided by (used in) operating activities:Depreciation
              
              
              617,400
              
              
              
              160,720Amortization
      of intangible assets
              
              
              849,367
              
              
              
              -Recognition
      of acquired customer contract cost
              
              
              -
              
              
              
              245,265Increase
      in the reserve for doubtful accounts (bad debt expense)
              
              
              251,446
              
              
              
              121,494Non-cash
      compensation expense recognized on issuance of stock
    options
              
              
              360,721
              
              
              
              598,031Amortization
      of loan discount
              
              
              594,031
              
              
              
              241,670Change
      in estimate - severance liability
              
              
              -
              
              
              
              (223,726
              )Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (1,503,990
              )
              
              
              191,336Inventory
              
              
              (109,178
              )
              
              
              -Income
      tax receivable
              
              
              250,000
              
              
              
              -Prepaid
      expenses and other current assets
              
              
              (233,134
              )
              
              
              (17,910
              )Other
      assets
              
              
              305,344
              
              
              
              (55,715
              )Accounts
      payable
              
              
              (51,114
              )
              
              
              279,717Accrued
      expenses
              
              
              1,120,807
              
              
              
              -Accrued
      interest related parties
              
              
              117,341
              
              
              
              -Deferred
      revenues
              
              
              581,194
              
              
              
              111,165Income
      tax payable
              
              
              2,094
              
              
              
              -Payments
      of severance liability
              
              
              (471,092
              )
              
              
              (260,738
              )Deferred
      gain on sale-leaseback
              
              
              -
              
              
              
              (49,196
              )Other
      current liabilities
              
              
              -
              
              
              
              10,391Net
      cash used in operating acitivities
              
              
              (3,786,972
              )
              
              
              (1,947,682
              )Cash
      flows from investing activities:Purchase
      of equipment, net
              
              
              (201,502
              )
              
              
              (69,831
              )Restricted
      deposit of purchase obligation - DocuCom
              
              
              (922,888
              )
              
              
              -Cash
      from (paid) for acquisitions, net of cash acquired
              
              
              (9,731,820
              )
              
              
              2,394,658Net
      cash  (used in)  provided by investing
activities
              
              
              (10,856,210
              )
              
              
              2,324,827Cash
      flows from financing activities:Proceeds
      from bank loans, net
              
              
              349,020
              
              
              
              267,525Repayment
      of bank loans
              
              
              (2,094,002
              )
              
              
              (1,286
              )Repayment
      of notes issued to former shareholders
              
              
              (1,879,909
              )
              
              
              -Proceeds
      (repayment) of capital lease obligations
              
              
              (74,598
              )
              
              
              (19,778
              )Proceeds
      from related party loans
              
              
              400,000
              
              
              
              -Proceeds
      from stockholder loans
              
              
              -
              
              
              
              2,340,000Proceeds
      from issuance of preferred stock, net of cash paidfor
      acquisitions and direct costs
              
              
              18,814,972
              
              
              
              -Issuance
      of common stock on conversion of C Warrants
              
              
              5,000
              
              
              
              -Distributions
      to related parties
              
              
              (141,869
              )
              
              
              -Distributions
      to shareholders
              
              
              -
              
              
              
              (3,502,098
              )Net
      cash provided by (used in) financing activities
              
              
              15,378,614
              
              
              
              (915,637
              )Effect
      of exchange rate changes on cash and cash equivalents
      (cumulative)
              
              
              (553,586
              )
              
              
              12,520Net
      changes in cash and cash equivalents
              
              
              181,846
              
              
              
              (525,972
              )Cash
      and cash equivalents, beginning of period
              
              
              706,197
              
              
              
              1,232,169Cash
      and cash equivalents, end of period
              
              $
              888,043
              
              
              $
              706,197See
      accompanying notes to consolidated financial statements.




F-7




BPO MANAGEMENT SERVICES, INC. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued) FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006






2007
              
              
              2006Supplemental
      disclosure of cash flow information:Cash
      paid for:Interest
              
              $
              267,388
              
              
              $
              43,618Income
      taxes
              
              $
              -
              
              
              $
              -Supplemental
      disclosure of non-cash investing and financing activities:Acquisition
      of equipment under capital leases
              
              $
              475,800
              
              
              $
              16,804Issuance
      of warrants
              
              $
              1,298,291
              
              
              $
              779,851Issuance
      of preferred A shares as compensation to officers
              
              $
              129,758
              
              
              $
              353,478Issuance
      of preferred A shares stock dividend
              
              $
              1,298
              
              
              $
              1,430Issuance
      of preferred C shares in partial conversion of bridge
loans
              
              $
              -
              
              
              $
              1,540,000Acquisition
      of companies:Net
      assets acquired
              
              $
              21,074,430
              
              
              $
              8,667,358Net
      liabilities assumed
              
              $
              6,270,903
              
              
              $
              4,995,585Note
      issued as consideration
              
              $
              2,680,000
              
              
              $
              1,157,052Common
      stock issued as consideration
              
              $
              2,200,000
              
              
              $
              228,030See
      accompanying notes to consolidated financial statements.




F-8




BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements


For
The Years Ended December 31, 2007 and 2006




(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. 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.




Company
              
              Inception/Acquisition
  DateBPO
      Management Services, Inc. (the "Company")
              Inception
      date:  July 26, 2005Adapsys
      Document Management LP ("ADM")
              
              Acquired:  July
      29, 2005Adapsys
      LP ("ADP")
              
              
              
              Acquired:  July
      29, 2005Digica,
      Inc. ("Digica")
              
              
              
              Acquired:  January
      1, 2006Novus
      Imaging Solutions, Inc. ("Novus")
              
              Acquired:  September
      30, 2006NetGuru
      Systems, Inc. ("netGuru")
              
              
              Acquired:  December
      15, 2006Research
      Engineers, GmbH ("GmbH")
              
              Acquired:  December
      15, 2006DocuCom
      Imaging Solutions, Inc. ("DocuCom")
              
              Acquired:  June
      21, 2007Human
      Resource Micro-Systems, Inc. ("HRMS")
              Acquired:  June
      29, 2007Blue
      Hill Data Services, Inc. ("Blue Hill")
              
              Acquired:  October
      10, 2007
  Going
Concern
  The
Company incurred net losses from operations of $5,668,120 and $2,943,975 and
used cash in operations of $3,786,972 and $1,947,682 in 2007 and 2006,
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.
  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.




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.




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.




F-9




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, 2007, 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. Gains and losses resulting from foreign currency transactions are
included in operations for the year ended December 31, 2007 and
2006.




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.  At December 31, 2007, the Company had $1,368,000 on
deposit that exceeded the United States (FDIC) federal insurance
limit.  At December 31, 2007, the Company had no accounts on deposit
that exceeded the Canadian (CDIC) insurable limit of $100,000 CDN per entity per
bank.  The Canadian funds insurance is limited to Canadian currency
deposits only and does provide coverage to money master high interest savings
accounts (money market accounts) but all accounts are considered in the overall
limitation per entity per bank.





Restricted
Cash





CDN
$900,000 is payable to the previous shareholders of DocuCom nine months from the
date of the acquisition. This payment is guaranteed by a letter of credit for
which the Company deposited as security a forward contract for the purchase of
CDN $900,000 purchased by the company at a cost of approximately $923,000 and
shown on the balance sheet as restricted cash.




Inventory




Inventory consists
primarily of finished goods and is stated at the lower of cost or
market.





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
      yearsLeasehold
      improvements
            Shorter
      of the life of the asset or the term of the
  lease





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.




F-10




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.




During
2006, 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, 2007, the Company’s goodwill balance was
$9,029,142.  The Company is in the process of obtaining third-party
valuations relating to three acquisitions during 2007, thus, the allocation of
the purchase price is preliminary and subject to refinement.




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.




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.




F-11





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 twelve months. Service
contracts are also for periods of up to twelve months. The Company did not have
any fixed price contracts at December 31, 2007. 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.





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. For the year ended December 31, 2007, no single customer accounted for
10% of the Company’s consolidated net sales.




DocuCom
purchases the majority of the services it provides from one vendor.  During
the year ended December 31, 2007, DocuCom purchased approximately $1.7 million
of services from that vendor.




Two of
the Company’s customers accounted for 15.87% and 10.43%, respectively, of the
Company’s consolidated net sales in fiscal 2006.





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.




F-12




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.





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.




The
Company has adopted FASB Interpretation No. 48, Accounting for Uncertainty 'in
Income Taxes - an interpretation of FASB Statement No. 109 ("FIN 48") as of
January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in companies' financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. As a result, the Company applies a
more-likely-than-not recognition threshold for all tax uncertainties. FIN 48
only allows the recognition of those tax benefits that have a greater than fifty
percent likelihood of being sustained upon examination by the taxing
authorities. As a result of implementing FIN 48, the Company's management has
reviewed the Company's tax positions and determined there were no outstanding,
or retroactive tax positions with less than a 50% likelihood of being sustained
upon examination by the taxing authorities, therefore the implementation of this
standard has not had a material affect on the Company.




Based on
its evaluation, the Company has concluded that there are no significant
uncertain tax positions requiring recognition in its financial statements. The
Company's evaluation was performed for the tax years ended December 31, 2006
through 2007.




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 12 “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 2007 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.” 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 2007 and 2006 in the amounts of $360,721 and $598,031, 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-13





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




Expected
      Dividend yield
            —Expected
      volatility
            123%-125%Risk-free
      interest rate
            3.87%-5.03%Expected
      option lives (in years)
            4.0-10.0Estimated
      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




During
2007, the Company granted its common stock as partial consideration for the
acquisition of HRMS in June 2007 and Blue Hill in October 2007.  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.




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 11 “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 2006 consolidated financial
statements to conform to the year ended December 31, 2007
presentation.




Impact
of Recently Issued Accounting Standards




Accounting
Changes 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. SFAS No.
155 was implemented during 2007 and did not have a material impact on our
financial position, results of operations, or cash flows.




F-14





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. The implementation of SFAS No. 156 did not
have a material impact on our 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. Due to the
Company’s generated losses for 2007 and 2006, FIN 48 did not have a
material impact 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.





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 adoption of SAB No. 108
did not have a material impact on our financial position, results of operations
or cash flows.




F-15




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. The adoption of SFAS No. 158 did not have a material impact 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.




Business
Combinations and Noncontrolling Interests




In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS
No. 141(R)"), which requires an acquirer to recognize in its financial
statements as of the acquisition date (i) the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquire, measured at
their fair values on the acquisition date, and (ii) goodwill as the excess of
the consideration transferred plus the fair value of any noncontrolling interest
in the acquiree at the acquisition date over the fair values of the identifiable
net assets acquired. Acquisition-related costs, which are the costs an acquirer
incurs to effect a business combination, will be accounted for as expenses in
the periods in which the costs are incurred and the services are received,
except that costs to issue debt or equity securities will be recognized in
accordance with other applicable GAAP. SFAS No. 141(R) makes significant
amendments to other Statements and other authoritative guidance to provide
additional guidance or to conform the guidance in that literature to that
provided in SFAS No. 141(R). SFAS No. 141(R) also provides guidance as to what
information is to be disclosed to enable users of financial statements to
evaluate the nature and financial effects of a business combination. SPAS No.
141(R) is effective for financial statements issued for fiscal years beginning
on or after December 15, 2008. Early adoption is prohibited. The Company has not
yet determined the effect on its financial statements, if any, upon adoption of
SPAS No. 141(R).




In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS No.
160"), which revises the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards that
require (i) the ownership interests in subsidiaries held by parties other than
the parent be clearly identified, labeled, and presented in the consolidated
statement of financial position within equity, but separate from the parent's
equity, (ii) the amount of consolidated net income attributable to the parent
and to the noncontrolling interest be clearly identified and presented on the
face of the consolidated statement of income, (iii) changes in a parent's
ownership interest while the parent retains its controlling financial interest
in its subsidiary be accounted for consistently as equity transactions, (iv)
when a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value, with
the gain or loss on the deconsolidation of the subsidiary being measured using
the fair value of any noncontrolling equity investment rather than the carrying
amount of that retained investment, and (v) entities provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SPAS No. 160 amends FASB
No. 128 to provide that the calculation of earnings per share amounts in the
consolidated financial statements will continue to be based on the amounts
attributable to the parent. SFAS No. 160 is effective for financial statements
issued for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Early adoption is prohibited. SFAS No.
160 shall be applied prospectively as of the beginning of the fiscal year in
which it is initially applied, except for the presentation and disclosure
requirements, which shall be applied retrospectively for all periods presented.
The Company has not yet determined the effect on its financial statements, if
any, upon adoption of SPAS No. 160.




(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.





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




F-16




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:




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 or state
income tax purposes.




In
September 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 $148,833. 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:




F-17




Current
      assets
            
            $
            342,042Property,
      plant and equipment
            
            
            132,710Goodwill
            
            
            996,073Total
      assets acquired
            
            
            1,470,825Current
      liabilities
            
            
            102,237Total
      liabilities assumed
            
            
            102,237Net
      assets acquired
            
            $
            1,368,588





The
purchase price and costs associated with the Novus acquisition exceeded the
Company's allocation of the fair value of net assets acquired by $996,073, which
was assigned to goodwill. The $996,073 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.  As of December 31,
2007, the Company has estimated that the remaining purchase obligation is
approximately $194,000 and recorded on the balance sheet as “Amount due former
shareholders of acquired companies”.




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
            
            
            2,049,297Total
      assets acquired
            
            
            6,294,648Current
      liabilities
            
            
            4,421,464Other
      non current liabilities
            
            
            49,196Total
      liabilities assumed
            
            
            4,470,660Net
      assets acquired
            
            $
            1,823,988




The
purchase price includes the value of a seven-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 $2,049,297 was assigned to goodwill, which is not expected to be
deductible for United States income tax or state income tax purposes. The
allocation of purchase price is based on preliminary data and could change when
final valuation is determined.





On June
21, 2007, we purchased all of the issued and outstanding capital stock of
DocuCom.  DocuCom is a provider of digital and film-based document
management solutions, offering document management products and services to
government and middle-market enterprises located throughout
Canada.  We plan to merge DocuCom with our existing ECM/document
management division based in Winnipeg, Canada.  The net aggregate
purchase price, after closing adjustments by the parties, was Cdn$2,761,097
(approximately US$2.58 million), of which amount we paid the selling
shareholders Cdn$961,097 (approximately US$900,000), at closing on June 22,
2007.  The purchase agreement provided that we are to pay the selling
shareholders Cdn$900,000 (approximately US$840,000) three months after closing
and Cdn$900,000 (approximately US$840,000) nine months after
closing.  We secured the subsequent payments through a bank-issued
irrevocable standby letter of credit in favor of the selling shareholders in the
aggregate amount of Cdn$1,800,000 (approximately US$1.68
million).   In connection with the closing, we paid Cdn$450,000
(US$420,000) to retire DocuCom’s credit facility, which also extinguished
certain personal guarantees of Raymond Patterson and Martin Mollot, the former
senior officers, directors, and, directly and through their family trusts,
shareholders of DocuCom.  As of December 31, 2007, the remaining
installment due the former shareholders of DocuCom is shown on the balance sheet
as restricted cash in the amount of $922,888.




F-18




On June
29, 2007, we acquired all of the issued and outstanding shares of capital stock
of HRMS.  HRMS,  founded in 1983 and headquartered in San
Francisco, California, is an organization of human resource professionals that
combine best practice human resource and technical expertise to design, develop,
and implement Human Resource Information System (“HRIS”) products and services
that meet the immediate and ongoing human resource initiatives.  It
provides comprehensive HRIS Software Solutions to human resource departments
across a broad range of middle-market industries with an installed base of more
than 100 middle-market companies located throughout the United
States.  Our plan is to integrate HRMS with our existing human
resources outsourcing services based in San Francisco,
California.  The aggregate purchase price, subject to a potential
post-closing adjustment, was $2,000,000, of which amount we paid the selling
shareholders $1,100,000 at closing on June 29, 2007, and issued them 384,968
shares of our restricted common stock valued at $400,000 (based upon the
volume-weighted average closing bid price of our common stock during the ten
consecutive trading days immediately preceding the closing).  The
Stock Purchase Agreement provided that we are to pay the selling shareholders
the remaining $500,000 12 months after closing through an escrow account with
U.S. Bank, subject to offset in our favor with respect to any claims for
indemnity by us under the terms of the Stock Purchase Agreement.  The
purchase price is also subject to immediate adjustment in the event that HRMS’
net equity (as defined in the Stock Purchase Agreement) as of the closing was
less than $80,000 or more than $140,000.  In such event, the sellers
shall rebate or we shall increase, as appropriate, the closing cash payment on a
dollar-for-dollar basis. The Company is required to use all reasonableefforts to effect the
registration of the Registerable Securities as soon as practicable after the
Closing Date, and in any event not later than one year after the Closing
Date.




Through a
Stock Purchase Agreement, entered into as of October 10, 2007, we purchased the
issued and outstanding capital stock of Blue Hill, a privately-held data center
outsourcing services company, based in Pearl River, New York.  Blue
Hill is a full-service data center outsourcing provider with customers located
throughout the United States representing a wide range of
industries.  We intend to consolidate the operations of our existing
Information Technology Outsourcing business unit with Blue Hill’s operations to
create additional capability for both new and existing customers and generate
additional economic efficiencies.  At or about the closing date, we
transferred approximately $11 million of value, as follows:  (i) cash
payments to the current selling stockholders of approximately $6.6 million; (ii)
our 15-month promissory note in the initial principal amount of $1 million,
subject to offset in our favor with respect to any claims for indemnity by us
under the terms of the Stock Purchase Agreement; (iii) cash payment through Blue
Hill in the amount of approximately $1.4 million to its former stockholder; and
(iv) 2,666,666 shares of our restricted common stock valued at approximately
$1.8 million (based upon the volume-weighted average closing bid price of our
common stock during the ten consecutive trading days immediately preceding the
closing).  The promissory note bears interest from and after January
1, 2009, at the rate of 9% per annum and is “secured” by a document to be held
in escrow, styled as a confession of judgment.  The principal of the
note, less any offsets, is, at the selling stockholders’ option, convertible
into restricted shares of our common stock, the number of which is to be
calculated in the same manner as the shares issued at closing were
calculated.




F-19




The
following table presents the preliminary 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 for the three acquisitions during fiscal 2007:




DocuCom
              
              
              HRMS
              
              
              Blue
      HillCash
      and cash equivalents
              
              $
              -
              
              
              $
              15,702
              
              
              $
              38,061Accounts
      receivable
              
              
              1,579,611
              
              
              
              252,008
              
              
              
              941,341Acquired
      contracts
              
              
              -
              
              
              
              -
              
              
              
              -Other
      current assets
              
              
              172,888
              
              
              
              8,876
              
              
              
              242,070Property,
      plant and equipment
              
              
              204,419
              
              
              
              2,611
              
              
              
              797,991Goodwill
              
              
              1,462,693
              
              
              
              758,268
              
              
              
              1,697,891Identifiable
      intangible assets
              
              
              2,300,000
              
              
              
              1,600,000
              
              
              
              9,000,000Total
      assets acquired
              
              
              5,719,611
              
              
              
              2,637,465
              
              
              
              12,717,354Debt
      payable to bank
              
              
              420,610
              
              
              
              -
              
              
              
              977,715Accounts
      payable and other accrued liabilities
              
              
              2,247,173
              
              
              
              477,525
              
              
              
              2,147,880Estimated
      termination liability
              
              
              -
              
              
              
              -
              
              
              
              -Total
      liabilities assumed
              
              
              2,667,783
              
              
              
              477,525
              
              
              
              3,125,595Net
      assets acquired
              
              $
              3,051,828
              
              
              $
              2,159,940
              
              
              $
              9,591,759




Acquired
identifiable intangible assets in the amount of $2,300,000, $800,000 and
$6,500,000 were assigned to customer contracts and non-compete agreements
pending refined valuation.  The purchase price and costs associated
with the DocuCom, HRMS and Blue Hill acquisitions exceeded the Company’s
preliminary allocation of the fair value of net assets acquired by $1,462,693,
$758,268 and $1,697,891, respectively, which was assigned to
goodwill.  The Company is in the process of obtaining third-party
valuations of the intangible assets and the allocation of the purchase price for
these three acquisitions is subject to refinement.  The amount
ultimately assigned to goodwill is not expected to be deductible for United
States income tax, state income tax or Canadian income tax
purposes.




(3)
            PROPERTY,
      PLANT AND EQUIPMENT




Property,
plant and equipment, at cost, as of December 31, 2007 consisted of the
following:





2007Furniture
      and fixtures
              
              $
              387,574Office
      equipment
              
              
              3,593,761Assets
      under capital lease
              
              
              492,604Software
              
              
              886,185Vehicles
              
              
              13,412Leasehold
      improvements
              
              
              180,3185,553,854Less
      accumulated depreciation and amortization
              
              
              (718,913
              )Property,
      plant and equipment, net
              
              $
              4,834,941





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.  For the years ended December 31, 2007 and 2006,
depreciation expense relating to assets under capital lease amounted to $89,794
and $3,394, respectively.  Depreciation expense for all assets for the
years ended December 31, 2007 and 2006 amounted to $617,400 and $83,772,
respectively.




F-20




(4)
            DEBT




Short-Term
Related Party Debt





Short-term
      related party debt consisted of the following at December 31,
      2007:Notes
      payable to 2 officers, who are also significantshareholders,
      secured by all assets of the Company,bearing
      an annual interest rate of 9%
              
              $
              1,200,000Long-term
      debtLong-term
      debt, including capital lease obligations, consisted of the
      followingat
      December 31, 2007:a.
              
              Credit
      facility from Royal Bank of Canada, stated interest at afloating
      rate plus 1.05%, (totaling 7.05% at December 31, 2007),secured
      by assets of the Company
              
              
              $
              795,132b.
              
              Loan
      from Business Development Bank of Canada, statedinterest
      at a floating rate plus 3.25%, (totaling 11.25% atDecember
      31, 2007), secured by assets and personal guarantees
              
              
              49,371of
      the Company, expiring May 21, 2010c.
              
              Capital
      lease obligations maturing at dates rangingfrom
      November 30, 2009 to December 31, 2011, securedby
      the leased assets
              
              
              
              655,522Total
      long-term debt before unamortized discount and inputed
      interest
              
              
              1,500,025Less: Imputed
      interest and unamortized discount
              
              
              (121,157
              )Long-term
      debt
              
              
              1,378,868Less:  current
      portion
              
              
              961,809$
              417,059




RELATED
PARTY NOTES PAYABLE





In August
2006 the Company entered into an agreement with two individuals who are
officers, directors, and significant shareholders for a bridge loan not to
exceed $3,000,000.  From the inception of that agreement through
January 30, 2007 a total of $2,740,000 was advanced to the
Company.  The loan agreement provided for principal and accrued and
unpaid interest were due and payable April 30, 2007.  The loan
agreement is unsecured.  The unpaid principal of $1,200,000 and
accrued and unpaid interest of $36,672 as of December 31, 2007 are due and
payable on demand. The amount due under the loan agreement has both a face and
stated value of $1,200,000 as of December 31, 2007.  The stated fixed
interest rate is 9.00% through August 18, 2008.





Common
share purchase warrants (collectively the Warrants) to purchase one share of the
Company’s common stock, par value $0.01 per share (the Common Stock), at an
exercise price of $0.035 per share that are exercisable on issuance were granted
in conjunction with the loan agreement. The total funds borrowed from the
related parties amounted $2,740,000.  The associated Warrants are
exercisable for 707,704 shares of common stock. The Warrants, which expire seven
years after issuance, were assigned a value of $834,717, estimated using the
Black-Scholes-Merton valuation model. The following assumptions were used to
determine the fair value of the Warrants using the Black-Scholes-Merton
valuation model: a term of seven years, risk-free rate range of 4.16% - 5.03%,
volatility of 125%, and dividend yield of zero. In accordance with EITF No.
00-27, Application of Issue
No. 98-5 to Certain Convertible Instruments, the values assigned to the
Warrants was allocated based on their relative fair values. The discount on the
loan agreement for the Warrants was accreted to interest expense, using the
effective interest method, over the initial term of the loan agreement (original
loan agreement due date was April 30, 2007) Total interest expense recognized
relating to the accretion of the Warrants discount for the the year ended
December 31, 2007 and 2006 was $594,029 and $241,670, respectively.




F-21




The loan
agreement provided that if the Company required additional equity in order to
meet certain surplus requirements needed to accomplish the reverse merger with
netGuru; it could offer  the related parties the opportunity to
convert  a  portion of  the outstanding loan
agreement amount then payable at an aggregate conversion price equal to 50% of
the fair value of the common stock at the adjusted closed market price on the
day immediately preceding the conversion of the loan agreement
amounts.  A total of $1,540,000 was converted into 916,667 shares of
the Company’s Series C preferred stock in December 2006 (conversion price of
$1.68 per share of Series C preferred stock is based on an adjusted closing
price of the common stock on the day immediately preceding the conversion of
$3.36).  The Company incurred an $82,200 loan fee of 3% of the total
amount borrowed under the loan agreement which was paid to the related
parties.





Under the loan agreement, the Company
was required to pay an amount equal to an amount not less than 25% of the net
proceeds it received from all subsequent debt and equity financings towards the
retirement of the then outstanding principal and accrued and unpaid interest
(Note 5).  Any unwaived failure by the Company to make any such
payment would constitute a material breach of the loan agreement. In connection
with the consummation of the Series D preferred stock equity financing on June
13, 2007, the two individuals waived this loan agreement
covenant.  The waiver related solely to the Series D preferred stock
financing.




A.    CREDIT
FACILITY FROM THE ROYAL BANK OF CANADA





Docucom
Imaging Solutions Inc. (“DocuCom”) has a revolving Operating Line with the Royal
Bank of Canada with a maximum availability of $1,000,000 and carries an
annual interest rate of the Royal Bank of Canada prime rate plus 1.05%, which
amounted to 7.05% at December 31, 2007.  The credit facility is
secured by a General Security Agreement signed by DocuCom as well as a guarantee
and postponement of claim for $500,000 in the name of Novus Imaging Solutions
Inc. (“Novus”) which is also supported by a General Security Agreement signed by
Novus.  The Borrowing Limit on the credit facility is 75% of the good
accounts receivable of the Company.  At December 31, 2007, DocuCom had
an outstanding balance of approximately $795,132 which did not exceed the
borrowing limit.  Interest expense for the period ended December 31,
2007 amounted to $28,365.




B.    TERM
LOAN FROM BUSINESS DEVELOPMENT BANK OF CANADA





Adapsys
Document Management LP (“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, 2007, the annual rate of interest on
this loan was 11.25% and the balance outstanding was approximately $53,984.
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 at an exercise price of $0.03 per share to each of these
shareholders in return for their loan guarantees. The warrants, valued at
approximately $11,049, were recorded as a discount to the term loan. The
value of the warrants is being amortized to interest expense over the
term of the loan. Unamortized discount at December 31, 2007 and 2006 was
approximately $8,980 and $9,794, respectively.





C.    CAPITAL
LEASES





Capital
leases consist primarily of equipment leases for the U.S. entities.
The Company added approximately $475,800 to capital leases duringfiscal
2007.




F-22




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




Long-Term
              
              
              Capital
      LeaseDebt
              
              
              Obligations2008
              
              $
              812,156
              
              
              $
              199,5182009
              
              
              17,023
              
              
              
              180,1672010
              
              
              7,094
              
              
              
              141,5822011
              
              
              -
              
              
              
              134,2552012
              
              
              -
              
              
              
              -Thereafter
              
              
              -
              
              
              
              -Total
      minimum payments
              
              $
              836,273
              
              
              $
              655,522Less:  amount
      representing interest
              
              
              
              
              
              
              (112,927
              )Present
      value of minimum capital lease payments
              
              
              
              
              
              $
              542,595




Long-term
debt and capital lease interest expense for the year ended December 31, 2007 was
approximately $41,797 and $55,640, respectively.




(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.





Based on
the settlements reached and amount of professional and other fees incurred
during 2006, the Company reduced its severance liability estimate at December
31, 2006 by $223,726.  This amount is shown as a reduction to operating
expense on the Company’s consolidated statement of operations for the year ended
December 31, 2006. The Company believes that the severance liability balance of
$72,199 at December 31, 2007 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, 1,449,204
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.





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.




F-23




In June
2007 the Company issued 384,968 common shares valued at $400,000 as part
consideration of the purchase price for the acquisition of HRMS.





In June
2007 the Company privately placed shares of Series D Convertible Preferred Stock
and various common stock and Series D-2 preferred stock purchase warrants to a
limited number of institutional investors for gross proceeds of approximately
$14,000,000. The shares of Series D Convertible Preferred Stock are convertible
into approximately 23.3 million shares of our common stock. The three-year
Series A Warrants (initial exercise price of $.90 per share) are exercisable for
the purchase of up to approximately 11.7 million shares of our common stock. The
five-year Series B Warrants (initial exercise price of $1.25 per share) are
exercisable for the purchase of up to approximately 23.3 million shares of
common stock. If exercised in full, the aggregate Series A Warrant and Series B
Warrant proceeds will be approximately $40 million.





The
investors were also granted a one-year option (in the form of Series J Warrants)
to purchase up to $21 million of Series D-2 Convertible Preferred Stock, which
is convertible into approximately 23.3 million shares of common stock. At the
closing and in connection with such option, the Company granted the investors
three-year Series C warrants (initial exercise price of $1.35 per share), which
are exercisable for the purchase of up to approximately 11.7 million shares of
common stock, and five-year Series D Warrants (initial exercise price of $1.87
per share), which are exercisable for the purchase of up to approximately 23.3
million shares of common stock. The Series C Warrants and the Series D warrants
vest only upon the exercise of the Series J Warrants. If exercised in full, the
aggregate Series C Warrant and Series D Warrant proceeds will be approximately
$60 million.





Through
amendments to each of the Series J Warrants to Purchase Shares of Preferred
Stock issued to the investors who purchased shares of the Company’s Series D
Convertible Preferred Stock on June 13, 2007 (which Series J Warrants were
issued in connection with such share purchases), the Company voluntarily reduced
the per-share warrant exercise price payable upon exercise of its Series J
Warrant from $14.40 to $9.60, effective only for exercises thereof during the
period between September 28, 2007 and October 10, 2007.  This reduced
warrant exercise price only applied for up to seventy-five percent (75%) of the
Series J Warrants then held by each investor and the original exercise price of
$14.40 per share was automatically re-applied to any Series J Warrants not
exercised at the reduced price.




The
Company also amended each of the Series C Warrants to purchase shares of Common
Stock and Series D Warrants to purchase shares of Common Stock, all of which
were also issued in connection with the purchases of the Series D Convertible
Preferred Stock on June 13, 2007, to provide that, in the event that an investor
exercised any portion of the Series J Warrants at the reduced exercise price,
the per-share warrant exercise price payable upon exercise of its Series C
Warrant was reduced from $1.35 to $0.01 and the per-share warrant exercise price
payable upon exercise of its Series D Warrant was reduced from $1.87 to $1.10
for the same percentage of the investor’s Series C Warrants and Series D
Warrants as the percentage of Series J Warrants then exercised by such investor
during the reduced warrant price period.   Any applicable reduced
warrant exercise price for the Series C Warrants and Series D Warrants applies
for the remainder of their respective terms.  The anti-dilution
provisions of the investors’ agreements were waived for such reduced exercise
prices.





In
connection with the sale of the Series D and Series D-2 Convertible Preferred
Stock;





(a) As
long as any shares of Series D and Series D-2 Preferred Stock are outstanding,
the Company may not declare, pay or set apart for payment any dividend or make
any distribution on any Junior Stock (other than dividends or distributions
payable in additional shares of Junior Stock), unless at the time of such
dividend or distribution the Company shall have paid all accrued and unpaid
dividends on the outstanding shares of Series D and Series D-2 Preferred
Stock.





(b) The
Company must maintain financial covenants relating to working capital, capital
expenditures, leverage, EBITDA, and fixed charge coverage ratio. The Company
believes that it is in compliance with these covenants.





(c) There
are penalties if a registration statement under the Securities Act providing for
the resale of the Warrant Shares and Conversion Shares is not in effect within
150 days of the sale of the Preferred Stock. The Company has received a waiver
of this provision from five of the seven investors and anticipates receipt of a
waiver from the remaining two investors.




F-24




(d) There
are provisions requiring repurchase of the warrants associated with the Series D
and Series D-2 Preferred Stock on the occurrence of certain triggering events.
These triggering events are under the control of the Company’s board of
directors. Provisions relating to the structure of the board of directors are
such that holders of the Series D and Series D-2 Preferred Stock or their
successors cannot take control of the board so no liability has been recorded in
relation to this repurchase requirement.




During
September and October 2007, several investors had exercised certain of their
Series J Warrants at the reduced exercise price and acquired an aggregate of
729,167 shares of the Company’s Series D-2 Convertible Preferred Stock for an
aggregate price of approximately $7.0 million.  The anti-dilution
provisions of the investors’ agreements were waived for such reduced exercise
prices.





In
October 2007 the Company issued 2,666,666 restricted common shares valued at
$1.8 million as part of the purchase consideration for Blue Hill.





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 seven-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, the Company issued seven-year warrants to purchase an aggregate of 10,870
shares of the Company’s common stock at an exercise price of $0.0345 per share,
in consideration for guaranteeing the term loan from the Business Development
Bank of Canada (see note 4C). The warrants were valued at $11,049. The value of
the warrants was recorded as a discount to the term loan and is being amortized
to interest expense over its term. At December 31, 2007, the unamortized balance
of the discount was $8,230.





In August
2006, September 2006, October 2006, November 2006 and December 2006, the Company
issued seven-year warrants to purchase an aggregate of 60,384; 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 $649,531. 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, 2007, the loan discount had been fully
amortized.





In
December 2006, the Company issued a seven-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.




In
January 2007, the Company issued a seven-year warrant to purchase an aggregate
of 133,333 shares of the Company’s common stock, at an exercise price of $0.0345
in conjunction with additional bridge loan funding from an individual who is an
officer and significant shareholder valued at $185,168 using the
Black-Scholes-Merton option pricing model, a volatility of 125%, risk-free
interest rate of 4.75%, and the expected term of 7 years.




F-25




In June
2007, the Company issued 5 & 7-year warrants to purchase an aggregate of
1,166,667 shares of the Company’s common stock, at an exercise price of $0.60 as
finders and broker fees in conjunction with the Private funding on June 13, 2007
valued at $1,113,105 using the Black-Scholes-Merton option pricing model, a
volatility of 123%, risk-free interest rate of 5.05%, and the expected term of
5-7 years.




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





Sharesunderlying
              
              
              Exercise
              
              
              Estimated
              
              
              
              
              
              
              
              
              Fair
      valueunder
              
              
              price
      per
              
              
              life
              
              
              
              
              
              Risk-free
              
              
              of
      warrantsGrant
      date
              
              warrants
              
              
              share
              
              
              (in
      years)
              
              
              Volatility
              
              
              rate
              
              
              (a)August
      2005
              
              
              121,733
              
              
              $
              0.03
              
              
              
              7.0
              
              
              
              125
              %
              
              
              4.20
              %
              
              $
              25,570August
      2006
              
              
              71,254
              
              
              $
              0.03
              
              
              
              7.0
              
              
              
              125
              %
              
              
              4.20
              %
              
              
              72,430September
      2006
              
              
              60,384
              
              
              $
              0.03
              
              
              
              7.0
              
              
              
              125
              %
              
              
              4.20
              %
              
              
              61,380October
      2006
              
              
              48,307
              
              
              $
              0.03
              
              
              
              7.0
              
              
              
              125
              %
              
              
              4.20
              %
              
              
              49,104November
      2006
              
              
              9,662
              
              
              $
              0.03
              
              
              
              7.0
              
              
              
              125
              %
              
              
              4.20
              %
              
              
              9,821.03
      toDecember
      2006
              
              
              443,253
              
              
              $
              0.63
              
              
              6.0
      to 7.0
              
              
              
              125
              %
              
              
              5.03
              %
              
              
              587,116January
      2007
              
              
              133,333
              
              
              $
              0.03
              
              
              
              7.0
              
              
              
              125
              %
              
              
              4.75
              %
              
              
              185,186June
      2007
              
              
              1,166,667
              
              
              $
              0.60
              
              
              5.0
      to 7.0
              
              
              
              123
              %
              
              
              5.05
              %
              
              $
              1,113,105Total
              
              
              2,054,593(a) Fair
      value was determined using the Black-Scholes-Merton option pricing
      model.




F-26




The
following table summarizes the warrant activity:




WeightedAverageWeighted
              
              Remaining
              
              AggregateAverage
              
              Contractual
              
              IntrinsicShares
              
              
              Exercise
      Price
              
              Term
      (years)
              
              ValueOutstanding
      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
              
              
              
              0.80Issued
              
              
              72,758,350
              
              
              
              1.43Exercised
              
              
              (1,229,167
              )
              
              
              5.70Forfeited
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2007
              
              
              72,332,779
              
              
              $
              1.35
              
              3.85
              
              $       0.92Exercisable
      at December 31, 2007
              
              
              72,332,779
              
              
              $
              1.35
              
              3.85
              
              $       0.92  Stock
Option Plans




The
Company has adopted the following employee stock option plans:




SharesAdopted
              Terminates
              AuthorizedBPO
      Management Services, Inc. 2007 StockIncentive
      Plan (the "2007 Plan")
              June
      2007
              June
      2017
              4,666,667BPO
      Management Services, Inc. Stock OptionPlan
      (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 OptionPlan
      (the "1998 Plan")
              December
      1998
              November
      2008
              1,000,000Research
      Engineers, Inc. 1997 Stock OptionPlan
      (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.




F-27




The
following is a summary of stock option activity:




WeightedAverageWeighted
              
              Remaining
              
              AggregateAverage
              
              Contractual
              
              IntrinsicShares
              
              
              Exercise
      Price
              
              Term
      (years)
              
              ValueOutstanding
      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
              
              
              
              0.56Issued
              
              
              3,023,964
              
              
              
              0.65Exercised
              
              
              -
              
              
              
              -Forfeited
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2007
              
              
              5,002,954
              
              
              
              0.61
              
              8.45
              
              0.18Exercisable
      at December 31, 2007
              
              
              1,094,289
              
              
              $
              1.08
              
              7.31
              
              $
              0.65




* Non-employee options acquired as part
of Merger.




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 the fiscal year 2007 or 2006.




The
weighted average grant-date fair value of options granted during the year ended
December 31, 2007 and 2006 was $0.65 and $0.21, respectively.




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 2007 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 2007 and 2006 in the amounts of $360,721and $244,553,
respectively. Total compensation cost related to non-vested stock option awards
not yet recognized as of December 31, 2007 was $3,804,320 which is expected to
be recognized over the weighted average period of 2.38 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.




F-28




(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, 2007, the Company has drawn a total of
$2,740,000 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, 2007, the loan fees of  $61,200
were paid during fiscal year 2007.





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):




Sharesissuable
      underDate
              
              Loan
      amount
              
              
              3%
      fees
              
              
              warrantsPatrick
      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
              
              
              
              338,147Patrick
      Dolan
              January
      30, 2007
              
              
              400,000
              
              
              
              12,000
              
              
              
              133,333James
      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$
              2,740,000
              
              
              $
              82,200
              
              
              
              707,705




The total
warrant value of $834,699 has been recorded as a discount to the bridge loan and
is being amortized to interest expense over the term of the bridge loan. 
For the year ended December 31,2007, the unamortized loan discount and interest
expense were $0 and $594,029, respectively.




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




(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 make
matching contributions to the plan among several of its subsidiaries, where it
matches 100% of the employee contribution up to a maximum of 4%. For the year
ended December 31, 2007 and 2006, the Company contributions to the plan amounted
to $102,418 and $27,043, respectively.




(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 31, 2007, future minimum annual rental commitments under these lease
obligations were as follows:




Year
      ending December 31:2008
              
              $
              1,531,1402009
              
              
              1,456,6932010
              
              
              1,283,1132011
              
              
              924,1302012
              
              
              335,070Thereafter
              
              
              1,309,790




Rent
expense was $1,045,587 and $451,425 for the year ended December 31, 2007 and
2006, respectively.




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,




2007
              
              
              2006United
      States
              
              $
              (5,266,744
              )
              
              $
              (2,852,476
              )Foreign
              
              
              (1,201,465
              )
              
              
              (447,710
              )Total
              
              $
              (6,468,209
              )
              
              $
              (3,300,186
              )




F-30




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




2007
              
              
              2006Current:Federal
              
              $
              -
              
              
              $
              -State
              
              
              -
              
              
              
              -Foreign
              
              
              -
              
              
              
              --
              
              
              
              -Deferred:Federal
              
              
              -
              
              
              
              -State
              
              
              -
              
              
              
              -Foreign
              
              
              -
              
              
              
              --
              
              
              
              -Total
              
              $
              -
              
              
              $
              -




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,:




2007
              
              
              2006Income
      tax benefit at statutory rate
              
              $
              (2,199,191
              )
              
              $
              (1,122,063
              )State
      taxes, net of federal benefits
              
              
              (331,172
              )
              
              
              (148,024
              )Change
      in valuation allowance
              
              
              2,345,748
              
              
              
              996,084Other
              
              
              184,615
              
              
              
              274,003Total
              
              $
              -
              
              
              $
              -


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:





2007
              
              
              2006Deferred
      tax assets:Accruals
      and reserves
              $
              679,040
              
              
              $
              68,012Depreciation
              
              15,603
              
              
              
              5,306Net
      operating loss carryforwards
              
              3,055,518
              
              
              
              1,922,298Research
      and development credit carryforwards
              
              172,340
              
              
              
              172,340Other
              
              
              2,156
              
              
              
              2,156Total
      deferred tax assets
              
              3,924,657
              
              
              
              2,170,112Less:
      valuation allowance
              
              (3,621,458
              )
              
              
              (1,702,994
              )Net
      deferred tax assets
              
              303,199
              
              
              
              467,118Deferred
      tax liabilities:Amortization
      of intangibles
              
              (303,199
              )
              
              
              (467,118
              )Total
      deferred tax liabililties
              
              (303,199
              )
              
              
              (467,118
              )Net
      Deferred Tax Asset/Liability
              $
              -
              
              
              $
              -




F-31





At
December 31, 2007, the Company had tax net operating loss carryforwards of
approximately $6,579,067 for federal income tax purposes and $2,592,715 for
state income tax purposes, and $1,649,175 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 December
31, 2007, the Company had provided a valuation allowance of approximately
$3,621,458 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.




(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.




F-32




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




For
      the year ended December 31,2007
              
              
              2006Net
      revenuesECM
              
              $
              10,141,210
              
              
              $
              2,713,769ITO
              
              
              5,616,239
              
              
              
              1,833,052HRO
              
              
              711,552
              
              
              
              164,318Consolidated
              
              $
              16,469,001
              
              
              $
              4,711,139Operating
      lossECM
              
              $
              (1,617,826
              )
              
              $
              (650,551
              )ITO
              
              
              (730,621
              )
              
              
              (355,393
              )HRO
              
              
              (800,146
              )
              
              
              (777,336
              )Corporate
              
              
              (2,519,527
              )
              
              
              (1,160,695
              )Consolidated
              
              $
              (5,668,120
              )
              
              $
              (2,943,975
              )Depreciation
      and amortization expenseECM
              
              $
              455,002
              
              
              $
              41,787ITO
              
              
              513,486
              
              
              
              108,109HRO
              
              
              249,901
              
              
              
              -Corporate
              
              
              248,378
              
              
              
              10,824Consolidated
              
              $
              1,466,767
              
              
              $
              160,720




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 31,2007
              
              
              2006Net
      revenuesNorth
      America
              
              $
              15,803,256
              
              
              $
              4,710,115Europe
              
              
              665,745
              
              
              
              1,024Consolidated
              
              $
              16,469,001
              
              
              $
              4,711,139For
      the year ended December 31,Long-Lived
      Assets
              
              2007
              
              
              2006North
      America
              
              $
              23,777,079
              
              
              $
              5,829,298Europe
              
              
              23,672
              
              
              
              25,874Consolidated
              
              $
              23,800,751
              
              
              $
              5,855,172





F-33




(12)
            BASIC
      AND DILUTED LOSS PER SHARE




In
      accordance with FASB Statement No. 128, Earnings Per Share, we
      calculate basic and diluted net loss per share using the weighted
      average number of common shares outstanding during the periods
      presented and adjust the amount of net loss, used in this
      calculation, for preferred stock dividends declared during the
      period.





We
      incurred a net loss in each period presented, and as such, did not
      include the effect of potentially dilutive common stock equivalents
      in the diluted net loss per share calculation, as their effect would
      be anti-dilutive for all periods. Potentially dilutive common stock
      equivalents would include the common stock issuable upon the
      conversion of preferred stock and the exercise of warrants and stock
      options that have conversion or exercise prices below the market
      value of our common stock at the measurement date. As of December 31,
      2007 and 2006, all potentially dilutive common stock equivalents
      amounted to 126,377,323 and 4,392,936 shares,
      respectively.




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, 2007 and 2006:




Year
      Ended December 31,2007
              
              
              2006Numerator:Net
      loss
              
              $
              (6,468,209
              )
              
              $
              (3,300,186
              )Less:Preferred
      dividends paid in stock
              
              
              129,758
              
              
              
              -Loss
      and numerator used in computing basisand
      diluted loss per share
              
              $
              (6,338,451
              )
              
              $
              (3,300,186
              )Denominator:Denominator
      for basic and diluted net loss per share-weighted
      average number of common sharesoutstanding
              
              
              9,513,749
              
              
              
              8,496,119Basic
      and diluted net loss per share
              
              $
              (0.67
              )
              
              $
              (0.39
              )




The
following table set forth potential shares of common stock that are not included
in the diluted net loss per share because to do so would be antidilutive since
the company reported net losses in both years:




December
      31,2007
              
              
              2006Options
      to purchase shares of common stock
              
              
              5,002,954
              
              
              
              566,020Warrants
      to purchase shares of common stock
              
              
              83,221,275
              
              
              
              803,596Shares
      of convertible preferred stock - Series A
              
              
              1,703,874
              
              
              
              1,574,116Shares
      of convertible preferred stock - Series B
              
              
              1,449,204
              
              
              
              1,449,204Shares
      of convertible preferred stock - Series D
              
              
              23,333,344
              
              
              
              -Shares
      of convertible preferred stock - Series D-2
              
              
              11,666,672
              
              
              
              -Total
              
              
              126,377,323
              
              
              
              4,392,936


F-34


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 15, 2008
            
            /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
      15, 2008Patrick
      A. Dolan
            
            (principal
      executive officer), and Director/s/
      James Cortens
            
            President,
      Secretary and Director
            
            April
      15, 2008James
      Cortens/s/
      Donald Rutherford
            
            Chief
      Financial Officer
            
            April
      15, 2008Donald
      Rutherford
            
            (principal
      financial and accounting officer)/s/
      Russell Cleveland
            
            Director
            
            April
      15, 2008Russell
      Cleveland/s/
      Dale Paisley
            
            Director
            
            April
      15, 2008Dale
      Paisley




53




INDEX
TO EXHIBITS FILED WITH THIS FORM 10-KSB





Exhibit
      No.
            Description21
            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