UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-KSB




ANNUAL
REPORT UNDER SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934




For the
fiscal year ended December 31, 2007




Commission
file number: 000-21729




PRESCIENT
APPLIED INTELLIGENCE, INC.


(Name
of Small Business Issuer in our Charter)




Delaware
            73-1247666(State
      or Other Jurisdiction
              of
      Incorporation or Organization)
            (I.R.S.
      Employer
              Identification
      No.)1247
      Ward Avenue
              West
      Chester, Pennsylvania
            19380(Address
      of Principal Executive Offices)
            (Zip
      Code)


(610) 719-1600


(Issuer’s
Telephone Number, Including Area Code)




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


Title
      of Each Class
            
            Name
      of Each Exchange
              on
      Which RegisteredNone
            
            N/A




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




Common
Stock, $.001 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.  ̈




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 past 90 days.
Yes  þ    No   ̈




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. þ




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




The
issuer’s revenues for the fiscal year ending December 31, 2007 were
$9,403,603.




As of
March 12, 2008, the aggregate market value of the common stock of the
registrant held by non-affiliates of the registrant (affiliates for these
purposes being the registrant’s directors, executive officers and holders of
more than 10% of the Registrant’s common stock on such date), computed by
reference to the last sales price at which the common stock was sold was
$1,854,094.




As of
March 12, 2008 the issuer had 33,600,251 outstanding shares of Common
Stock




Transitional Small Business Disclosure
Format: Yes ̈Noþ






Table of Contents


TABLE OF
CONTENTS




PART
      IITEM 1.
            Description
      of Business
            1ITEM 2.
            Description
      of Property
            14ITEM 3.
            Legal
      Proceedings
            14ITEM 4.
            Submission
      of Matters to a Vote of Security Holders
            14PART
      II
            
            
            14ITEM 5.
            Market
      for Common Equity, Related Stockholder Matters and Small Business Issuer
      Purchases of Equity Securities
            14ITEM 6.
            Management’s
      Discussion and Analysis
            15ITEM 7.
            Financial
      Statements
            20ITEM 8.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            20ITEM 8A
      (T).
            Controls
      and Procedures
            21ITEM 8B.
            Other
      Information
            21PART
      III
            
            
            21ITEM 9.
            Directors,
      Executive Officers, Promoters, Control Persons and Corporate
      Governance; Compliance with Section 16(a) of the Exchange
      Act
            21ITEM 10.
            Executive
      Compensation
            24ITEM 11.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            26ITEM 12.
            Certain
      Relationships, Related Transactions, and Director
      Independence
            28ITEM 13.
            Exhibits
            29ITEM 14.
            Principal
      Accountant Fees and Services
            31







Table of Contents


PART I




SPECIAL PRECAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS




This
Form 10-KSB contains forward-looking statements that involve substantial risks
and uncertainties. These statements can be identified by forward-looking words
such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,”
“continue” and other similar words. You should read statements that contain
these words carefully because they discuss our future expectations, make
projections of future results of operations or of our financial condition, or
state other “forward-looking” information. We believe that it is important to
communicate our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or control. The
factors listed in the sections captioned “Additional Factors That May Affect
Future Results” and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” as well as any cautionary language in this Form
10-KSB, provide examples of risks, uncertainties and events that may cause our
actual results to differ materially from the expectations described in our
forward-looking statements.
  Although
we believe that the expectations reflected in these forward-looking statements
are based upon reasonable assumptions, no assurance can be given that such
expectations will be attained or that any deviations will not be material. In
light of these risks, uncertainties and assumptions, the forward-looking events
and circumstances discussed in this Annual Report may not occur and actual
results could differ materially and adversely from those anticipated or implied
in the forward-looking statements. We disclaim any obligation or undertaking to
disseminate any updates or revision to any forward-looking statement contained
herein to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.




ITEM 1.
            Description
      of Business





We were
originally formed in 1985 as Applied Intelligence Group, an Oklahoma
corporation. In 1998, we changed our name to The viaLink Company. In 1999, we
reorganized as a Delaware corporation. On December 31, 2004, we merged with
Prescient Systems, Inc. (Prescient Systems) and changed our name to Prescient
Applied Intelligence, Inc.




OVERVIEW




We are a
leading provider of on-demand solutions for the retail marketplace, including
both retailers and suppliers. Our solutions capture information at the point of
sale, provide greater visibility into real-time demand and turn data into
actionable information across the entire supply chain. As a result, our products
and services enable trading partners to compete effectively, increase
profitability and excel in today’s retail business climate. This represents our
one operating segment.




Our
solutions address the primary concern of retailers and suppliers today: out of
stock merchandise.  According to the Grocery Manufacturers Association
Out of Stock Survey (GMA Survey), the amount of lost sales due to out of stock
merchandise is substantial – over $6.0 billion annually, and almost 50% of all
out of stock merchandise is caused by poor store ordering. Our retail supply
chain and replenishment solutions provide trading partners with the ability to
clearly see real-time demand and use that knowledge to drive supply chain
efficiency. The results are more accurate ordering and replenishment, lower
inventory levels, and fewer out of stock merchandise.




Our
solution set includes:




·
            Store
      Level Replenishment (SLR)·
            Vendor
      Managed Inventory (VMI)·
            Scan
      Based Trading (SBT)·
            Visibility &
      Analytics (V&A)·
            Global
      Data Sync Adaptor (GDS)·
            Enterprise
      Demand & Distribution Planning (ED&EP)·
            Production
      Line Sequencing·
            Professional
      Services


We have
organized our sales operations to address several key markets: Supply Chain,
focused primarily on manufacturers, distributors, and suppliers in the consumer
products industry, and Advanced Commerce, focused on large mass merchandise,
grocery, chain drug stores, electronics, and other “big box” retailers. In
addition, we have a professional services organization that provides
assessments, implementation services, and support functions to our entire array
of customers.




We market
our solutions to companies primarily throughout North America, with a small
percentage of business in Europe. Our customers include many leading consumer
goods and retail organizations, including Meijer, SUPERVALU, Sunny Delight
Beverage Company, Russell Stover Candies, and Crayola, among
others.




We
maintain our corporate headquarters in West Chester, Pennsylvania, and have an
office in Dallas, Texas. Our fiscal year ends December 31.


-1-
 Table of Contents






INDUSTRY
BACKGROUND




Technology
that Impacts the Consumer Experience




As
competition increases and consumer loyalty declines, retailer trading partners
must focus on creating store and brand loyalty, improving customer satisfaction,
and building destination-faithful traffic. This is accomplished through a
detailed understanding of consumer demand combined with effective retail
execution.


According
to a recent retail industry market study conducted by a leading industry
analyst, retailers will be investing in technology that helps them build brand
and store loyalty through a better shopping experience and flawless execution on
the sales floor. These technology investments include better store systems and
planning applications that focus on demand intelligence to more accurately
forecast from supplier to shelf.





IT
Cost Containment





In order
to stay focused on the consumers, retailers need to free up working capital to
invest in merchandising and promoting products, creating the need to operate
more efficiently. Management believes, that between now and 2009, retailers will
invest in commercially available software systems to replace internally
developed applications because they can no longer afford to support them.
Industry analysts suggest that retailer software spending will move towards
technology capabilities like demand planning and global supply network
visibility – applications that use consumer demand information to optimize
merchandising plans and drive more efficient store execution.





Software
as a Service





Faced
with lower IT budgets and the need for rapid return on investment, management
believes that chief information officers are hesitant to invest money up front
to buy software only to realize later that the product did not deliver what they
expected. An alternate model is Software as a Service (Saas), where the customer
subscribes to, rather than licenses, the software. We believe companies want the
choice of entering into either a subscription-based contract or software license
purchase, based on the particular application and their overall business
strategy. Therefore, we offer both subscription-based services and traditional
license-based contracts.





The
Importance of Collaboration





Companies
that want to succeed in today’s highly competitive retail market are continually
seeking new ways to enhance the productivity of their enterprise business
systems and processes. We believe that those companies that effectively
communicate, collaborate, and integrate with their business partners –
suppliers, distributors, wholesalers, and retailers – can realize significant
competitive advantages in the form of lower costs and greater responsiveness to
true consumer demand. Significant process improvements are possible when trading
partners collaborate to find a better mutual set of practices that focus on
value-added, consumer-driven activities on the sales floor.





STRATEGY





Our
objective is to maintain our position as a leading provider of advance commerce
and supply chain solutions for retail trading partners by enhancing
collaboration from the point-of-sale through the entire supply chain. Our
solutions translate consumer insight into better execution at the store shelf by
capturing scan-sales data, improving forecast accuracy and increasing supply
chain efficiencies.




The
following are our strategies to achieve our objective:





·
            Management believes that we
      are the only company to provide solutions that serve both suppliers and
      retailers by coupling supply chain planning solutions with retail programs
      to drive results at the store shelf.We believe our position as the
      only company to offer solutions that address the needs of both retailers
      and suppliers, from the capture of scan sales data to increased supply
      chain efficiencies to stocked shelves, provides us with the opportunity to
      attract a critical mass of retailers and suppliers.·
            Deliver technology that
      focuses on the consumer experience.We expect this
      will be accomplished through an emerging industry trend that analysts have
      labeled DDSN — the Demand-Driven Supply Network, alternately known as the
      Consumer-Driven Supply Network or Customer Focused Differentiation. Our
      solutions support this trend, emphasizing the need to focus on real-time
      consumer demand through collaboration between retail trading
      partners.  Our solutions integrate demand data (gathered at the
      point of sale) into the end-to-end supply chain network of consumers,
      retailers, consumer product manufacturers, distributors, and raw material
      suppliers. The ultimate goal is to ensure a positive shopping experience
      for the consumer.·
            Deliver the majority of
      solutions through subscription-based offerings.Our advanced
      commerce solutions have historically been offered through a
      subscription-based model. Positioned effectively for the industry shift
      toward SaaS solutions, we derived 62% of our revenue in 2007 from
      subscription-based contracts.




-2-
 Table of Contents







·
            Provide cost-effective
      solutions that are fast and easy to implement.We believe that our
      on-demand model removes many of the traditional barriers to technology
      adoption, enabling retailers and suppliers to implement our solutions
      quickly, with less risk, fewer resources and reduced up-front
      investment.·
            Build strategic alliances and
      business relationships.We combine and complement our solutions
      with the competencies of third parties, including consulting firms and
      technology providers like MicroStrategy and Microsoft. We are a Microsoft
      Business Solutions ISV partner, and also partner with various Microsoft
      resellers. We are actively engaged in key industry associations,
      including: Private Label Manufacturer’s Association and Texas A&M
      University’s Center for Retailing Studies.·
            Seek growth opportunities
      through mergers,
      acquisitions andstrategic transactions.We intend to seek growth opportunities to enhance stockholder value
      by considering acquisitions, combinations or other strategic
      transactions.


SOLUTIONS





In a
typical retail marketplace, there is a strong relationship between retailers,
suppliers, and consumers.  The points where their distinct needs
intersect are where the real challenges exist.  Our solutions address
the challenges inherent in the retail demand chain.




We
believe that the consumer is at the center of the retail transaction. Our
solutions facilitate the flow and use of demand data between retailer and
supplier, allowing trading partners to gather, cleanse, analyze, and respond to
consumer demand. This greater understanding of consumer trends and needs
directly impacts performance at the store shelf, increases sales, and reduces
overall costs.




Our solutions
provide visibility into consumer demand at the point of sale, driving the flow
of goods, and allowing retail trading partners to focus on value-added
activities at store level, such as keeping shelves stocked with
merchandise.  According to the GMA Survey, retail grocers incur lost
sales of over $6.0 billion resulting from out of stocks (empty shelves),
and once lost, the sales can never be recovered.




Our
solutions provide suppliers and retailers with benefits throughout the retail
demand chain, from new product introduction through invoicing and support,
planning and execution, and enhanced analysis including:




·
            Reduced
      invoice discrepancies through synchronization of trading information,
      thereby reducing write-offs and the administrative costs associated with
      discrepancy resolution;·
            Increased
      sales from reducing out-of-stocks and improving replenishment
      processes;·
            Lower
      inventory levels due to increased visibility into consumer demand and
      improved forecast accuracy;·
            Higher
      service levels based on the suppliers’ ability to achieve the perfect
      order;·
            Reduced
      manual data entry and price book maintenance, thereby increasing overall
      administrative efficiency;·
            Improved
      ability to manage pricing and to protect gross margin in an environment
      with constantly changing prices;·
            Increased
      sales force productivity resulting from decreased time spent resolving
      errors and disputes and increased time actually selling;·
            Enhanced
      promotion effectiveness and ability to facilitate more efficient new
      product introductions due to greater trading information visibility;
      and·
            Improved
      delivery and store receiving process.


Our
comprehensive offering consists of the following solutions:


-3-
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Store Level Replenishment
(SLR). Many retailers are placing the responsibility of replenishing
product at the store shelf directly onto the suppliers who bring that product
into the store. Avoiding overstocks and under stocks, particularly with highly
promoted products such as ice cream or bread, has been a challenge for direct
store delivery (DSD) suppliers. Our SLR solution provides these suppliers with
visibility into store level movement and activity, and generates replenishment
orders based on point of sale data. Suppliers using this solution are able to
optimize store-level demand forecasting and replenishment, resulting in fewer
out of stocks and lost sales. Retailers benefit by having product on the
shelf.





Vendor Managed Inventory
(VMI). VMI programs are gaining in popularity because suppliers have come
to realize that VMI offers the opportunity to better align themselves with their
trading partners and add value to those relationships. Our VMI solution provides
collaboration tools that increase supply chain efficiencies, lower inventory,
and enhance trading partner relationships. The solution is pre-mapped to the
specific requirements of each trading partner for the transfer of electronic
data directly into our system. This enables suppliers to analyze
retailer-supplied demand information, automatically generate orders for each
customer, set inventory policy at the retailer’s distribution center and monitor
on-going inventory levels, determine which items need to be replenished, and how
to ship them most cost-effectively. Our VMI suite has the flexibility and
functionality to scale to accommodate new trading partners. Our solution
delivers real value for suppliers through fewer out-of-stocks, increased
inventory turns, and increased customer satisfaction and loyalty.




Scan Based Trading
(SBT). Our SBT solution eliminates supply chain inefficiencies and helps
retailers and suppliers get product to the store shelves more quickly,
efficiently, and profitably. SBT is an advanced commerce practice where the
supplier retains ownership of the inventory until it scans at the cash register.
Once the retailer and supplier agree to begin an SBT relationship, the first
step is item and price authorization. This process matches retailer and supplier
product data to eliminate invoice discrepancies at the point of sale. Our SBT
system receives the scan sales data and maintains it in a repository to ensure
that product movement data is available to all members of the trading community.
SBT is offered as a hosted service, so implementation is immediate and the
application is readily available.




Visibility &
Analytics (V&A). Our V&A solution is a web-based business
intelligence tool that helps retailers and suppliers improve performance at
store level. The V&A suite consists of a foundational data layer and a set
of specifically-focused modules, including: V&A Shrink (for DSD suppliers
who are conducting SBT with Prescient); V&A Sales (tracks trends by store,
item, etc.); V&A Inventory (analyze in-stock position and product flow); and
V&A Performance Analysis (a scorecarding module).  This solution
is easily configurable to include data attributes that facilitate
decision-making, such as geography, product groups, or routes. The ability to
access and analyze accurate and timely data is critical to keeping shelves
stocked.




Global Data Sync Adaptor
(GDS Adaptor). Our GDS Adaptor provides retailers with a “one pipe”
solution for receiving data from their Global Data Synchronization Network
(GDSN) and non-GDSN suppliers. The GDS Adapter enables retailers to
synchronize and receive item and price data in the format of their choice, for
whatever items they specify, no matter where the data originates. Suppliers
publish their data to their desired data pool, which is routed through our GDS
Adapter. Suppliers who don’t publish to a pool can send their data directly
to us.




Enterprise Demand &
Distribution Planning (ED&DP). Our ED&DP solution helps users
analyze POS data and other demand signals to gain insight into customer demand.
Suppliers have visibility into historical data – seasonal events, promotions,
and buying trends – to facilitate accurate forecasting. Our software assesses
how inventory will be impacted, then calculates recommended stocking levels,
considers service level goals, and develops a time-phased replenishment
plan.  The solution brings demand data into one place, and will
determine whether orders should come from existing inventory or if new
production or procurement is necessary. And it is extremely flexible, so it can
be configured to meet the needs of any company’s supply chain
processes.




Inventory &
Replenishment Planning. Part of ED&DP, the Inventory &
Replenishment Planning modules help customers achieve balance between inventory
investment and optimal customer service levels. In addition, it synchronizes all
the elements affecting inventory to ensure product is available for timely
distribution to customers.  Users can easily manage the complex sets
of data and parameters that impact their businesses, including seasonal builds,
desired service levels, and manufacturing constraints. The solution considers
consumption rates and inventory levels, and automatically calculates time-phase
safety stocks and replenishment quantities for each item and each
location.




New Product
Introduction and Product Profiling.  Also part of our
ED&DP suite, New Product Introduction and Product profiling facilitate new
product introductions, conduct promotion analysis, and manage the product
lifecycle. By providing a detailed analysis of past demand patterns and applying
that data to similar products, these modules help customers understand what
makes a product launch successful, how a promotion will impact demand forecasts
and revenue streams, and how long a product is likely to be profitable. They
also create seasonality profiles and help manage inventory pipeline fill
requirements through increased visibility into consumer demand.


-4-
 Table of Contents


Production Line
Sequencing. Our Production Line Sequencing solution is a robust software
application that enables more effective use of resources to meet customer demand
and corporate goals. Production Line Sequencing works with existing enterprise
resource planning (ERP) systems, combining master data with the latest
forecasts, customer orders, on-hand inventories, and planned receipts to
generate production plans and master production schedules.





PROFESSIONAL
SERVICES





We
provide professional consulting services to ensure that our solutions are
seamlessly integrated into our customers’ business processes as quickly and
efficiently as possible. In addition to implementation of our solutions, we have
developed a portfolio of service offerings designed to deliver unparalleled
performance throughout the lifecycle of the customer’s solution. Specific
services are tailored to each customer and include the following:
implementation, business optimization, technical services, education, business
process outsourcing, and advisory services. The intent of such services is to
support our clients’ business operations by enabling them to maximize the speed,
effectiveness, and overall value of our offerings. We believe that the ability
to create value for our customers is critical to our long-term
success.




TECHNOLOGY
PLATFORM




Our
advanced commerce technology platform is based on open architectures and
industry standard technologies. It provides an efficient and effective
e-commerce model because it acts as the single interface between one retailer
and its community of suppliers, or one supplier and its community of retailers.
This removes the challenges that both retailers and suppliers face when
exchanging information with multiple trading partners who communicate in
different ways.




Access to
our advanced commerce services is available through a variety of methods,
including an Internet browser and sophisticated EDI using an XML-based
interface. In order to maintain the security of our database, users do not have
direct access to the underlying data stored in the Oracle database. Users
connect to application programs, which interpret the requests for service, then
connect to the Oracle database for access to the underlying data. We expect to
issue four advanced commerce releases on an annual basis, and expect to provide
service packs with enhancements throughout the year.




Our
advanced commerce services production operations are housed and hosted in a
facility that is secured through a variety of technical and physical protection
mechanisms, including a full-time staff. The facility provides redundant
infrastructure such as backup utilities and communication lines to support a
high availability operation. The servers hosting these services include
fail-over capability, with redundant data storage and communications
resources.




Our suite
of supply chain solutions is built on a common data model, has a common user
interface, and offers an integration module that easily connects our
applications with other enterprise applications such as ERP or continuous
replenishment model (CRM) systems. Supported database platforms include
Oracle and SQL Server. We expect to issue a major software release on an annual
basis, and expect to provide service packs with enhancements throughout the
year.





SALES
AND MARKETING





We sell
our advance commerce products and services through our direct sales force to US
retailers and their community of suppliers.  We sell our supply chain
planning solutions through our direct sales force as well as select channel
partners, primarily to US suppliers, manufacturers, and
distributors.  To further increase sales, we intend to expand our
sales force in 2008, as well as increase our marketing efforts.




Sales
strategies include:





·
            The network effect: By
      targeting leading retailers and suppliers and providing the services
      necessary to create efficiencies for all participants, the value to each
      participant using our advanced commerce services increases with the
      addition of each new participant, increasing the overall value of the
      solution. Consequently, our best sales and marketing support often comes
      from our existing customers·
            Partnerships:To
      further our penetration into the mid-market sector, we are a Microsoft
      Business Solutions ISV partner, and are integrated with Microsoft’s
      mid-market ERP package, Microsoft Dynamics.·
            Industry consultants:We maintain working relationships with several industry consultants
      who have extensive expertise in various segments of the market, such as
      retail effectiveness and trade promotion management.


Our
marketing strategy is to create programs that give prospects a compelling reason
to contact us, whether in response to an offer, register for an on-line event,
or request information from our website.  This is what we refer to as
inbound lead generation.  Typically, inbound leads (where a prospect
reaches out to us) have a much higher likelihood of making it into our sales
pipeline than an outbound lead (where we have contacted a prospect through
outbound activities).


-5-
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To
support this strategy, our marketing programs include: electronic campaigns in
relevant industry newsletters and daily clipping services; and integrated
campaign in the industry’s leading consumer goods manufacturing publication;
targeted direct mail and electronic campaigns featuring specific solutions;
public relations activities such as regular announcements, by-lined articles,
company mentions in industry articles, and customer testimonials; a series of
podcasts that feature both Prescient solutions and client interviews;
identification of the available market for both retailers and suppliers;
bi-monthly electronic communications to our database of prospects and clients;
and informative, dynamic content on our web site.





CLIENTS





We
service over 600 clients – manufacturers, wholesalers, distributors, suppliers
and retailers – from small companies to regional retail chains to large national
companies whose names are well known.




Some of
our clients include:





·
            Retailers and Wholesalers:Ahold,CVS, Meijer, Rite
      Aid, Schnuck Markets, Sunoco, SUPERVALU, WinCo Foods, and
      Winn-Dixie.·
            Suppliers:Allen’s
      Canning, Attends Health Care Products,Bimbo Bakeries,
      BIC Corporation, Boar’s Head, Bush Brothers, Churchill China, Cliffstar,
      Coors Brewing Company, Crayola, Dean Foods, Domino’s Pizza, Dreyer’s/
      Edy’s Grand Ice Cream, Flowers Foods, General Nutrition Corporation,
      George Weston Bakeries, Hallmark, I & K Distributors, Interstate
      Brands, J.M. Smucker Co., NutriSystem, Pepperidge Farm, Perfection
      Bakeries, Ranir, Riviana Foods, Rhodes International, Russell Stover
      Candies, Sara Lee Bakery Group, Schwan’s Consumer Brands, Snyder’s of
      Berlin, Well’s Dairy, Wyeth, and Zondervan.


One
customer individually accounted for 16% of our total revenues in
2007.  The same customer accounted for 12% of our total revenues in
2006.




COMPETITION





Our
advanced commerce solutions currently compete principally with a potential
customer’s desire to build the functionality in-house. This is a costly approach
to advanced commerce, one that many retailers can no longer afford. We believe
the in-depth industry knowledge embedded in the functionality of our advanced
commerce services, cost-effective subscription pricing, and the accessibility of
our services to all potential customers in the industry are competitive
advantages for us. Additionally, we believe that we have the most advanced
electronic commerce solutions in production today built on synchronized item,
price and promotion information.




As the
cost-savings and benefits of scan based trading become more mainstream, direct
competition for advanced commerce and Visibility & Analytics services will
continue to develop and increase in the future, coming from several potential
sources, including but not limited to:





·
            Large
      enterprise-wide software vendors, developers and integrators such as
      Oracle and SAP;·
            B2B
      exchanges such as 1SYNC and Agentrics;·
            Consulting
      firms such as CGEY;·
            Existing
      industry participants who may attempt to deploy their proprietary systems
      as industry solutions; and·
            Business
      intelligence technology platforms such as Microsoft, MicroStrategy, SAS
      and Cognos.


These
potential competitors, if successful, may provide functionality similar to our
advanced commerce services. Many potential competitors have substantially
greater resources than we do. Any failure by us to achieve rapid market
penetration or to successfully address the risks posed by expected competition
could have a material adverse effect on our business, financial condition and
operating results.




The
market for our supply chain solutions currently has more direct competitors. Our
competitors offer a variety of solutions directed at various aspects of the
supply chain, as well as the enterprise application market as a whole. These
include, but are not limited to:


-6-
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·
            Supply
      Chain vendors such as Logility/Demand Solutions who will compete primarily
      on functionality, domain expertise, and price;·
            Major
      Enterprise Resource Planning (ERP) software vendors, developers and
      integrators such as SAP, Oracle, and JDA, each of which offers ERP
      solutions that currently incorporate supply chain management modules. SAP
      and Oracle are also marketing more aggressively to the
      mid-market;·
            Mid-market
      ERP vendors such as Ross Systems (a division of CDC Corporation) and
      Infor, who also offer supply chain capabilities and will position their
      solutions as offering one-stop shopping to mid-market prospects;
      and·
            Niche
      players for VMI & SLR such as IBM and Market6, respectively, who focus
      exclusively on continuous replenishment planning solutions for
      warehouse and DSD environments.


We
believe our supply chain solutions are designed to address the need of mid-sized
suppliers in the consumer goods industry, including: industry-specific
functionality such as vendor-managed inventory and collaborative planning; the
ability to easily integrate with companies’ existing enterprise resource
planning backbones; and rapid implementation that results in faster return on
investment. We also believe that our domain expertise, our flexible pricing
options, our customer support, and our reputation in the market also provide us
with a competitive advantage.





PRODUCT
DEVELOPMENT AND ENHANCEMENT




All
development of our advanced commerce services and supply chain software is
conducted by an in-house staff that consists of development, quality assurance,
technical writing and technical support personnel. During the year ended
December 31, 2007, we spent approximately $1.15 million on research and
development expenses.




We intend
to continue to make investments in product development and enhancements in order
to improve and extend our services. Growth of our advanced commerce services
requires us to continue to invest in our hardware platform, including additional
servers, enterprise storage systems and additional backup and recovery
capabilities.




Our
supply chain application suite has been designed to meet the needs of mid-market
manufacturers and distributors. These needs include ease of initial
implementation, ease of use by the average worker, and a low cost of maintenance
of the application set over time.




A major
supply chain software release is anticipated once a year, and service packs with
enhancements are provided throughout the year. In addition, our advanced
commerce services have four feature enhancements each year.




Currently,
the dynamic nature of the information technology industry places significant
research and development demands on businesses that desire to remain
competitive. Our future success, particularly our ability to achieve widespread
market adoption, depends on the success of our product development and
enhancement efforts in a timely manner.




PROPRIETARY
RIGHTS




Our
success and ability to compete are dependent upon our ability to develop and
maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely primarily on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our proprietary rights in all
of our products and licensing arrangements in our software products. We have no
patents or pending patent applications. We believe that factors such as the
technological and creative skills of our personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance
are very important to establishing and maintaining a technology leadership
position in our product and service offerings, in addition to the various legal
protections available for our technology.




In the
future, we may receive notice of claims of infringement of other parties’
proprietary rights. Although we do not believe that our products infringe on the
proprietary rights of third parties, there can be no assurance that infringement
or invalidity claims (or claims for indemnification resulting from infringement
claims) will not be asserted or prosecuted against us or that any such
assertions or prosecutions will not materially adversely affect our business,
operating results, or financial condition. Regardless of the validity or the
successful assertion of such claims, defending against such claims could result
in significant costs and diversion of resources with respect to the defense
thereof, which could have a material adverse effect on our business, operating
results, or financial condition. In addition, the assertion of such infringement
claims could result in injunctions preventing us from distributing certain
products or providing certain services, which could have a material adverse
effect on our business, operating results, or financial condition. If any claims
or actions are asserted against us, we may seek to obtain a license to such
intellectual property rights. There can be no assurance, however, that such a
license would be available on reasonable terms, or at all.


-7-
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We
require all of our employees and consultants to enter into non-disclosure and
confidentiality agreements. We seek to protect our software, documentation and
other written materials under trade secret and copyright laws, which afford only
limited protection. We cannot be certain that others will not develop
technologies that are similar or superior to our technology or design around the
copyrights and trade secrets owned by us. We believe, however, that these
measures afford only limited protection. Despite these precautions, it may be
possible for unauthorized parties to copy portions of our products, reverse
engineer, or obtain and use information that we regard as
proprietary.




In our
retailer-centric solutions business, we enter into license agreements with each
of our customers. Each of our license agreements provides for non-exclusive
license of the software. Our license agreements generally allow the use of our
retailer-centric software solely by the customer for internal purposes without
the right to sublicense or transfer the software to third parties. Our contracts
also contain strict confidentiality and non-disclosure provisions, a limited
warranty covering the software and indemnification for the customer from any
infringement action related to the retailer-centric software.




We
believe that the foregoing measures afford only limited protection. Despite our
efforts, it may be possible for third parties to copy certain portions of our
retailer-centric solutions or reverse engineer or obtain and use information
that we regards as proprietary. In addition, the laws of certain countries do
not protect our proprietary rights to the same extent as do the laws of the
United States. Accordingly, there can be no assurance that we will be able to
protect our proprietary retailer-centric software against unauthorized third
party copying or use, which could adversely affect our competitive position.
Policing unauthorized use of our retailer-centric software products is
difficult, and while we are unable to determine the extent to which piracy of
our software exists, software piracy can be expected to be a problem.
Furthermore, there can be no assurance that our competitors will not
independently develop similar technologies to what we offer.




EMPLOYEES




As of
December 31, 2007, we had 39 full-time employees: nine employed in sales and
marketing; 12 employed in technical development; 14 employed in customer
operations and support; and four employed in administration, finance and
accounting. We also had three part-time consultants.




None of
our employees are represented by a labor union. We have experienced no work
stoppages and believe that our employee relations are generally good. In
addition, we utilize consultants, independent contractors, and temporary
employees to meet our staffing needs.




ADDITIONAL
FACTORS THAT MAY AFFECT FUTURE RESULTS




You
should carefully consider these factors that may affect future results, together
with all of the other information included in this Form 10-KSB, in evaluating
our business. The risks and uncertainties described below are those that we
currently believe may materially affect our business and results of operations.
Additional risks and uncertainties that we are unaware of or that we currently
deem immaterial also may become important factors that affect our business and
results of operations.




Keep
these risks in mind when you read “forward-looking” statements elsewhere in this
Form 10-KSB. These are statements that relate to our expectations for future
events and time periods. Generally, the words “anticipate,” “expect,” “intend,”
and similar expressions identify forward-looking statements. Forward-looking
statements involve risks and uncertainties, and future events and circumstances
could differ significantly from those anticipated in the forward-looking
statements. Please see “Special Cautionary Note Regarding Forward-Looking
Statements” above in this Item 1.





We
have only recently achieved profitable operations and we may incur operating
losses in the future, resulting in a deterioration of our cash
position.




Our
existing cash and cash equivalents, expected cash flow from operations, and
available borrowings under a Financing Agreement by and between us and Sand
Hill, dated May 25, 2006 (Financing Agreement), are expected to be
sufficient to meet our projected operating and capital
requirements.  However, in the event we fail to maintain profitable
operations, our cash position will deteriorate. As a result, we may need
additional financing. No assurances can be given that we will continue to
maintain profitable operations in the future, and that funding will be available
when we need it on terms that we find favorable, if at all.





Our
current cost reduction efforts could severely limit our ability to maintain and
grow our business.




Our
current cost reduction efforts place significant demands on management and
operational resources. We may not be able to maintain and grow our business at
current staffing levels. Additionally, the failure to retain the highly trained
technical personnel that are essential to our product development, marketing,
service and support may limit the rate at which we can generate revenue and
develop new products or product enhancements.


-8-
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Our failure
to adequately expand our direct sales force has and will continue to
impede our growth.




We expect
to be substantially dependent on our direct sales force to obtain new customers
and to manage our customer base. We believe that there is significant
competition for direct sales personnel with the advanced sales skills and
technical knowledge we need. Our inability to adequately recruit and retain a
significant sales force has impeded our sales growth, and our ability to achieve
significant growth in revenue in the future will depend, in large part, on our
success in recruiting, training, and retaining sufficient direct sales
personnel. New hires require significant training and may, in some cases, take
more than a year before they achieve full productivity. Our recent hires and
planned hires may not become as productive as we would like, and we may be
unable to hire sufficient numbers of qualified individuals in the future in the
markets where we do business. If we are unable to hire and develop sufficient
numbers of productive sales personnel, sales of our products and services may
suffer.




Our
client base is concentrated and our success depends in part on our ability to
retain existing customers and subscribers.





If one or
more of our major advanced commerce clients were to substantially reduce or
terminate their use of our services, our business, operating results and
financial condition would be harmed, as evidenced by the loss of revenue
associated with one such client which terminated its relationship with us
in the second quarter of 2007.  This client accounted for approximately 6%
of our total revenues in 2007 and 13% in 2006. The amount of our revenue
attributable to specific clients is likely to vary from year to year. We do not
have long-term contractual commitments with any of our current clients, and our
clients may terminate their contracts with little or no advance notice and
without significant penalty. As a result, we cannot be certain that any of our
current clients will be clients in future periods. A client termination would
not only result in lost revenue, but also the loss of client references that are
necessary for securing future clients. For the year ended December 31, 2007,
subscription revenue comprises 62% of our total revenue and approximately 67% of
our subscription revenue was derived from our five largest clients. Our largest
client accounted for approximately 16% of total revenue for year ended December
31, 2007.





We
are dependent upon the operation of an outsourced data center for the timely and
secure delivery of our advanced commerce services.




We
currently contract with Fastech Integrated Solutions LLC (Fastech) to host our
advanced commerce services. We are dependent on a continued relationship with
Fastech, for the timely and secure delivery of our advanced commerce services.
If our outsourced data center fails to meet our expectations in terms of
reliability and security, or if the outsourced data center vendor, as our
largest vendor, withdraws its support, our ability to deliver our advanced
commerce services will be seriously harmed, resulting in the potential loss of
customers and subscription revenue. Furthermore, if our relationship with the
outsourced data center vendor were terminated, or we would otherwise be forced
to find another service provider to host our services, there is no assurance
that any potential new data environment will improve operations or even equal
our current operations. In the process of moving the data environment, our
customers may experience outages in availability to our hosted data environment.
Such outages may result in loss of existing customers, require us to pay damages
and may impact our ability to acquire new customers.




If
our security measures are breached and unauthorized access is obtained to a
customer’s data, our advance commerce services may be perceived as not being
secure and customers may curtail or stop using our service.




Our
advance commerce services involve the storage, analysis, and transmission of
customers’ proprietary information, and security breaches could expose us to a
risk of loss or corruption of this information, litigation, and possible
liability. If our security measures are breached as a result of third-party
action, employee error, malfeasance, or otherwise, and, as a result, an
unauthorized party obtains access to one or more of our customers’ data, our
reputation could be damaged, our business may suffer, and we could incur
significant liability. Because techniques used to obtain unauthorized access or
to sabotage computer systems change frequently and generally are not recognized
until launched against a target, we may be unable to anticipate these techniques
or to implement adequate preventative measures. While we are not aware of any
such breach, if an actual or perceived breach of our security occurs, the
perception by existing or potential customers of the effectiveness of our
security measures could be harmed and we could lose sales and
customers.




The
interests of our controlling stockholders may conflict with our interests and
the interests of our other stockholders.




As of
December 31, 2007, SDS Capital Group SDC LTD and its affiliate, CGA Resources,
LLC and its affiliates, and NewSpring Ventures owned approximately 22%, 17%, and
10%, respectively, of our outstanding common stock on a fully diluted basis. If
our controlling stockholders choose to act together, they may be able to
exercise control over us, including the election of directors and the approval
of actions submitted to our stockholders. In addition, without the consent of
these controlling stockholders, we may be prevented from engaging in
transactions that would be beneficial to our other stockholders. Therefore, the
interests of the controlling stockholders may materially conflict with our
interests and the interest of our other stockholders.





-9-
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We
have an annual limitation on the use of our tax net operating loss carry
forwards.




Due to
the change of ownership resulting from our merger with Prescient Systems, Inc.
on December 31, 2004, we are subject to an annual limitation on the use of
our tax net operating loss carry forwards.




Acquisitions
or other corporate transactions may disrupt or otherwise have a negative impact
on our business.




We may
make acquisitions of complementary companies, technologies, and assets or
otherwise engage in a corporate transaction. Future acquisitions and
transactions are subject to the following risks:





·
            acquisitions
      and other transactions may cause a disruption in our ongoing business,
      distract our management and other resources, and make it difficult to
      maintain our standards, controls, and procedures;·
            we
      may acquire companies in markets in which we have little
      experience;·
            we
      may not be able to successfully integrate the services, products, and
      personnel of any acquisition or other transaction into our
      operations;·
            we
      may be required to incur debt or issue equity securities, which may be
      dilutive to existing stockholders, to pay for any acquisition or other
      transaction;·
            we
      may be exposed to unknown or undisclosed liabilities; and·
            any
      acquisition or other transaction may not result in any return on our
      investment and we may lose our entire investment.


If
our services and software fail to gain market acceptance, our business will be
materially adversely affected.




Virtually
all of our revenue for the foreseeable future will be derived from
implementation fees, subscription revenues, license sales, and related
maintenance and professional fees. We need to generate an increased amount of
revenues from these services. A number of factors will determine whether these
services achieve market acceptance, including:





·
            competitive
      offerings;·
            performance
      and functionality of the services;·
            ease
      of adoption;·
            satisfaction
      of initial subscribers; and·
            success
      of our marketing efforts.


If market
acceptance develops more slowly than expected, or fails to develop at all, our
business, operating results and financial condition will be seriously
damaged.





Our
success is dependent upon a critical mass of leading retailers and suppliers
subscribing to our advanced commerce services.




The
success of our advanced commerce business depends on a significant number of
retailers subscribing to and using these services and linking with
manufacturers, wholesalers and distributors over the Internet (or other
technologies) through our advanced commerce suite of services. We cannot predict
if, or when, a significant number of manufacturers, suppliers and retailers will
subscribe to our services. To encourage purchasers to subscribe to and use our
advanced commerce services, we must offer a broad range of product, price and
promotion information from a large number of suppliers through our advanced
commerce service. However, to attract suppliers to subscribe to our advanced
commerce solutions, we must increase the number of retailers who use our
services. If we are unable to build a critical mass of retailers and suppliers,
we will not be able to benefit from a network effect where the value of our
services to each subscriber significantly increases with the addition of each
new subscriber. Our inability to achieve this network effect would reduce the
overall value of our services to retailers and suppliers and, consequently,
would harm our business.




-10-
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Our
advanced commerce sales cycle causes unpredictable variations in our operating
results.




Our
advanced commerce sales cycle has been and may continue to be unpredictable. Our
sales cycle is also subject to delays because we have little or no control over
customer-specific factors, including customers’ budgetary constraints and
internal acceptance procedures. Consequently, we may spend considerable time and
expense providing information to prospective customers about the use and
benefits of our services without generating corresponding revenue. The length of
the sales pursuit makes it difficult to accurately forecast the quarter in which
implementation and subscription services will occur. This may cause our revenues
from those services to be delayed from the expected quarter to a subsequent
quarter or quarters or to vary from quarter to quarter. Furthermore, we have
little or no control over customer-specific deployment plans, including but not
limited to the expansion of the customer’s trading community. Our future revenue
growth is dependent upon the addition of new customers and the expansion of our
existing customers’ trading communities. As a result, our revenues and results
of operations in any quarter may not meet market expectations or be indicative
of future performance.




We
depend on suppliers for the success and accuracy of our advanced commerce
services.




We depend
on suppliers to subscribe to our advanced commerce services in sufficient and
increasing numbers to make the services attractive to retailers and,
consequently, other suppliers. In order to provide retailers accurate data, we
rely on suppliers to update their item, price and promotion information stored
in the advanced commerce database. We cannot guarantee that the item, price and
promotion information available from our services will always be accurate,
complete and current, or that it will comply with governmental regulations, such
as those relating to pricing alcohol and liquor or nutritional guidelines.
Incorrect information could expose Prescient to liability if it harms users of
our services or results in decreased adoption and use of these
services.




We
expect to face increased competition with our advanced commerce services; if we
are unable to compete successfully, our business will be harmed.




If we
face increased competition with our advanced commerce services, we may not be
able to sell our advanced commerce services on favorable terms. Furthermore,
increased competition could reduce our advanced commerce market share or require
us to reduce the price of our services.




To
achieve market acceptance and thereafter to increase our advanced commerce
market share, we will need to continually develop additional services and
introduce new features and enhancements. Our potential competitors may have
significant advantages over us, including:





·
            significantly
      greater financial, technical and marketing resources;·
            greater
      name recognition;·
            the
      ability to offer a broader range of products and services;
and·
            larger
      customer bases.


Consequently,
if we are unable to compete successfully, our business will be
harmed.




There
can be no assurance that future sales of new supply chain licenses or
subscriptions will increase enough to ensure revenue growth and
profitability.




We have a
history of uneven revenue performance due to the unpredictable nature of our
supply chain software license sales. We also have recently shifted our focus
towards offering our supply chain solutions through a subscription-based model.
There can be no assurance that new supply chain software license sales will ever
increase sufficiently enough for our retailer-centric solutions business to
achieve consistent growth and profitability, or that our focus on offering our
supply chain solutions through a subscription based model will offset the loss
of revenue from license sales.




Our
supply chain solutions are dependent upon the Microsoft platform for our
business rules, which may limit our acceptance by potential
customers.




Our
supply chain solutions are dependent on Microsoft operating systems and PC based
systems to run our business rules. While the solutions can run databases on UNIX
or Linux, it cannot run business rules on these platforms. Therefore, the
inability of our supply chain solutions to run business rules on non-Microsoft
platforms may severely limit our potential customer base.




-11-
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Industry
competitors have licensed our supply chain application code and could develop a
product competitive to our own technology, or partner with an organization that
would offer a more robust solution.




Ross
Systems signed a technology licensing agreement with our predecessor, Prescient
Systems’ on April 21, 2004, under which it licensed application code owned
by Prescient Systems in order to resell and build out a Ross-specific solution
based upon Prescient Systems’ technology. The agreement with Ross included a
non-compete clause that restricted Ross’ ability to compete with Prescient
Systems for one year. Ross is no longer prohibited from selling directly into
our customer base with a competing solution. Therefore, we may have to compete
against solutions provided by Ross that are based on our own technology,
although Ross does not have any rights to any technology developed by us since
April 21, 2004. Ross also has the ability to partner with other providers of
consumer goods industry point solutions, thus rounding out Ross’ ERP solution.
If Ross is able to offer a more robust solution to the consumer goods industry,
there can be no assurance that we will be able to offer comparable
functionality. Therefore, there can be no assurance that we will be able to
compete effectively against Ross.




We
must adapt to technology trends and evolving industry standards to remain
competitive. We may be unable to adapt our offerings to meet the continuing
evolution of the advanced commerce and supply chain markets, or capitalize on
more advanced technology offerings.




The
web-based advanced commerce market is characterized by rapid changes due to
technological innovation, evolving industry standards and changes in customer
needs. Our future success will depend on our ability to continue to develop and
introduce a variety of new services and enhancements that are responsive to
technological change, evolving industry standards and customer requirements on a
timely basis. We cannot be certain that technological developments and products
and services that our competitors introduce will not cause our existing
services, and new technologies in which we invest, to become
obsolete.




The
supply chain market is evolving to include new, more advanced technology
offerings such as RFID (radio frequency identification) for the gathering,
exchange, and analysis of information. As the market continues to evolve,
additional competitors may enter the market and competition may intensify. The
software market is characterized by rapid changes, and is highly competitive
with respect to the need for timely and state-of-the-art product innovation. Our
success, in part, depends on our ability to remain abreast of the latest
technologies and to incorporate new and advanced technologies into our product
offerings. There can be no assurance that we will be sufficiently innovative to
remain competitive.




Our
success is dependent on retaining key personnel.




We are
highly dependent on our president and chief executive officer, Jane F. Hoffer.
The loss of Ms. Hoffer’s services could have a material adverse effect on
our future operations. Our success is also dependent on our ability to attract,
retain, and motivate highly trained technical, marketing, sales, and management
personnel. There is no assurance we will be able to retain our key employees or
that we will be successful in attracting and retaining such personnel in the
future and an inability to do so would materially adversely affect our
business.




Our
stockholders will experience dilution in connection with the exercise of
warrants and stock options, the conversion of our preferred stock, or any
restructuring of our senior securities.




Our
stockholders will experience dilution in connection with the exercise of
warrants and stock options into shares of our common stock, the conversion of
shares of our preferred stock into shares of our common stock, or the
restructuring of any of our outstanding senior securities. As of December 31,
2007 we had:





·
            outstanding
      warrants exercisable into approximately 5.7 million shares of our
      common stock;·
            outstanding
      stock options exercisable into approximately 7.1 million shares of
      our common stock; and·
            outstanding shares of preferred
      stock convertible into approximately 20.8 million shares of our
      common stock.


The sale
of a substantial number of shares of our common stock underlying the above
warrants, options or preferred stock, or even the potential for such sales, or
the restructuring of any of our outstanding senior securities into common stock,
could adversely affect the market price of our common stock and could impair our
ability to raise capital through the sale of equity securities.




-12-
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There
are certain rules applicable to our common stock as a “penny stock,” and those
rules may limit the liquidity and the resale of our common stock.




The SEC
has promulgated rules governing the trading in penny stocks, defined generally
as low-priced (below $5), speculative securities of very small companies. While
penny stocks generally trade over-the-counter, such as on the OTCBB or the Pink
Sheets, they may also trade on securities exchanges, including foreign
securities exchanges. Under these rules, our common stock is currently
classified as a penny stock. As a penny stock, our common stock is currently
subject to rules promulgated by the SEC that impose additional sales practice
requirements on broker-dealers that might sell such securities to persons other
than established customers and institutional accredited investors. For
transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser’s written
consent to the transaction prior to sale. Further, if the price of the stock is
below $5 per share and the issuer does not have $2.0 million or more net
tangible assets or is not listed on a registered national securities exchange,
sales of such stock in the secondary trading market are subject to certain
additional rules promulgated by the SEC. Our common stock is currently subject
to these additional rules. These rules generally require, among other things,
that brokers engaged in secondary trading of penny stocks provide customers with
written disclosure documents, monthly statements of the market value of penny
stocks, disclosure of the bid and asked prices, and disclosure of the
compensation to the broker-dealer and the salesperson working for the
broker-dealer in connection with the transaction. These rules and regulations
may affect the ability of broker-dealers to sell our common stock, thereby
effectively limiting the liquidity of our common stock. These rules may also
adversely affect the ability of persons that acquire our common stock to resell
their securities in any trading market that may exist at the time of such
intended sale. Furthermore, penny stocks, including our common stock, may trade
infrequently, which means that it may be difficult to sell penny stock shares,
including shares of our common stock, once you own them. Investors in penny
stocks, including our common stock, should be prepared for the possibility that
they may lose their whole investment.




Our
common stock price is likely to remain highly volatile.





The
market for stocks of technology companies has been highly volatile over the past
few years. Throughout this period, the market price of our common stock has
experienced significant volatility, and our daily trading volume has been, and
will likely continue to be, highly volatile. Investors may not be able to resell
their shares of our common stock following periods of price or trading volume
volatility because of the market’s adverse reaction to such volatility. Factors
that could cause volatility in our stock price and trading volume, in some cases
regardless of our operating performance, include, among other
things:





·
            general
      economic conditions, including suppressed demand for technology products
      and services;·
            actual
      or anticipated variations in quarterly operating results;·
            announcements
      of technological innovations;·
            new
      products or services;·
            changes
      in the market valuations of other software or technology
      companies;·
            failure
      to meet analysts’ or investors’ expectations;·
            announcements
      by us or our competitors of significant acquisitions, strategic
      partnerships, or joint ventures;·
            our
      cash position and cash commitments;·
            our
      prospects for advance commerce and software sales and new customers;
      and·
            additions
      or departures of key personnel.




-13-
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ITEM 2.
            Description
      of Property





We
currently lease the following facilities under operating leases:





·
            Approximately
      3,500 square feet of space in Dallas, Texas under a lease expiring on
      September 30, 2011. The lease requires monthly rental payments of
      $7,595 which includes customary operating expenses. This location houses
      certain of our development and professional service teams.·
            Approximately
      7,634 square feet of office space in West Chester, Pennsylvania. This
      lease expires April 30, 2010. The lease requires monthly rental
      payments $11,061 subject to customary annual operating expense
      escalations. This location serves as our corporate
      headquarters.


We
believe that our existing facilities are adequate for our current needs and that
additional space will be available as needed.




ITEM 3.
            Legal
      Proceedings





We are
not party to any legal proceedings.




ITEM 4.
            Submission
      of Matters to a Vote of Security
Holders







None.





PART II





ITEM 5.
            Market
      for Registrant’s Common Equity,  Related Stockholder Matters and
      Small Business Issuer Purchases of Equity
  Securities




Our
common stock is quoted on the Over-the-Counter Bulletin Board (OTCBB) under the
symbol PPID.OB. The following table sets forth, for the periods indicated, the
high and low sale prices of our common stock as reported by the OTCBB. These
prices may not be an accurate indicator of the value of our shares. Bid prices
entered by market makers are inter-dealer price quotations and do not reflect
retail markup, markdown or commissions, and may not represent actual
transactions.




Common Stock PriceHigh
            
            
            Low2007:First
      Quarter
            
            $
            .12
            
            
            $
            .06Second
      Quarter
            
            
            .15
            
            
            
            .07Third
      Quarter
            
            
            .14
            
            
            
            .07Fourth
      Quarter
            
            
            .11
            
            
            
            .072006:First
      Quarter
            
            $
            .30
            
            
            $
            .12Second
      Quarter
            
            
            .21
            
            
            
            .15Third
      Quarter
            
            
            .24
            
            
            
            .06Fourth
      Quarter
            
            
            .11
            
            
            
            .04




As of
March 12, 2008, there were approximately 273 holders of record of our
common stock.




DIVIDEND
POLICY




We have
never declared or paid cash dividends on our capital stock and do not intend to
pay cash dividends on our capital stock for the foreseeable future. The
Certificate of Designations for our Series E Preferred Stock prohibit the
payment of dividends on our common stock unless and until all accrued and unpaid
dividends on our Series E Preferred Stock have been paid in full.   We
currently expect to retain any future earnings to fund the operation and
expansion of our business. Any future determination as to the payment of
dividends will be at the discretion of our board of directors.




-14-
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ITEM 6.
            Management’s
      Discussion and Analysis




You
should read the following discussion and analysis of our financial condition and
results of operation in conjunction with the financial statements and related
notes. In addition to historical information, this discussion and analysis
contains forward-looking statements based on current expectations that involve
risks, uncertainties and assumptions. Our actual results and the timing of
events may differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth in the
“Additional Factors That May Affect Future Results” section and elsewhere in
this Form 10-KSB.




This Form
10-KSB contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. Those statements are
therefore entitled to the protection of the safe harbor provisions of these
laws. These forward-looking statements, which are usually accompanied by words
such as “may,” “might,” “will,” “should,” “could,” “intends,” “estimates,”
“predicts,” “potential,” “continue,” “believes,” “anticipates,” “plans,”
“expects” and similar expressions, involve risks and uncertainties, and relate
to, without limitation, statements about our market opportunities, our strategy,
our competition, our projected revenue and expense levels and the adequacy of
our available cash resources. This Form 10-KSB also contains forward-looking
statements attributed to third parties. These statements are only predictions
based on current expectations and projections about future events. There are
important factors that could cause our actual results, level of activity,
performance or achievements to differ materially from those expressed or
forecasted in, or implied by, such forward-looking statements, including those
factors discussed in “Additional Factors That May Affect Future
Results.”




Although
we believe that the expectations reflected in these forward-looking statements
are based upon reasonable assumptions, no assurance can be given that such
expectations will be attained or that any deviations will not be material. In
light of these risks, uncertainties and assumptions, the forward-looking events
and circumstances discussed in this Annual Report may not occur and actual
results could differ materially and adversely from those anticipated or implied
in the forward-looking statements. We disclaim any obligation or undertaking to
disseminate any updates or revision to any forward-looking statement contained
herein to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.





Overview




We were
originally formed in 1985 as Applied Intelligence Group, an Oklahoma
corporation. In 1998, we changed our name to The viaLink Company. In 1999, we
reorganized as a Delaware Corporation. On December 31, 2004, we merged with
Prescient Systems, Inc. (Prescient Systems) and changed our name to Prescient
Applied Intelligence, Inc.




Prescient
Systems was founded in 1982 as Lucas, Bear and Associates, Inc. Prescient
Systems was renamed in 1996, after a management buyout of Lucas, Bear &
Associates, Inc., led by Jane Hoffer, our President and CEO. In 2000, Prescient
Systems acquired Proasis Ltd., a provider of Advanced Planning and Scheduling,
or APS, software based in the United Kingdom. Coupling industry insight with
strategic growth, Ms. Hoffer, Prescient Systems’ CEO since 1996, and her
team evolved Prescient Systems into a premier provider and innovator of
retailer-centric planning and collaboration solutions.




Sources
of Revenue




We derive
our revenue primarily from (i) subscription services; (ii) software
licenses; (iii) maintenance and support and (iv) professional
services. See “Critical Accounting Policies” for a more detailed description of
our revenue recognition policies.




Subscription
Services. We provide our advance commerce hosting solutions to customers
for a monthly fee. Subscription revenue is recognized as the services are
provided to the customer. Monthly service fees are charged to customers based on
negotiated rates in individual contracts.




Software Licenses.
Revenue from software license fees is recognized upon contract execution,
provided delivery has occurred, fees are fixed and determinable, and collection
of the related receivable is deemed probable. Typically, our license fees are
non-refundable. If a software license contains customer-specific acceptance
criteria or a cancellation right, recognition of the software revenue is
deferred until the earlier of customer acceptance or the expiration of the
acceptance period or cancellation right.




Maintenance and
Support. Maintenance revenue includes post-contract customer support and
the rights to unspecified software upgrades and enhancements. Maintenance
revenues, including those sold with an initial license fee, are deferred based
on vendor-specific objective evidence, determined by the renewal rate of the
annual maintenance contract and recognized ratably over the maintenance contract
period, which is typically one year.




-15-
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Professional
Services. Professional services, which include project management,
systems planning, design and implementation, customer configurations and
training, are billed on an hourly basis (time and materials) or under fixed
price contracts. Revenue is recognized as the work is performed. On fixed price
contracts, services revenue is recognized using the proportional performance
method of accounting by relating labor hours incurred to date to total estimated
labor hours. In the event services are billed in advance of work being
performed, the billed amount is initially recorded as deferred services revenue
and recognized as services revenue when the work is performed.




We
generate substantially all of our revenue from within the United States. During
the year ended December 31, 2007 and 2006, approximately 96% and 98%,
respectively, of our total revenue was generated within the United States.
Approximately 4% and 2% of our total revenue was generated from Europe and
Canada in 2007 and 2006, respectively.




Operating
Expenses




We
classify our operating expenses as follows:




Customer Operations and
Support. Customer operations expense consists of personnel costs
associated with implementation, consulting and other services and costs of
operating, maintaining and accessing our technical operations and hosting
facilities. Customer operations expense also includes the cost of providing
support and maintenance to customers.




Development.
Development expense includes personnel and contract labor costs and professional
fees incurred for product development, enhancements, upgrades, quality assurance
and testing.




Selling and
Marketing. Selling and marketing expense consists primarily of personnel
costs, travel, seminars and technical conferences, and limited advertising and
public relations programs.





General and Administrative
(G&A). G&A expense consists primarily of the personnel and other
costs for the administration of our financial and human resources requirements
and the fees and expenses associated with legal, accounting and other
services.




Critical
Accounting Policies




Our
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
generally accepted accounting principles in the United States. The preparation
of our financial statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to valuation allowances for
accounts receivable, deferred income taxes and long-lived assets, certain
accrued expenses, and certain equity instruments valuation. We base these
estimates on historical experience and various other assumptions that we believe
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Our actual results may differ from
these estimates.




We
believe that the following critical accounting policies affect our more
significant estimates and judgments used in the preparation of our consolidated
financial statements:




Revenue Recognition.We
generate revenues from monthly subscriptions to our advance commerce and supply
chain services. Additionally, we generate revenues from the sale of licenses of
our supply chain planning software along with related maintenance revenue. We
also provide professional services to our customers.




Subscriptions
- For use of our subscription advance commerce services, customers pay a flat
monthly subscription rate, a rate based on the number of trading partners and
the size and complexity of the trading relationships, or the dollar volume of
the transactions that go through the advanced commerce engine. Supply chain
subscription services are based on the modules selected, the number of users,
and the number of trading partners with whom our customer does business. Other
services are available for additional monthly subscription fees. Subscription
services are provided by and are resident on our database servers. Customers
gain access to and use our services through means ranging from Internet web
browsers to fully automated batch interfaces imbedded in the customer’s IT
systems. For new advanced commerce transactions, customers are typically charged
an implementation fee ranging from $200 for an on-line implementation to more
than $100,000 for complex supplier and retailer installations. Such fees are
separately priced from the use of advance commerce services on a time and
materials basis and are included in professional services revenue described
below. We have no obligation to perform any future implementation services and
no additional implementation services are necessary upon renewal of the service
by the customer.




-16-
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We
recognize revenues for our subscription services ratably over the term of the
subscription arrangement. Revenues collected in advance are deferred and
recognized as earned. In cases where customers are charged a “per use” fee, we
recognize revenues for subscription fees for customer use of services as these
services are provided. Revenues collected in advance and revenues dependent upon
future performance criteria are deferred and recognized as earned and those
performance criteria are met.




License
and maintenance - Software license revenue is recognized upon shipment of the
software product, where no significant obligations by us exist, the payment is
fixed or determinable, the arrangement is evidenced by an agreement and
collection is probable. Maintenance revenues are recognized ratably over the
maintenance period, in accordance with the terms of the related agreements. We
use the residual method of allocating a portion of the total fee to maintenance
and license fees when both are included in the total contract fee (license and
maintenance).




Professional
services - Professional services revenue is recognized as the services are
performed, based upon the fair value of services performed. A Professional
Services Agreement is a time and materials agreement for services provided by us
for new and existing customers. Professional services performed include
implementation, training, audit assessment, upgrades, and
enhancements.





Allowance for Doubtful Accounts.Our allowance for doubtful accounts relates to trade accounts receivable.
The allowance for doubtful accounts is an estimate prepared by management based
on identification of the collectability of specific accounts and the overall
condition of the receivable portfolios. We specifically analyze individual
customer balances in trade receivables, historical bad debts, customer credit,
customer concentrations, customer credit-worthiness, current economic trends and
changes in customer payment terms when evaluating the adequacy of the allowance
for doubtful accounts. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Likewise, should we determine that it
would be able to realize more of our receivables in the future than previously
estimated, an adjustment to the allowance would increase income in the period
such determination was made. The allowance for doubtful accounts is reviewed on
a quarterly basis and adjustments are recorded as deemed necessary.




Asset Impairment.We review
long-lived assets for impairment in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS
No. 144 required us to identify events or changes in circumstances, which
indicate that the carrying amount of an asset may not be recoverable. If
impairment indicators are present and the estimated future undiscounted cash
flows are less than the carrying value of the long-lived assets, the carrying
value is reduced to the estimated fair value as measured by the discounted cash
flows.




Losses
from operations are one factor that the carrying amounts of any of our
assets may not be recoverable. We performed an analysis comparing estimated
future cash flows to the carrying value of our assets at December 31, 2007. The
analysis did not indicate that impairment exists as of December 31, 2007. The
estimated future cash flows were based upon certain assumptions and are
dependent upon future performance. See “Additional Factors That May Affect
Future Results”for factors that may cause operations to vary from our
estimates. If actual results differ from the estimated future cash flows
impairment may be evident in future periods.




Goodwill and Other Intangible
Assets.Goodwill and other Intangible Assets represent the excess
of costs over fair value of assets of business acquired. Goodwill and intangible
assets acquired in the purchase business combination and determined to have an
indefinite useful life are not amortized, but instead tested for impairment at
least annually in accordance with the provisions of FASB Statement No. 142,
Goodwill and Other Intangible
Assets.Intangible assets with estimable useful lives are amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with FASB Statement No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets.The occurrence of certain events may be
indicators that goodwill is impaired and therefore require us to test for
impairment other than annually.




Determining
fair value of a reporting unit is judgmental in nature and involves the use of
significant estimates and assumptions. These estimates and assumptions include
revenue growth rates and operating margins used to calculate projected future
cash flows, risk-adjusted discount rates, future economic and market conditions
and determination of appropriate market comparables. We base our fair value
estimates on assumptions we believe to be reasonable but that are unpredictable
and inherently uncertain. Actual results may differ from those
estimates.  Our goodwill impairment analysis, which was perfomed as of
December 31, 2007, did not result in an impairment charge.




Stock Based Compensation.We account for stock based compensation under SFAS No. 123R, which
requires that share-based payments be reflected as an expense based upon the
grant-date fair value of those awards. The expense is recognized over the
remaining vesting period of the awards. The Company estimates the fair value of
these awards using the Black-Scholes model. This model requires management to
make certain estimates in the assumptions used in this model, including the
expected term the award will be held, volatility of the underlying common stock,
discount rate and forfeiture rate. We develop our assumptions based on our past
historical trends as well as consider changes for future
expectations.




-17-
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Results
of Operations




Comparison
of 2007 to 2006




Revenues.Our revenues are
comprised of revenues for subscriptions for our advanced commerce solutions, as
well as license, maintenance and services revenues for our retail-centric
solutions. The following table sets forth for the periods indicated the
components of revenue included in our consolidated statements of
operations:




For
      the year endedDecember 31,2007
            
            
            2006Revenues:Subscription
      services
            
            $
            5,830,449
            
            
            $
            5,792,739Licenses
            
            
            595,527
            
            
            
            649,081Maintenance
            
            
            1,592,097
            
            
            
            1,621,330Professional
      services
            
            
            1,385,530
            
            
            
            1,181,075$
            9,403,603
            
            
            $
            9,244,225




Subscription
revenues were $5.8 million in 2007, up slightly from 2006. Continued
subscription revenue growth is dependent upon the number of subscribers to these
services, the number of trading partners with which they are exchanging data
(connections), and upon increasing the number of connections between our
existing customers and adding new customers. The rate at which the connections
increase can vary significantly from one customer to another depending upon each
company’s deployment strategy.   While we experienced growth in
our existing communities in the year ended December 31, 2007, as compared to the
same period in the prior year, and we added new customers during the year, these
increases were largely offset by client cancellations attributable to a single
retail hub.  This retail hub accounted for approximately 10% and 21%
of total subscription revenue for the year ended December 31, 2007 and 2006,
respectively.  Management believes that the loss of revenue as a
result of the cancellation of this retail hub will be at least partially offset
by gains in other business verticals in 2008, specifically the addition of new
clients and the continued expansion of existing clients.




License
revenues decreased 8% to $596,000 as compared to $649,000 in
2006.  The decrease in revenue is principally due to the sale of nine
new licenses in 2007, compared to 12 new licenses in 2006.  License
revenue recognition is dependent upon finalization of new arrangements and is
comprised of perpetual license sales to both new customers and upgrades to
existing customers.   The terms of each new license sale, as well
as the revenue attributable to each license, vary depending on such factors as
the number and type of products sold and permitted number of users.




Maintenance
revenues were $1.6 million in 2007, down slightly from 2006. Maintenance revenue
is primarily associated with new license sales and services performed with
existing accounts.  Maintenance revenue is largely dependent on the
number of new licenses sold during the period.  The slight
decrease in 2007 is the result of the 8% decrease in the number of new
licenses sold during 2007 compared to 2006.




Professional
services revenue, which includes implementation, increased 17% from $1.2 million
in 2006 to $1.4 million in 2007. Professional services revenue mainly results
from new license installation, training, application analysis and custom
enhancements. The increase is due primarily to two large contracts for custom
enhancements completed in 2007, which accounted for approximately $400,000 or
29% of the total professional services revenue in 2007.




Customer Operations and Support.Customer operations and support expense consists of personnel costs
associated with implementation, consulting and other services and costs of
operating, maintaining and accessing technical operations and hosting facilities
in support of our advance commerce offerings. Customer operations and support
expense also includes the cost of providing support and maintenance to
customers. Our customer operations and support expense decreased to $2.7 million
in 2007, as compared to $3.5 million in 2006. The decrease is due primarily to
reductions in personnel costs of $222,000 resulting from a decrease in headcount
from 17 at December 31, 2006 to 14 at December 31, 2007, and decreased data
center costs of $508,000, offset by increases of $30,000 in maintenance
agreements, $24,000 in hosting expenses, and $11,000 in equipment rentals
related to the transition of the HP data center to Fastech in August
2006.




Development.Development
expense includes personnel and professional fees incurred for product
development, enhancements, upgrades, and quality assurance and testing across
both advanced commerce and supply chain product offerings. Our development
expenses decreased to $1.2 million in 2007 as compared to $1.4 million in 2006.
The decrease is due primarily to reductions in personnel costs of $219,000,
offset by an increase of $14,000 in communication costs.




-18-
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Selling and Marketing.Selling and marketing expense consists primarily of personnel costs,
travel, sales lead generation fees, public relations fees, seminars and
conferences. Selling and marketing expense decreased to $1.8 million in 2007, as
compared to $2.0 million in 2006. The decrease in 2007 is principally
attributable to decreases in the following: personnel costs of $99,000, travel
expenses of $68,000, and marketing expenses of $69,000.  We currently
 intend to add sales staff in 2008 and, therefore, anticipate an increase
in our selling and marketing expenses in 2008 compared to 2007.





General and Administrative.G&A expense consists primarily of the personnel and other costs for
the administration of our financial, human resources and executive requirements,
and the fees and expenses associated with legal, accounting and other services.
G&A expense decreased to $2.0 million in 2007, as compared to $3.1 million
in 2006. This decrease is due to a decrease in bad debt expense of $140,000,
decreases in legal and accounting fees of $247,000, workers compensation of
$41,000, and communication charges of $61,000. Further decreases include
$226,000 in personnel costs, $133,000 in office rent, and reduction in
stock-based compensation expense of $96,000.




Depreciation and Amortization.Depreciation and amortization expense decreased to $472,000 in 2007 as
compared to $506,000 in 2006. Depreciation of property plant and equipment
increased $10,000 while amortization expense decreased $44,000 due to the full
amortization in 2006 of certain intangible assets recorded in 2004 related to
our merger with Prescient Systems, Inc. (Merger).




Other Income (Expense).We recorded interest expense of $258,000 and $91,000 in 2007 and 2006,
respectively, related to a promissory note issued to Tak Investments, LLC (Tak),
a former affiliate and supplier of ours, pursuant to a Settlement Agreement
between us and Tak in July 2006 (Tak Note). The interest expense paid to Tak
includes payments required under the terms of the Tak Note through December 31,
2007, plus amortization of the warrant issued to Tak under the terms of the
Settlement Agreement, which was recorded as a discount on the Tak Note payable,
and is being amortized to interest expense over the term of the Tak Note.
Additional interest in the amount of $3,000 was paid to Sand Hill Finance, LLC
(Sand Hill) in 2007 as compared to $26,000 in 2006, in conjunction with a
Financing Agreement we entered into with Sand Hill, dated May 25, 2006
(Financing Agreement).  We also paid interest of $5,000 in both 2007
and 2006 related to financing our director’s and officers’ insurance
policy.




Accrued
damages to stockholders in the amount of $45,000 in 2006 represents
contractually obligated penalty payments arising from registration rights
agreements with certain preferred stockholders.  There were no such
accruals in the current period.




Tax provision.   For the
year ended December 31, 2007, we had a taxable profit that was offset by
previously unrecognized Federal and state tax loss carryforwards.  However,
the Federal alternative minimum tax system imposes an overall 90% limitation on
the amount of tax loss carryforwards that can be utilized to reduce taxable
income in any given year.  As a result of these limitations, we were
subject to the Federal alternative minimum tax on approximately 10% of taxable
income and recorded an income tax provision
of $29,071.





Deemed Dividend on Series E
Preferred Stock. In connection with the conversion price reset provision
of our Series E Preferred Stock, we recorded a non-cash charge of $1.2 million
and $359,000 in 2007 and 2006, respectively, that represented the deemed
dividend relating to the intrinsic value of the beneficial conversion feature of
the preferred stock (see Note 10 in the Notes to Consolidated Financial
Statements).





Liquidity
and Capital Resources




Our
principal sources of liquidity are cash on hand and cash generated from current
operations. As of December 31, 2007, we had cash and cash equivalents of $2.6
million, which, together with expected cash flow from operations, are expected
to be sufficient to meet our operating and capital requirements for the next 12
months.  We have incurred operating losses and negative cash flow in
the past, however, and may incur operating losses in the future.  In
addition, spending is anticipated to increase in the future for further
technology and product development and other technology and database costs, and
due to an expected increase in the number of sales
personnel.   As a result, our cash and cash equivalents may
decrease in subsequent periods.  Management continues to be focused on
achieving positive cash flow from operations by carefully managing expenses, and
pursuing sales efforts with (a) new retailers to create new communities,
(b) small to medium size suppliers for the use of the supply chain software
and (c) suppliers that will become subscribers to our advanced commerce
services within existing and new hub communities.





During the year ended December 31,
2007, $2.0 million was provided by our operating activities. Cash provided by
operating activities during 2007 reflects a net income of $1.0 million which
includes non cash items such as, $472,000 of depreciation and amortization,
non-cash compensation expense of $205,000, and $18,000 provision for doubtful
accounts.  Other primary provisions of cash include an increase in
accounts payable and accrued liabilities of $86,000 and a decrease in accounts
receivable of $183,000 due to improved collection efforts during the
year.




During
the year ended December 31, 2007, approximately $89,000 was used in our
investing activities reflecting capital expenditures.




-19-
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Our
Financing Agreement with Sand Hill allows us to assign certain accounts
receivable to Sand Hill and for Sand Hill to advance up to $1.0 million to us in
contemplation of the collection of those accounts receivable. As of December 31,
2007, no amounts were owed to Sand Hill under the terms of the Financing
Agreement. Sand Hill is entitled to full recourse against us for any uncollected
accounts. Accordingly, the Financing Agreement is accounted for as a debt
instrument collateralized by accounts receivable. The Financing Agreement has an
initial term of one year with automatic renewals on an annual basis, but either
party may terminate it at any time upon notice to the other.




Advances
made under the Financing Agreement are subject to finance charges, an annual
facility fee and other administrative charges. The finance charge is paid on a
monthly basis and equals 1.9% on the net outstanding account balance for the
month, calculated on a daily basis. The annual facility fee currently equals
$10,000 of which $5,000 is paid and we will not be required to pay the balance
of the fee until our obligations under the Financing Agreement exceed $500,000.
We will also be charged certain administrative fees for wire transfers and
returned checks for insufficient funds in connection with collection of our
accounts receivable.




On
July 31, 2006, we entered into the Settlement with Tak. Under the terms of
the Settlement Agreement, we issued a three year secured promissory note, in the
principal amount of $2,558,348 that bears interest at the prime rate plus 2%
(9.25% at December 31, 2007).  The Tak Note is payable in monthly
payments of $30,000, which includes interest, with the remaining amounts of
principal and interest, equal to approximately $2,152,000, due in August
2009.  The Tak Note has an outstanding principal balance, net of the
debt discount, of $2,398,000 at December 31, 2007. A loss of $1.2 million is
included in our consolidated statements of operations for the year ended
December 31, 2006, resulting from the recognition of costs and fees, reversal of
certain accruals and the effect of recapitalization related to this settlement.
(See Note 7 in the Notes to Consolidated Financial Statements for further
details regarding the Settlement Agreement).




Set forth
below is a summary of our current obligations as of December 31, 2007 to make
future payments due by the period indicated below, excluding payables and
accruals.




Total
            
            
            Within 1 year
            
            
            2
      - 3 years
            
            
            4
      - 5 yearsContractual
      ObligationsRental
      lease obligations
            
            $
            656,000
            
            
            $
            224,000
            
            
            $
            364,000
            
            
            $
            68,000Equipment
      lease obligations
            
            
            362,000
            
            
            
            136,000
            
            
            
            226,000
            
            
            
            -Obligations
      in connection with Fastech data center
            
            
            732,000
            
            
            
            477,000
            
            
            
            255,000
            
            
            
            -Obligations
      in connection with Tak Promissory Note(1)
            
            
            2,722,000
            
            
            
            360,000
            
            
            
            2,362,000
            
            
            
            -$
            4,472,000
            
            
            $
            1,197,000
            
            
            $
            3,207,000
            
            
            $
            68,000




(1)
            Includes interest payable
      to August 2009.




Off
Balance Sheet Agreements
  As
of December 31, 2007, we did not have any relationships with unconsolidated
entities or financial partners, such as entities often referred to as structured
finance or special purpose entities, that had been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.  As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged
in such relationships.
  Recently
Issued Accounting Pronouncements




In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities", which includes an amendment
to FASB Statement No. 115 (SFAS 159).  SFAS 159 permits entities
to choose, at specified election dates, to measure eligible financial assets and
financial liabilities at fair value (referred to as the “fair value option) and
report associated unrealized gains and losses in earnings. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. We do not expect SFAS
159 to have a material effect on our financial position or results of
operations.




In
September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”(SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements.
Accordingly, SFAS 157 does not require any new fair value measurements. However,
for some entities, the application of SFAS 157 will change current practice.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The future implementation of SFAS 157 is not
expected to have a significant effect on our financial statements.





ITEM 7.
            Financial
      Statements




See Index
to Financial Statements on Page F-1 of this Annual Report on Form
10-KSB.




ITEM 8.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure





None.


-20-
 Table of Contents





ITEM8A(T).
            Controls
      and Procedures




Disclosure Controls and
Procedures.





An
evaluation of the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of
1934) was carried out by us under the supervision and with the participation of
our President, who serves as our principal executive officer, and our Interim
Chief Financial Officer, who serves as our principal financial
officer.  Based upon that evaluation, they concluded that as of
December 31, 2007, our disclosure controls and procedures were effective to
ensure (i) that information we are required to disclose in reports that we file
or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms and (ii) that such information is accumulated and communicated to
management, including our president, in order to allow timely decisions
regarding required disclosure.





Management’s Report on Internal
Control over Financial Reporting.





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) of the Securities
Exchange Act of 1934.  Our internal control system was designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial reporting and the preparation of financial
statements for external purposes, in accordance with generally accepted
accounting principles.  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 the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.





Our
management, including our President, who serves as our principal executive
officer, and our Interim Chief Financial Officer, who serves as our principal
financial officer, conducted an evaluation of the effectiveness of internal
control over financial reporting using the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission in Internal Control –
Integrated Framework.  Based on its evaluation, our management
concluded that our internal control over financial reporting was effective as of
December 31, 2007.





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





There
have not been any changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act )
that occurred during the fiscal quarter ended December 31, 2007 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.





This
report shall not be deemed to be filed for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liabilities of that
section, and is not incorporated by reference into any filing of the Company,
whether made before or after the date hereof, regardless of any general
incorporation language in such filing.





Changes
in Internal Control Over Financial Reporting




During
our last fiscal quarter of 2007, there was no change in our internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.





ITEM8B.
            Other
      Information




None.




PART III




ITEM9.
            Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(a) of the Exchange
  Act







-21-
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Directors
and Executive Officers




The
following table sets forth information concerning our executive officers and
directors as of December 31, 2007:




Name
            
            
            Age
            
            PositionJane
      F. Hoffer
            
            
            
            42
            
            Chief
      Executive Officer and DirectorDaniel
      W. Rumsey
            
            
            
            46
            
            Interim
      Chief Financial Officer, Chairman of the Board of
  DirectorsPatrick
      L. Kiernan
            
            
            
            63
            
            DirectorMichael
      A. DiPiano
            
            
            
            49
            
            DirectorWarren
      D. Jones
            
            
            
            65
            
            DirectorMary
      Lou Fox
            
            
            
            65
            
            Director




Jane F. Hoffer has served as
our Chief Executive Officer and as a member of our board of directors since
December 2004, following her appointment in connection with the merger between
our predecessor, The viaLink Company and Prescient Systems on December 31,
2004. Ms. Hoffer previously served as President, Chief Executive Officer
and a member of the board of directors of Prescient Systems. Ms. Hoffer
founded Prescient Systems, Inc. having led the management buyout from Lucas,
Bear and Associates, Inc. in December 1996. From 1994 to 1996, she served as
Chief Executive Officer of Lucas, Bear and Associates, Inc. Ms. Hoffer was
elected to the Albert Einstein Healthcare Network, a private not-for-profit
company in July 2002 and was elected to the Board of Trustees in July 2003 and
still serves as a trustee.




Daniel W. Rumsey has served
as Chairman of our board of directors since December 2004, following his
election in connection with the merger between our predecessor, The viaLink
Company and Prescient Systems on December 31, 2004. Following the
resignation of our Chief Financial Officer in November 2006, Mr. Rumsey
assumed the responsibility of Interim Chief Financial Officer. He is currently
the Chief Executive Officer and Chairman of the Board of Directors of Azzurra
Holding Corporation, a public company which recently emerged from Chapter 11 of
the U.S. Bankruptcy Code. From 2003 to March 2006, Mr. Rumsey held various
other positions at Azzurra Holding Corporation including Vice President, General
Counsel and Secretary, Chief Financial Officer and Acting Chief Executive
Officer. From 2000 to 2002, Mr. Rumsey was Vice President and General
Counsel of Knowledge Kids Network, Inc., a multi-media education company. Prior
to joining Knowledge Kids Network, Inc., Mr. Rumsey was the President and
General Counsel of Aspen Learning Systems and NextSchool, Inc., which he joined
in February 1997. Mr. Rumsey sold Aspen Learning Systems and NextSchool to
Knowledge Kids Network in 1999. Mr. Rumsey has an extensive legal and
finance background, dating back to 1987 when he served as a staff attorney in
the SEC’s Division of Corporation Finance. In addition to serving on the Board
of Directors of Azzurra Holding Corporation, Mr. Rumsey serves on the board
of directors of World Racing Group, Inc. and XELR8 Holdings, Inc.




Patrick L. Kiernan has served
as a member of our board of directors since January 2004. Mr. Kiernan
currently serves as the President of Day/Kiernan & Associates, a
consulting group focused on growth strategies and emerging issues with an
emphasis on consumer future forces, customized education programs, and trade
policy development, were he has served since 1998. Mr. Kiernan is a
contributing editor writing for Grocery Headquarters Magazine, serves on the
staff of Saint Joseph’s University Center for Food Marketing, The Council of
Logistics Management Research Strategies Committee, and is a research affiliate
with the Institute for the Future.




Michael A. DiPiano has served
as a member of our board of directors since December 2004, following his
election in connection with the merger between our predecessor, The viaLink
Company and Prescient Systems on December 31, 2004. Mr. DiPiano is the
Managing Partner of NewSpring Capital and has served in that capacity since,
2001. From 1998 to 2004, he was Chairman of Maxwell Systems, a venture-funded
e-commerce and software company during which time he also co-founded four
additional venture backed startups, including MessageLink, HR Division, Alliance
One, and Vytek Wireless. From 1996 until 1998, Mr. DiPiano was affiliated
with Safeguard Scientifics, Inc. and its related venture funds, serving in
high-level management positions, and working on investment matters with several
of their wireless and IT related companies. He is currently a director of
Nutrisystem, Inc. (Nasdaq: NTRI). He is also a director of a number of private
companies including Ecount and FemmePharma. Mr. DiPiano is also a director
of the University City Science Center.




Warren D. Jones has served as
a member of our board of directors since December 1999. From September 2001
until August 2002, he served as our interim Chief Executive Officer. Prior to
his retirement, Mr. Jones spent 31 years at PricewaterhouseCoopers LLP
where he served as managing partner in New Orleans and Pittsburgh, and most
recently was responsible for risk management and compliance for the firm’s
Southwest region technology, telecommunications and entertainment
customers.




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Mary Lou Fox has served as a
member of our board of directors since December 2004, following her election in
connection with the merger between our predecessor, The viaLink Company and
Prescient Systems on December 31, 2004. She previously served as a director
of Prescient Systems from August 2001 until the completion of the merger in
December 2004. Ms. Fox is currently President of Fox Supply Chain
Consulting and has served in that capacity since 2001. Ms. Fox is a
recognized expert in supply chain management and has broad experience in the
software and services industry. Her career at Manugistics spanned the growth of
Manugistics from the beginning of its supply chain business through 1999, where
Ms. Fox built the consulting services business as well as serving in
executive positions in marketing and product development. Ms. Fox was chief
operating officer at NextLinx, a global trade software company, from January
2000 to January 2001.




Executive
officers are appointed by our board of directors and serve until their
successors have been duly elected and qualified. There are no family
relationships among any of our directors or executive officers.




Board
Committees




Our board
of directors has an audit committee, a compensation committee and a nominating
and governance committee. A majority of our board members meet the criteria for
independence under Nasdaq Marketplace Rule 4200(a)(15)(B).




Audit Committee. We have
established a standing audit committee in accordance with 3(a)(58)(A) of the
Exchange Act that makes recommendations to our board of directors regarding the
selection of an independent registered public accounting firm, reviews the
results and scope of our audits and other accounting-related services and
reviews and evaluates our internal control functions. Our audit committee is
comprised of Messrs. Jones (Chair) and Kiernan. Our board of directors has
determined that Mr. Jones is an “audit committee financial expert” as currently
defined under the SEC rules implementing Section 407 of SOX.




Compensation Committee. We
have a standing compensation committee that reviews and makes recommendations to
our board of directors concerning salaries and incentive compensation for our
officers and employees. Our compensation committee also administers the 2007
Equity Incentive Plan. Our compensation committee is currently comprised
entirely of directors, each of whom is (a) “independent” as defined by the
listing standards of The Nasdaq Stock Market, (b) a “non-employee director”
as defined in Rule 16b-3 of the Exchange Act and (c) an “outside director”
as defined for the purposes of Section 162(m) of the Internal Revenue Code.
The members of the compensation committee are Ms. Fox and Mr. Kiernan
(Chair).




Nominating and Governance
Committee. Our nominating and governance committee is responsible for the
recommendation of the criteria for the selection of board members and assisting
our board of directors in identifying candidates. Our nominating and governance
committee is currently composed entirely of independent directors that are
“independent” as defined by the listing standards of The Nasdaq Stock Market.
Our nominating and governance committee is comprised of Messrs. Kiernan (Chair)
and Fox.




Section 16(a)
Beneficial Ownership Reporting Compliance




Section 16(a)
of the Exchange Act requires our executive officers and directors and any
persons who beneficially own more than 10% of our common stock (collectively,
Reporting Persons) to file reports of ownership and changes in ownership with
the SEC. Reporting Persons are required by SEC regulations to furnish us with
copies of all Section 16(a) forms they file.




Based
solely on our review of the copies of any Section 16(a) forms received by
us or written representations from the Reporting Persons, we believe that with
respect to the fiscal year ended December 31, 2007, all the Reporting Persons
complied with all applicable filing requirements.




Code
of Ethics




We have
adopted a Code of Ethics that applies to all of our directors, officers and
employees and meets the requirements of the SEC’s rules and regulations. Our
Code of Ethics is available on our website, www.prescient.com, or can be
obtained without charge by a written request addressed to the Secretary,
Prescient Applied Intelligence, Inc., 1247 Ward Avenue, West Chester,
Pennsylvania 19380. We do not anticipate making amendments to or waivers from
the provisions of our Code of Ethics. If we make any amendments to our Code of
Ethics, or if our board of directors grants any waiver from a provision thereof
for our principal executive officer, our principal financial officer, our
principal accounting officers, or controller, we will disclose the nature of
such amendment or waiver, the name of the person(s) to whom the waiver was
granted and the date of the amendment or waiver on our internet
website.




-23-
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ITEM10.
            Executive
      Compensation





The following section sets forth
summary information concerning the compensation paid to our executive officers
and directors during 2007.




SUMMARY
COMPENSATION TABLE




The
following table sets forth certain information about the compensation paid or
accrued during the last two fiscal years to our Chief Executive Officer
and our Interim Chief Financial Officer, the only other executive
officer who was serving at December 31, 2007, whose total compensation exceeded
$100,000 in any of the last two fiscal years.




Name
      and Principal Position
              
              Year
              
              Salary ($)
              
              Bonus ($)
              
              Option Awards
      ($)(1)
              
              All
      Other Compensation ($)
              
              Total
      ($)Jane
      Hoffer
              
              2007
              
              
              235,385
              
              
              
              11,317
              (2)
              
              
              9,750
              (3)
              
              256,452President
      and Chief Executive Officer
              
              2006
              
              
              214,615
              
              
              37,500
              (4)
              
              122,743
              (2)
              
              
              6,000
              (3)
              
              
              
              380,858Daniel
      W. Rumsey(5)
              
              2007
              
              
              
              
              
              
              
              
              30,931
              (6)
              
              
              120,000
              (5)
              
              
              
              150,931
              (5)Chairman
      and Interim Chief Financial Officer
              
              2006
              
              
              
              
              
              
              
              
              20,085
              (6)
              
              
              28,000
              (5)
              
              
              
              48,085
              (5)


(1)
            The value for Option Awards in
      the table above represents the dollar amount recognized for financial
      reporting purposes for each respective year in accordance with Statement
      of Financial Accounting Standards No. 123R, Accounting for
      Stock-Based Compensation, (SFAS 123R). The dollar amount for each named
      executive officer varies depending on the number of options held, the fair
      value of such options, and the vesting terms of such options. See Note 9
      of Notes to Consolidated Financial Statements for the year ended December
      31, 2007 for information on the assumptions used to calculate the grant
      date fair value of Option Awards and the expense recognized under SFAS
      123R.


(2)
                Ms. Hoffer was granted
      options to purchase 250,000 shares of common stock during 2007, of which
      83,333 will vest on September 26, 2008, and 6,945 will vest on October 26,
      2008, and on the 26thof each month thereafter until
      fully vested. During 2006, Ms. Hoffer was granted 600,000 options, of
      which 349,992 vested on March 3, 2006, and 16,668 vested on
      March 26, 2006, and on the 26thof each month thereafter until
      fully vested.
 (3)
                Represents
      an automobile allowance paid to Ms. Hoffer of $6,000, in each of 2007 and
      2006, and an employer contribution to Ms. Hoffer under the Company's
      401(k) Profit Sharing Plan, in
2007.
 (4)
                  Ms. Hoffer’s bonus resulted from
      the consummation of the merger of the Company and The viaLink Company on
      December 31, 2004, which was paid partially in 2005 with the
      remaining amount paid in
2006.





(5)
            Mr. Rumsey currently serves
      as our Chairman, Interim Chief Financial Officer and
      Secretary.  Mr. Rumsey is paid $10,000 per month in his capacity
      as Interim Chief Financial Officer.   Amounts paid to Mr.
      Rumsey in 2007 and 2006 include $15,000 and $18,000, respectively, as
      compensation for serving on our board of
  directors.




(6)
            Mr. Rumsey
      was granted options to purchase 634,921 shares of common stock during
      2007, of which 277,778 vested on May 1, 2007, and 357,143 will vest on May
      1, 2008.




OUTSTANDING
      EQUITY AWARDS AT DECEMBER 31, 2007




The
following table sets forth information regarding unexercised options for
each of the named executive officers as of December 31, 2007.


-24-
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Option
      AwardsName
              
              Number
      ofSecurities
                UnderlyingUnexercised
                Options(#)
              
              Number
      ofSecurities
                UnderlyingUnexercised
                Options(#)
              
              OptionExercisePrice($)
              
              OptionExpirationDateExercisable
              UnexercisableJane
      Hoffer
              
              222,599
              
              -
              
              $1.00
              
              7/24/121,200,000
              
              -
              
              0.21
              
              5/26/14-
              
              250,000
              
              0.07
              
              9/26/17Daniel
      W. Rumsey
              
              119,048
              
              -
              
              0.21
              
              12/09/15277,778
              
              -
              
              0.09
              
              05/01/16-
              
              357,143
              
              0.07
              
              05/01/17
  DIRECTOR
COMPENSATION




Effective
May 3, 2005, we approved a compensation program that provides for our
non-employee directors to be paid $3,000 quarterly for service on our board of
directors and $1,000 for every audit committee meeting attended. We also
reimburse our directors for any out-of-pocket expenses and additional fees
incurred in attending meetings of our board of directors and committees thereof
on which such directors serve.




Each of
our non-employee directors are also entitled to receive annual grants of stock
options to purchase the number of shares equal to $25,000 divided by the fair
market value of our common stock on the date of grant. Such options generally
vest one year after grant.




The
following table sets forth information concerning the compensation of our
directors during the last completed fiscal year:


Name
              
              Fees Earned orPaid in Cash($)
              
              Option Awards
      ($)(1)
              
              All
      OtherCompensation($)
              
              Total($)Daniel
      W. Rumsey
              
              15,000
              
              30,931(2)
              
              105,000(3)
              
              150,931Warren
      Jones
              
              16,000
              
              30,931(4)
              
              
              
              46,931Mary
      Lou Fox
              
              12,000
              
              30,931(5)
              
              
              
              42,931Patrick
      Kiernan
              
              13,000
              
              30,931(6)
              
              
              
              43,931Mike
      DiPiano
              
              12,000
              
              30,931(7)
              
              
              
              42,931


(1)
              The
      value for Option Awards in the table above represents the dollar amount
      recognized for financial reporting purposes for 2007, in accordance with
      Statement of Financial Accounting Standards No. 123R, Accounting for
      Stock-Based Compensation, (SFAS 123R). The dollar amount for each named
      executive officer varies depending on the number of options held, the fair
      value of such options, and the vesting terms of such options. See Note 9
      of Notes to Consolidated Financial Statements for the year ended December
      31, 2007 for information on the assumptions used to calculate the grant
      date fair value of Option Awards and the expense recognized under SFAS
      123R.
 (2)
                  As
      of December 31, 2007, Mr. Rumsey owned options to
      purchase 753,969 shares of commons
stock.
  (3)
                Mr. Rumsey was paid $10,000
      per month for providing consulting services to the Company as Interim
      Chief Financial Officer during
2007.
 (4)
              As
      of December 31, 2007, Mr. Jones owned options to purchase 786,869
      shares of commons stock.
  (5)
              As
      of December 31, 2007, Ms. Fox owned options to purchase 783,649
      shares of commons stock.
  (6)
              As
      of December 31, 2007, Mr. Kiernan owned options to purchase 753,969 shares
      of commons stock.
  (7)
              As
      of December 31, 2007, Mr. DiPiano owned options to purchase 753,969
      shares of commons stock




Employment
Agreements




On
December 8, 2005, we entered into employment agreements with Jane F.
Hoffer, our Chief Executive Officer.   Ms. Hoffer's employment
agreement terminated on December 31, 2007.  We are currently negotiating a
new agreement with Ms. Hoffer.




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ITEM11.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters





Equity
Compensation Plan Information (as of December 31, 2007)




Our
stockholders have approved all of the equity compensation plans pursuant to
which we are currently granting equity awards.




(a)
                Number of securities
      to be issued upon exercise
                of
      outstanding options,
                warrants
      and rights
              
              
              (b)
                Weighted average exercise
                price
      of outstanding
                options, warrants
      and
                rights
              
              
              (c)
                Number of securities
                remaining
      available
                for
      future issuance
                under
      equity
                compensation
      plans
                (excluding
      securities
                reflected
      in column
                (a))
      (1)Equity
      compensation plans approved by security holdersStock
      options
              
              7,066,093
              
              $
              0.72
              
              
              3,380,935Restricted
      stock(2)
              
              273,581
              
              $
              0.07
              
              
              -Equity
      compensation plans not approved by security holders
              
              -
              
              
              -
              
              
              -Total
              
              7,339,674
              
              
              
              
              
              3,380,935


(1)
            On
      September 26, 2007, the shareholders approved the 2007 Equity Incentive
      Plan (2007 Plan) which replaced the 1999 Stock Option Plan/Stock Issuance
      Plan (1999 Plan). The aggregate number of shares of common stock that may
      be issued under the 2007 Plan pursuant to all types of awards shall not
      exceed 6,065,674 which includes, 65,674 shares which remained for issuance
      under the 1999 Plan. In addition, 4,654,935 options previously granted
      under the 1999 Plan also remain outstanding until they are either
      exercised of forfeited.





(2)
            Awards
      of restricted stock may be granted under the 2007 Plan and may or may not
      be subject to vesting.  Vesting shall incur in full installments
      upon satisfaction of the conditions specified in the restricted stock
      agreement.




Security
Ownership of Certain Beneficial Owners and Management




The
following table sets forth information known to us with respect to beneficial
ownership of our common stock, our Series E Convertible Preferred Stock and our
Series G Convertible Preferred Stock, as of March 12, 2008by:





·
            each
      person, or group of affiliated persons, known by us to own beneficially
      more than 5% of our outstanding common stock, Series E Convertible
      Preferred Stock and Series G Convertible Preferred Stock;·
            each
      of our directors;·
            each
      of our named executive officers; and·
            all
      of our current executive officers and directors as a group.


Beneficial
ownership is determined in accordance with the rules of the SEC. Shares of our
common stock subject to options, warrants or other derivative instruments, such
as convertible preferred stock, currently exercisable or exercisable within 60
days of March 12, 2008are deemed to be
outstanding for calculating the percentage of outstanding shares of the person
holding these options, warrants or other derivative instruments, but are not
deemed outstanding for calculating the percentage of any other person.
Percentage of beneficial ownership is based upon (i) 33,600,251 shares of our
common stock outstanding, (ii) 1,657 shares of our Series E Convertible
Preferred Stock outstanding and (iii) 480 shares of our Series G
Convertible Preferred Stock outstanding as of March 12, 2008, as the case
may be. To our knowledge, except as set forth in the footnotes to this table and
subject to applicable community property laws, each person named in the table
below has sole voting and investment power with respect to the shares set forth
opposite such person’s name. Except as otherwise indicated, the address of each
of the persons in this table is c/o Prescient Applied Intelligence, Inc.,
1247 Ward Avenue, West Chester, Pennsylvania 19380.


-26-
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Common
      Stock
            
            Series
      E Convertible Preferred Stock (1)
            
            Series
      G Convertible Preferred Stock (2)Number
            
            Percent
      of Class Outstanding
            
            Number
            
            Percent
      of Class Outstanding
            
            Number
            
            Percent
      of Class OutstandingDirectors
      and Named Executive Officers:Jane
      F. Hoffer
            2,064,961(3)
            
            5.89%Warren
      D. Jones
            439,726
      (4)
            
            1.29%Patrick
      Kiernan
            420,176(5)
            
            1.24%Michael
      A. DiPiano
            4,450,392(5)(6)(10)
            
            13.23%Daniel
      W. Rumsey
            396,826(5)
            
            1.17%Mary
      Lou Fox
            430,706
      (7)
            
            1.27%Directors
      and Executive officers as a Group (6 persons)
            8,202,787
            
            22.10%5%
      Stockholders:SDS
      Capital Group SPC LTD (including Merchant Fund)
            5,731,743
      (8)
            
            17.06%
            
            383
            
            23%
            
            237
            
            49%CGA
      Resources, LLC
            3,356,665
      (9)
            
            9.99%
            
            460
            
            28%
            
            222
            
            46%New
      Spring Ventures
            4,053,566
      (10)
            
            12.06%
            
            274
            
            17%
            
            21
            
            4%Hudson
      Ventures
            3,356,665
      (11)
            
            9.99%
            
            205
            
            12%*
      Less than 1%







(1)
            The holder of each share of our
      Series E Convertible Preferred Stock shall be entitled to vote such
      number of shares of common stock into which such share of Series E
      Convertible Preferred Stock could be converted for purposes of determining
      the shares of our common stock entitled to vote at any regular, annual or
      special meeting of our stockholders, and shall have voting rights and
      powers equal to the voting rights and powers of our common stock. The
      holders of our Series E Convertible Preferred Stock also have separate
      class voting rights with respect to certain actions proposed to be taken
      by us. Each share of our Series E Convertible Preferred Stock is
      convertible into 5,955 shares of our common stock, subject to
      anti-dilution provisions. However, a holder of shares of our Series E
      Convertible Preferred Stock may not convert such shares of Series E
      Convertible Preferred Stock into shares of our common stock if the number
      of shares of our common stock to be issued pursuant to such conversion
      would cause, when aggregated with all other shares of our common stock
      owned by such holder at such time, such holder to beneficially own in
      excess of 9.99% of the then issued and outstanding shares of our common
      stock. Such holder of shares of our Series E Convertible Preferred Stock
      may elect to convert such shares of our Series E Convertible Preferred
      Stock into greater than 9.99% of all the then outstanding shares of our
      common stock by giving to us 61 days advance notice of its intention to do
      so.




(2)
            Our holders of Series G
      Convertible Preferred Stock shall be entitled to vote as a separate class
      on matters that affect their share ownership in our equity securities.
      Otherwise they will not be entitled to vote. Each share of Series G
      Convertible Preferred Stock is convertible into 22,727 shares of common
      stock, subject to anti-dilution provisions. However, a holder of shares of
      our Series G Convertible Preferred Stock may not convert such shares of
      Series G Convertible Preferred Stock into shares of our common stock if
      the number of shares of our common stock to be issued pursuant to such
      conversion would cause, when aggregated with all other shares of our
      common stock owned by such holder at such time, such holder to
      beneficially own in excess of 9.99% of the then issued and outstanding
      shares of our common stock. Such holder of shares of our Series G
      Convertible Preferred Stock may elect to convert such shares of our Series
      G Convertible Preferred Stock into greater than 9.99% of all the then
      outstanding shares of our common stock by giving to us 61 days advance
      notice of its intention to do
so.




-27-
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(3)
            Includes 1,422,599 shares of our
      common stock issuable upon exercise of stock options and 41,153 shares of
      our common stock issuable upon exercise of warrants, each within 60 days
      of March 12, 2008.





(4)
            Includes 429,726 shares of our
      common stock issuable upon exercise of stock options within 60 days of
      March 12, 2008.




(5)
            Includes 396,826 shares of our
      common stock issuable upon exercise of stock options within 60 days of
      March 12, 2008.




(6)
            Mr. DiPiano is the managing
      partner of New Spring
Ventures.




(7)
            Includes 426,506 of shares of our
      common stock issuable upon exercise of stock options within 60 daysof
      March 12, 2008.




(8)
            Does not include warrants that
      are exercisable into 1,331,258 shares of our common stock, shares of our
      Series E Convertible Preferred Stock currently convertible into 2,277,890
      shares of our common stock, and Series G Convertible Preferred Stock
      currently convertible into 5,375,000 shares of our common stock, each upon
      61 days advance written notice to us. The address of SDS is P.O. Box
      174865, Cayman Corporate Center, 27 Hospital Road, Grand Cayman,
      E9.




(9)
            Includes a maximum of 1,705,574
      shares of our common stock issuable upon conversion of either of our
      Series E Convertible Preferred Stock or our Series G Convertible Preferred
      Stock, or warrants within 60 days of March 12, 2008. Does not include
      shares of our common stock in excess of 1,705,574 shares issuable upon
      conversion of either our Series E Convertible Preferred Stock or our
      Series G Convertible Preferred Stock or warrants, each within 61 days
      advance written notice to us. In the aggregate, CGA Resources, LLC holds
      preferred stock convertible into 7,788,788 shares of our common stock and
      warrants exercisable into 1,648,500 shares of our common stock. The
      address of CGA Resources, LLC is 590 Madison Avenue, 5th Floor, New
      York, NY 10022.




(10)
            Does not include warrants that
      are exercisable into 467,070 shares of our common stock, shares of our
      Series E Convertible Preferred Stock currently convertible into 1,632,811
      shares of our common stock, and Series G Convertible Preferred Stock
      currently convertible into 481,364 shares of our common stock, each upon
      61 days advance written notice to us. The address of New Spring Ventures
      is 500 N Gulph Road, Suite 500, King of Prussia, PA
      19406.




(11)
            Includes a maximum of 515,683
      shares of our common stock issuable upon conversion of either our Series E
      Convertible Preferred Stock or, or warrants within 60 days of
      March 12, 2008. Does not include shares of our common stock in excess
      of 515,683 shares issuable upon conversion of either our Series E
      Convertible Preferred Stock or warrants, each within 61 days advance
      written notice to us. In the aggregate, Hudson Ventures holds preferred
      stock convertible into 1,219,312 shares of our common stock and warrants
      exercisable into 311,579 shares of our common stock. The address of Hudson
      Ventures is 660 Madison Avenue, 14thFloor, New York, NY
      10021.




ITEM12.
            Certain
      Relationships and Related Transactions, and Director
      Independence


Certain
Relationships and Related Transactions




On
August 4, 2006, we entered into a services agreement with Fastech for
hardware relocation/migration services and on demand hosting services. The
services agreement shall remain in effect for a period of 36 months and shall
renew each term for a consecutive 36-month period until terminated by one party
120 days prior to the expiration of the then current term. Under the terms of
the services agreement, Fastech is paid approximately $40,000 per month. Under
the terms of the services agreement, $477,120 and $164,000 was paid or accrued
to Fastech for the years ended December 31, 2007 and 2006,
respectively.  Michael A. DiPiano, a member of our Board of Directors
and a General Partner in NewSpring Ventures, is an affiliate of NewSpring
Capital, a significant debt holder of Fastech.




On May 8,
2007, we entered into a letter of intent (LOI) with Fastech for the purchase by
us of all assets of Fastech.  The LOI was subsequently terminated
effective July 17, 2007.


Director
Independence


Our Board
of Directors currently consists of Daniel W. Rumsey, Jane F. Hoffer, Patrick L.
Kiernan, Warren D. Jones, Mary Lou Fox and Michael A. DiPiano.  In
applying the definition of “independent director” established by NASDAQ, the
Board has determined that Patrick L. Kiernan, Warren D. Jones and Mary Lou Fox,
who constitute a majority of our board of directors, qualify as “independent
directors”.
  We
maintain separately designated audit, compensation and nominating committees. In
applying the “independence standards” applicable to audit, compensation and
nominating committee members established by NASDAQ, each of the members of such
committees are considered “independent”.


-28-
 Table of Contents





ITEM13.
            Exhibits





The
following are included as exhibits to this report. Exhibits incorporated by
reference are so indicated.





Exhibit
              Number
            Description2.1
            Amended
      and Restated Agreement and Plan of Merger, dated as of May 24, 2004,
      by and among the Company, viaLink Acquisition, Inc. and Prescient Systems,
      Inc. (1)3.1
            Amended
      and Restated Certificate of Incorporation of the Company
    (2)3.2
            First
      Amendment to Amended and Restated Certificate of Incorporation of the
      Company (3)3.3
            Amended
      and Restated Bylaws of the Company (4)3.4
            Certificate
      of Designation of the Series E Convertible Preferred Stock of the Company
      (3)3.5
            Certificate
      of Correction of the Certificate of Designation relating to the Series E
      Convertible Preferred Stock of the Company (5)3.6
            Certificate
      of Designation relating of the Series G Convertible Preferred Stock of the
      Company (6)3.7
            Certificate
      of Correction of the Certificate of Designation of Series G Convertible
      Preferred Stock of the Company (5)3.8
            Certificate
      Increasing the Maximum Number of the Series G Convertible Preferred Stock
      of the Company (5)4.1
            Form
      of Certificate of Common Stock (16)4.2
            Form
      of Certificate of Series E Convertible Preferred Stock
  (16)4.3
            Form
      of Certificate of Series G Convertible Preferred Stock
  (16)4.4
            Form
      of Warrant for Series F Preferred Holders to Purchase Shares of Common
      Stock of the Company (6)4.5
            Form
      of Warrant to purchase shares of Common Stock of Company issued to certain
      note holders (7)4.6
            Form
      of Warrant to purchase shares of Common Stock of Company issued to
      Purchasers of Series E and Series F Convertible Preferred Stock
      and Related Senior Secured Notes (8)10.1†
            1999
      Stock Option/Stock Issuance Plan (9)10.2
            1999
      Stock Option/Stock Issuance Plan Form of Incentive Stock Option Agreement
      (16)10.3†
            1999
      Employee Stock Purchase Plan (10)10.4†
            2007
      Equity Incentive Plan (17)10.5
            Form
      of Series F Convertible Preferred Stock Purchase Agreement dated as
      of December 31, 2004 (3)10.6†
            Employment
      Agreement dated as of December 8, 2005, between the Company and Jane F.
      Hoffer (5)10.7†
            Employment
      Agreement dated as of December 8, 2005, between the Company and Thomas W.
      Aiken (5)10.8
            5%
      Demand Promissory Note between the Company as Issuer and Tak Investments,
      Inc. as Holder (15)10.9
            Financing
      Agreement dated as of May 25, 2006, between the Company and Sand Hill
      Finance, LLC. (11)10.10
            Office
      Lease Agreement dated as of May 26, 2006, between the Company and Trizec
      Partners Real Estate, L.P. (12)10.11
            Lease
      Termination Agreement dated as of May 26, 2006, between the Company and
      Trizec Partners Real Estate, L.P.
(12)




-29-
 Table
of Contents


10.12
            Settlement
      and Mutual Release Agreement dated July 31, 2006, between the Company and
      Tak Investments, LLC. (14)10.13
            Promissory
      Note dated as of August 8, 2006, between the Company as Issuer and Tak
      Investments, LLC. (16)10.14
            Security
      Agreement dated as of August 8, 2006, between the Company and Tak
      Investments, LLC. (16)




10.15
            Services
      Agreement dated as of August 4, 2006, between the Company and Fastech
      Integrated Solutions. (15)23.1*
            Consent
      of Amper, Politziner & Mattia, P.C.31.1*
            Certification
      of Chief Executive Officer31.2*
            Certification
      of Chief Financial Officer32.1*
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Financial
      Officer32.2*
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive
      Officer99.1*
            Press
      release announcing results for the quarter ending December 31,
    2007.




*           Filed Herewith




†
            Compensation plans and
      arrangements for executives and
others.






(1)
            Incorporated by reference to the
      Company’s Current Report on Form 8-K filed on May 26,
      2004.




(2)
            Incorporated by reference to the
      Company’s Annual Report on Form 10-KSB for the year ended December 31,
      2004 filed on March 31,
2005.




(3)
            Incorporated by reference to the
      Company’s Current Report on Form 8-K filed on January 4,
      2005.




(4)
            Incorporated by reference to the
      Company’s Post Effective Amendment No. 3 to Form SB-2/A filed on January
      15, 2004 (File No.
333-101523).




(5)
            Incorporated by reference to the
      Company’s Amendment No. 1 to form S-3 on Form SB-2 filed on January 20,
      2006 (File No. 333-128752).




(6)
            Incorporated by reference to the
      Company’s Current Report on Form 8-K filed on May 5,
      2005.




(7)
            Incorporated by reference to the
      Company’s Current Report on Form 8-K filed on April 11,
      2003.




(8)
            Incorporated by reference to the
      Company’s Current Report on Form 8-K filed on June 1,
      2004.




(9)
            Incorporated
      by reference to the Company’s Definitive Proxy Statement filed on
      September 6, 2005




(10)
            Incorporated by reference to the
      Company’s Registration Statement on Form S-8 filed on November 24, 1999
      (File No. 333-91651).


(11)
              Incorporated by reference to the Company’s
      Current Report on Form 8-K filed on May 31,
  2006.


(12)
            Incorporated by reference to the
      Company’s Current Report on Form 8-K filed on June 1,
      2006.


(13)
                  Incorporated by reference to
      Amendment No. 4 of the Company’s Quarterly Report on Form 10-QSB for the
      three months ended June 30, 2005 as filed with the SEC on December 6,
      2005.
 (14)
                Incorporated by reference to the
      Company’s Current Report on Form 8-K filed on July 31,
      2006.
 (15)
                    Incorporated by reference to the
      Company’s Current Report on Form 8-K filed on August 10,
      2006.
 (16)
                        Incorporated by reference to the Company’s
      Current Report on Form 8-K filed on August 28,
  2006.
 (17)
                            Incorporated by reference to the Company's
      Definitive Schedule 14A filed on September 5,
  2007.











-30-
 Table of Contents












ITEM14.
            Principal
      Accountant Fees and Services




Audit
Fees




The
aggregate fees billed by Amper, Politziner & Mattia, P.C. during 2007
and 2006 for assurance and related services that are reasonably related to the
performance of the audit and interim quarterly review of our financial
statements and registration filings totaled $190,000 and $205,000,
respectively.




Audit-Related
Fees




Our
independent auditors did not render any additional professional services
relating to the audit or review our financial statements during 2007 and
2006.




Tax
Fees




During
2007 and 2006, we received billings in the amount of $20,800 and $37,300,
respectively, from Amper, Politziner & Mattia, P.C. in connection with
preparation of tax returns and other tax compliance services.




All
Other Fees




Amper,
Politziner & Mattia, P.C. provided due diligence services related to
Fastech in the amount of $4,900 during 2007.




Pre-Approval
Policies and Procedures




Our audit
committee has adopted a policy that requires advance approval of all audit,
audit-related, tax services, and other services performed by the independent
auditors. This policy provides for pre-approval by our audit committee of all
audit and non-audit services. Our audit committee has delegated to the Chair of
our audit committee authority to approve permitted services up to a certain
amount provided that the Chair reports any decisions to our audit committee at
our next scheduled meeting.


-31-
 Table of Contents





SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, we have duly caused this report to be signed on our behalf by the
undersigned, thereunto duly authorized.




Prescient
      Applied Intelligence, Inc.Date:
      March 12, 2008
            
            By:
            /s/
      Jane F. HofferName:
            Jane
      F. HofferTitle:
            Chief
      Executive Officer




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




Each
person, in so signing also makes, constitutes, and appoints Jane F. Hoffer and
Daniel W. Rumsey, and each of them acting alone, as his or her true and lawful
attorneys-in-fact, with full power of substitution, in his name, place, and
stead, to execute and cause to be filed with the Securities and Exchange
Commission any or all amendments to this report.




Signature
            
            Title
            
            Date/s/
      Jane F. Hoffer
              Jane
      F. Hoffer
            
            Chief
      Executive Officer and Director (Principal Executive
    Officer)
            
            March
      12, 2008/s/
      Daniel W. Rumsey
              Daniel
      W. Rumsey
            
            Interim
      Chief Financial Officer and Chairman of the Board of Directors (Principal
      Financial and Accounting Officer)
            
            March
      12, 2008/s/
      Michael A. DiPiano
              Michael
      A. DiPiano
            
            Director
            
            March
      12, 2008/s/
      Warren D. Jones
              Warren
      D. Jones
            
            Director
            
            March
      12, 2008/s/
      Mary Lou Fox
              Mary
      Lou Fox
            
            Director
            
            March
      12, 2008/s/
      Patrick L. Kiernan
              Patrick
      L. Kiernan
            
            Director
            
            March
      12, 2008




-32-
 Table of Contents


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




Report
      of the Independent Registered Public Accounting
      Firm
            F2Consolidated
      Balance Sheets as of December 31, 2007 and 2006
            F3Consolidated
      Statements of Operations for the Years Ended December 31, 2007 and
      2006
            F4Consolidated
      Statements of Stockholders’ Equity  for the Years ended December
      31, 2007 and 2006
            F5Consolidated
      Statements of Cash Flows for the Years ended December 31, 2007 and
      2006
            F6Notes to
      Consolidated Financial Statements
            F7


















F-1
 Table of Contents





Report of Independent Registered Public Accounting
Firm




We have
audited the accompanying consolidated balance sheets of Prescient Applied
Intelligence, Inc. and subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of operations, stockholders’ equity, and cash
flows for the years then ended. 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 audits.




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




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Prescient
Applied Intelligence, Inc. and subsidiaries as of December 31, 2007 and 2006,
and the results of their operations and their cash flows for each of the years
then ended, in conformity with U.S. generally accepted accounting
principles.







/s/
      Amper, Politziner & Mattia P.C.March
      12, 2008Edison,
      New Jersey







F-2
 Table of Contents


Prescient
Applied Intelligence, Inc.


CONSOLIDATED BALANCE SHEETS


December 31,




2007
            
            
            2006ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            2,594,149
            
            
            $
            1,016,568Accounts
      receivable - net of allowance for doubtful accounts of $43,000 in 2007 and
      $135,000 in 2006
            
            
            1,236,603
            
            
            
            1,437,218Prepaid
      and other current assets
            
            
            100,504
            
            
            
            108,624Total
      current assets
            
            
            3,931,256
            
            
            
            2,562,410Furniture,
      equipment and leasehold improvements, net
            
            
            200,057
            
            
            
            183,311Intangible
      assets, net
            
            
            1,300,000
            
            
            
            1,700,000Goodwill
            
            
            17,257,483
            
            
            
            17,257,483Other
      assets
            
            
            49,342
            
            
            
            50,342Total Assets
            
            $
            22,738,138
            
            
            $
            21,753,546LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Borrowings
      under accounts receivable financing arrangement
            
            $
            -
            
            
            $
            260,117Current
      portion note payable
            
            
            169,696
            
            
            
            106,038Accounts
      payable
            
            
            163,526
            
            
            
            118,314Accrued
      expenses
            
            
            632,648
            
            
            
            571,311Income
      taxes payable
            
            
            29,071
            
            
            
            -Deferred
      revenues
            
            
            1,357,953
            
            
            
            1,419,972Total
      current liabilities
            
            
            2,352,894
            
            
            
            2,475,752Deferred
      maintenance - long-term portion
            
            
            67,884
            
            
            
            30,412Long
      term portion note payable, net of discount of $15,889 in 2007 and $25,442
      in 2006
            
            
            2,228,314
            
            
            
            2,394,1282,296,198
            
            
            
            2,424,540Stockholders’
      equity:Series
      E Preferred Stock, $.001 par value; 1,660 shares authorized; 1,657 shares
      issued and outstanding at December 31, 2007 and 2006 (liquidation value
      $18,889,955 and $17,893,167 at December 31, 2007 and 2006,
      respectively)
            
            
            16,567,747
            
            
            
            16,567,747Series
      G Preferred Stock, $.001 par value; 480 shares authorized; 479.9 shares
      issued and outstanding at December 31, 2007 and 2006 (liquidation value
      $4,798,838 at December 31, 2007 and 2006)
            
            
            4,798,838
            
            
            
            4,798,838Common
      stock, $.001 par value; 400,000,000 shares authorized; 33,600,251 and
      33,326,670 shares issued and outstanding at December 31, 2007 and 2006,
      respectively
            
            
            33,600
            
            
            
            33,326Additional
      paid-in-capital
            
            
            104,754,887
            
            
            
            103,348,018Accumulated
      deficit
            
            
            (108,066,026
            )
            
            
            (107,886,943)Cumulative
      translation adjustment
            
            
            -
            
            
            
            (7,732)Total
      stockholders’ equity
            
            
            18,089,046
            
            
            
            16,853,254Total
      liabilities and stockholders’ equity
            
            $
            22,738,138
            
            
            $
            21,753,546




The
accompanying notes are an integral part of these consolidated financial
statements.





F-3
 Table of Contents


Prescient
Applied Intelligence, Inc.


CONSOLIDATED STATEMENTS OF OPERATIONS


For
the years ended December 31,




2007
            
            
            2006Revenue:Subscription
      services
            
            $
            5,830,449
            
            
            $
            5,792,739Licenses
            
            
            595,527
            
            
            
            649,081Maintenance
            
            
            1,592,097
            
            
            
            1,621,330Professional
      services
            
            
            1,385,530
            
            
            
            1,181,075Total revenue
            
            
            9,403,603
            
            
            
            9,244,225Operating
      expenses:Customer
      operations and support
            
            
            2,653,359
            
            
            
            3,463,293Development
            
            
            1,154,035
            
            
            
            1,354,044Selling
      and marketing
            
            
            1,807,364
            
            
            
            1,966,846General
      and administrative
            
            
            1,978,554
            
            
            
            3,087,015Depreciation
      and amortization
            
            
            472,231
            
            
            
            506,366Total operating expenses
            
            
            8,065,543
            
            
            
            10,377,564Income (loss)
      from operations
            
            
            1,338,060
            
            
            
            (1,133,339)Other
      income (expense):Interest
      expense
            
            
            (265,332
            )
            
            
            (121,069)Accrued
      damages to stockholders
            
            
            -
            
            
            
            (45,000)Loss
      on Tak Settlement
            
            
            -
            
            
            
            (1,193,896)Total other expense
            
            
            (265,332
            )
            
            
            (1,359,965)Net
      income (loss) before provision for income
taxes:
            
            
            1,072,728
            
            
            
            (2,493,304)Provision
      for income taxes
            
            
            29,071
            
            
            
            -Net
      income (loss):
            
            
            1,043,657
            
            
            
            (2,493,304)Deemed
      Dividend on Series E Preferred Stock
            
            
            (1,222,740
            )
            
            
            (359,477)Undeclared
      Dividend on Series E Preferred Stock
            
            
            (996,788
            )
            
            
            (1,325,420)Payment
      of damages to certain preferred stockholders
            
            
            (20,250
            )
            
            
            (74,250)Net
      loss applicable to common stockholders
            
            $
            (1,196,121
            )
            
            $
            (4,252,451)Net
      loss applicable per common share - basic and diluted
            
            $
            (0.04
            )
            
            $
            (0.11)Weighted
      average common shares outstanding - basic and
diluted
            
            
            33,398,626
            
            
            
            39,942,178




The
accompanying notes are an integral part of these consolidated financial
statements.







F-4
 Table of Contents


Prescient
Applied Intelligence, Inc.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


For
the years ended December 31, 2006 and 2007




Preferred
      Stock
            
            
            Common
      Stock
            
            
            Additional
              paid-in
              capital
            
            
            Accumulated
      deficit
            
            Cumulative
              translation
              adjustment
            
            TotalShares
            
            
            Amount
            
            
            Shares
            
            
            AmountBalance,
      January 1, 2006
            
            
            2,137
            
            
            $
            21,366,585
            
            
            
            43,558,282
            
            
            $
            43,558
            
            
            $
            103,501,265
            
            
            $
            (105,034,162
            )
            
            $
            (4,018
            )
            
            $
            19,873,228Deemed
      dividend on Series E Preferred Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            359,477
            
            
            
            (359,477
            )
            
            
            
            
            
            
            -Non-cash
      compensation expense pursuant to SFAS 123R
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            300,297
            
            
            
            
            
            
            
            
            
            
            
            300,297Foreign
      currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,714
            )
            
            
            (3,714
            )Accrued
      damages to certain preferred stockholders
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (74,250
            )
            
            
            
            
            
            
            
            
            
            
            (74,250
            )Warrants
      issued in connection with Tak Settlement
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            28,600
            
            
            
            
            
            
            
            
            
            
            
            28,600Common
      Stock cancelled in connection with Tak Settlement
            
            
            
            
            
            
            
            
            
            
            (10,231,612
            )
            
            
            (10,232
            )
            
            
            (767,371
            )
            
            
            
            
            
            
            
            
            
            
            (777,603
            )Net
      loss for the year ended December 31, 2006
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,493,304
            )
            
            
            
            
            
            
            (2,493,304
            )Balance,
      December 31, 2006
            
            
            2,137
            
            
            $
            21,366,585
            
            
            
            33,326,670
            
            
            $
            33,326
            
            
            $
            103,348,018
            
            
            $
            (107,886,943
            )
            
            $
            (7,732
            )
            
            $
            16,853,254Deemed
      dividend on Series E Preferred Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,222,740
            
            
            
            (1,222,740
            )
            
            
            
            
            
            
            -Non-cash
      compensation expense related to stock options pursuant to SFAS
      123R
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            191,886
            
            
            
            
            
            
            
            
            
            
            
            191,886Non-cash
      compensation expense related to restricted stock grants pursuant to SFAS
      123R
            
            
            
            
            
            
            
            
            
            
            273,581
            
            
            
            274
            
            
            
            12,493
            
            
            
            
            
            
            
            
            
            
            
            12,767Foreign
      currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,732
            
            
            
            7,732Accrued
      damages to certain preferred stockholders
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (20,250
            )
            
            
            
            
            
            
            
            
            
            
            (20,250
            )Net
      income for the year ended December 31, 2007
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,043,657
            
            
            
            
            
            
            
            1,043,657Balance,
      December 31, 2007
            
            
            2,137
            
            
            $
            21,366,585
            
            
            
            33,600,251
            
            
            $
            33,600
            
            
            $
            104,754,887
            
            
            $
            (108,066,026
            )
            
            $
            -
            
            
            $
            18,089,046




The
accompanying notes are an integral part of these consolidated financial
statements.







F-5
 Table of Contents


Prescient
Applied Intelligence, Inc.


CONSOLIDATED STATEMENT OF CASH FLOWS


For
the Years ended December 31,




2007
            
            
            2006Cash
      flows from operating activities:Net
      income (loss)
            
            $
            1,043,657
            
            
            $
            (2,493,304)Adjustments
      to reconcile net income (loss) to net cash from operating
      activities:Provision
      for doubtful accounts
            
            
            17,990
            
            
            
            157,666Depreciation
      and amortization
            
            
            472,231
            
            
            
            509,544Loss
      on sale of assets
            
            
            -
            
            
            
            25,853Loss
      on Tak Settlement
            
            
            -
            
            
            
            1,193,896Non-cash
      stock compensation expense
            
            
            204,653
            
            
            
            300,297Non-cash
      interest expense
            
            
            9,533
            
            
            
            3,176Increase
      (decrease) in cash for changes in:Accounts
      receivable
            
            
            182,625
            
            
            
            362,289Prepaid
      expenses and other assets
            
            
            9,120
            
            
            
            28,384Income
      taxes payable
            
            
            29,071
            
            
            
            -Accounts
      payable and accrued expenses
            
            
            86,299
            
            
            
            (315,180)Deferred
      revenue
            
            
            (24,547
            )
            
            
            354,496Net
      cash provided by operating activities
            
            
            2,030,632
            
            
            
            127,117Cash
      flows from investing activities:Capital
      expenditures
            
            
            (88,977
            )
            
            
            (47,361)Net
      cash used in investing activities
            
            
            (88,977
            )
            
            
            (47,361)Cash
      flows from financing activities:(Payments)
      proceeds from accounts receivable financing agreement,
      net
            
            
            (260,117
            )
            
            
            260,117Payment
      of note payable-Tak
            
            
            (111,689
            )
            
            
            (35,936)Net
      cash (used in) provided by financing activities
            
            
            (371,806
            )
            
            
            224,181Net
      increase in cash and cash equivalents
            
            
            1,569,849
            
            
            
            303,937Effect
      of foreign currency translation on cash balances
            
            
            7,732
            
            
            
            (3,714)Cash
      and cash equivalents, beginning of period
            
            
            1,016,568
            
            
            
            716,345Cash
      and cash equivalents, end of period
            
            $
            2,594,149
            
            
            $
            1,016,568Supplemental
      schedule of non-cash transactions:Deemed
      dividend on Series E Preferred Stock
            
            $
            1,222,740
            
            
            $
            359,477Warrants
      issued in connection with Tak Settlement (See Note
7)
            
            $
            -
            
            
            $
            28,600Provision
      for damages due to certain preferred stockholders
            
            $
            (20,250
            )
            
            $
            (74,250)Adjustment
      to accruals related to previous acquisition
            
            $
            -
            
            
            $
            122,973Supplemental
      disclosure of cash paid:Interest
            
            $
            255,799
            
            
            $
            117,893




The
accompanying notes are an integral part of these consolidated financial
statements.





F-6
 Table of Contents


Prescient
Applied Intelligence, Inc.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




1.
            Business and Summary of
      Significant Accounting
Policies




General Description of Business—We provide subscription-based business-to-business electronic commerce
services that enable companies in the consumer packaged goods, retail and
automotive industries to efficiently manage their highly complex supply chain
information. These activities are referred to as advanced commerce offerings. We
also sell supply chain planning solutions to consumer products companies,
referred to as supply chain offerings. Our offerings allow manufacturers,
wholesalers, distributors, sales agencies (such as food brokers) and retailers
to plan, communicate and synchronize item, pricing and promotion information in
a more cost-effective and accessible way than has been possible using
traditional electronic and paper-based methods. We offer both advance commerce
and supply chain applications in combined offerings to existing and potential
customers and considers this one business segment.




Our
customers range from small, rapidly growing companies to large corporations in
the consumer products, retail and automotive parts industries and are
geographically dispersed throughout the United States, Canada and
Europe.




Basis of Presentation— The
consolidated financial statements include Prescient Applied Intelligence, Inc.
and our wholly owned subsidiaries which consist of Prescient Systems, Inc. (a
Delaware corporation), Prescient Systems Limited (a U.K. company) and viaLink
Operations, Inc. (a Pennsylvania corporation). Intercompany transactions and
balances have been eliminated. Certain prior year balances have been
reclassified to conform to the current year presentation. Such reclassifications
did not affect total revenues, operating income or net
income.  Effective December 31, 2006, we closed our U.K. subsidiary
office and transferred all operations to the U.S. corporate
office.  There were no significant closing costs incurred as part of
this transfer.





A
calculation of Comprehensive Income (Loss) is as follows:





2007
            
            
            2006Net
      income
            $
            1,043,657
            
            $
            (2,493,304
            )Foreign
      currency translation adjustment
            
            -
            
            
            (3,714
            )Comprehensive
      income (loss)
            $
            1,043,657
            
            $
            (2,497,018
            )




Use of Estimates— The
preparation of financial statements in conformity with generally accepted
accounting principles requires the use of management’s estimates and assumptions
in determining the carrying values of certain assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts for certain revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
items subject to such estimates include the carrying amount of long-lived
assets, intangible assets and goodwill, stock-based compensation, certain
accrued expense and valuation allowances for accounts receivable and deferred
income tax assets.




Cash and Cash Equivalents—
We consider all highly liquid investments with a maturity of three months or
less at the time of purchase to be cash equivalents. At December 31, 2007, we
had cash equivalents of $1.0 million, as compared to 2006 when we had no cash
equivalents.




Risks from Concentrations—
Financial instruments which potentially subject us to concentrations of credit
risk consist principally of temporary cash investments and accounts receivable.
Temporary cash investments are placed with high credit quality financial
institutions. Concentrations of credit risk with respect to accounts receivable
are limited due to the large number of individual accounts and their dispersion
across different regions. We do not believe a material risk of loss exists with
respect to the financial position due to concentrations of credit
risk.




Revenues
are dependent on large implementation and subscription fees from a limited
number of customers. One customer accounted for 16% and 12% of our revenues in
2007 and 2006, respectively.  During 2007, we experienced client
cancellations attributable to the loss of a single retail hub, which accounted
for 13% of revenue in 2006 and 6% in 2007.  We will continue to be
dependent upon revenues from a limited number of customers until we achieve
market penetration.




Trade Accounts Receivable—
Trade accounts receivable are recorded at the invoiced amount and do not bear
interest. Our allowance for doubtful accounts is an estimate prepared by
management based on identification of the collectability of specific accounts
and the overall condition of the receivable portfolios. We specifically analyze
individual customer balances in trade receivables, historical bad debts,
customer credit, customer concentrations, customer credit-worthiness, current
economic trends and changes in customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. Likewise, should we
determine that we would be able to realize more of our receivables in the future
than previously estimated, an adjustment to the allowance would increase income
in the period such determination was made. The allowance for doubtful accounts
is reviewed on a quarterly basis and adjustments are recorded as deemed
necessary. We do not have any off-balance-sheet credit exposure related to our
customers. During 2007 and 2006 our statement of operations includes provisions
for bad debt of $18,000 and $158,000, respectively. The allowance for doubtful
accounts at December 31, 2007 and 2006 is $43,000 and $135,000, respectively.
During 2007 and 2006, we wrote-off uncollectible accounts receivable of $92,000
and $203,000, respectively.


F-7
 Table of Contents





Furniture, equipment and leasehold
improvements— Furniture, equipment and leasehold improvements are stated
at cost. Expenditures for repairs and maintenance are charged to expense as
incurred. Upon disposition, the cost and related accumulated depreciation are
removed from the accounts and the resulting gain or loss is reflected in
operations for the period. Furniture and equipment are deprecated using the
straight-line method over their estimated useful lives ranging from 2 to
10 years. Leasehold improvements are amortized over the lesser of the
useful life or the lease term using the straight-line method.





Goodwill and Other Intangible
Assets — Goodwill and intangible assets acquired in the purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead tested for impairment at least annually in accordance with the
provisions of FASB Statement No. 142, Goodwill and Other Intangible
Assets. Intangible assets with estimable useful lives are amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with FASB Statement No. 144, Accounting for Impairment or
Disposal of Long−Lived Assets. The occurrence of certain events may be
indicators that goodwill is impaired and therefore require us to test for
impairment other than annually.





Determining
fair value of a reporting unit is judgmental in nature and involves the use of
significant estimates and assumptions. These estimates and assumptions include
revenue growth rates and operating margins used to calculate projected future
cash flows, risk−adjusted discount rates, future economic and market conditions
and determination of appropriate market comparables. We base our fair value
estimates on assumptions we believe to be reasonable but that are unpredictable
and inherently uncertain. Actual results may differ from those estimates. We
have only one reporting unit.  Our goodwill impairment analysis, which
was performed as of December 31, 2007, did not result in an impairment
charge.





Impairment of long-lived assets.We review long-lived assets for impairment in accordance with SFAS
No. 144, which required us to identify events or changes in circumstances,
which indicate that the carrying amount of an asset may not be recoverable. If
impairment indicators are present and the estimated future undiscounted cash
flows are less than the carrying value of the long-lived assets, the carrying
value is reduced to the estimated fair value as measured by the discounted cash
flows.




Losses
from operations are one factor that could be an indicator that the carrying
amounts of any of our assets may not be recoverable. We performed an analysis
comparing estimated future cash flows to the carrying value of our assets at
December 31, 2007. The analysis did not indicate that impairment exists as of
December 31, 2007. The estimated future cash flows were based upon certain
assumptions and are dependent upon future performance. See “Additional Factors That May Affect
Future Results”for factors that may cause operations to vary from our
estimates. If actual results differ from the estimated future cash flows
impairment may be evident in future periods.




Revenue
Recognition




We
generate revenues from monthly subscriptions to our advance commerce services.
Additionally, we generate revenues from the sale of licenses of our supply chain
planning software along with related maintenance revenue. We also provide
professional services to our customers.




Subscriptions
- For use of our subscription advance commerce services, customers pay a flat
monthly subscription rate, a rate based on the number of trading partners and
the size and complexity of the trading relationships, or the dollar volume of
the transactions that go through the advanced commerce engine. Supply chain
subscription services are based on the modules selected, the number of users,
and the number of trading partners with whom our customer does business. Other
services are available for additional monthly subscription fees. Subscription
services are provided by and are resident on our database servers. Customers
gain access to and use our services through means ranging from Internet web
browsers to fully automated batch interfaces imbedded in the customer’s IT
systems. For new advanced commerce transactions, customers are typically charged
an implementation fee ranging from $200 for an on-line implementation to more
than $100,000 for complex supplier and retailer installations. Such fees are
separately priced from the use of advance commerce services on a time and
materials basis and are included in professional services revenue described
below. We have no obligation to perform any future implementation services and
no additional implementation services are necessary upon renewal of the service
by the customer.




We
recognize revenues for our subscription services ratably over the term of the
subscription arrangement. Revenues collected in advance are deferred and
recognized as earned. In cases where customers are charged a “per use” fee, we
recognize revenues for subscription fees for customer use of services as these
services are provided. Revenues collected in advance and revenues dependent upon
future performance criteria are deferred and recognized as earned and those
performance criteria are met.




License
and maintenance - Software license revenue is recognized upon shipment of the
software product, where no significant obligations by us exist, the payment is
fixed or determinable, the arrangement is evidenced by an agreement and
collection is probable. Maintenance revenues are recognized ratably over the
maintenance period, in accordance with the terms of the related agreements. We
use the residual method of allocating a portion of the total fee to maintenance
and license fees when both are included in the total contract fee (license and
maintenance).


F-8
 Table of Contents




Professional
services - Professional services revenue is recognized as the services are
performed, based upon the fair value of services performed. A Professional
Services Agreement is a time and materials agreement for services provided by us
for new and existing customers. Professional services performed include
implementation, training, audit assessment, upgrades, and
enhancements.




Development— Capitalization of costs
for internal use software begins after the preliminary project stage and ends
when the software is substantially complete and ready for its intended use. We
also capitalize certain of these costs for software to be sold beginning when
technological feasibility has been established and ending when the product is
available for customers. Capitalized software development costs are amortized
using the straight-line method over the estimated useful life of three to five
years and are subject to impairment evaluation in accordance with the provisions
of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
We incurred costs and expenses of approximately $1.2 million and $1.4 million
for product development in 2007 and 2006, respectively. We have not capitalized
these costs as they did not meet the above criteria for
capitalization.





Earnings Per Share— Basic
earnings per share is calculated by dividing net income (loss) available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share are calculated by dividing net
income (loss) available to common stockholders by the weighted-average
number of common shares and dilutive potential common shares outstanding during
the period. Diluted earnings per share also includes the impact of convertible
debt, if dilutive, using the if-converted method. Our diluted earnings per share
are the same as the basic earnings per share for 2007 and 2006 because our
common stock equivalents are anti-dilutive.




Income Taxes— We account for
income taxes using the asset and liability method. Deferred tax liabilities or
assets are recognized for the anticipated future tax effects of temporary
differences that arise as a result of the differences in the carrying amounts
and tax bases of assets and liabilities and for loss carry forwards and tax
credit carry forwards. Deferred tax assets and liabilities are measured using
the 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
records a valuation allowance when it is more likely than not that some portion
or all of the deferred tax assets will not be realized.





On
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS 109” (FIN
48).  FIN 48 provides recognition criteria and a related measurement
model for uncertain tax positions taken or expected to be taken in income tax
returns.  FIN 48 requires that a position taken or expected to be
taken in a tax return be recognized in the financial statements when it is more
likely than not that the position would be sustained upon examination by tax
authorities.  Tax positions that meet the more likely than not
threshold are then measured using a probability weighted approach recognizing
the largest amount of tax benefit that is greater than 50% likely of being
realized upon ultimate settlement.





Preferred Stock Classification— We follow SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity” (SFAS
No. 150). SFAS No. 150 modifies the accounting for certain financial
instruments that, under previous guidance, issuers could account for as equity.
SFAS No. 150 requires that those instruments be classified as liabilities.
We do not have any preferred stock or other financial instruments outstanding at
December 31, 2007 that should be classified as a liability.




Stock Based Compensation — We
adopted SFAS No. 123R, effective January 1, 2006, which requires that
share-based payments be reflected as an expense based upon the grant-date fair
value of those awards. The expense is recognized over the remaining vesting
period of the awards.




Recently
Issued Accounting Pronouncements




In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities", which includes an amendment
to FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose,
at specified election dates, to measure eligible financial assets and financial
liabilities at fair value (referred to as the “fair value option) and report
associated unrealized gains and losses in earnings. SFAS 159 is effective for
fiscal years beginning after November 15, 2007. We do not expect SFAS 159
to have a material effect on our financial position or results of
operations.







In
September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”(SFAS
157).  SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. SFAS
157 applies under other accounting pronouncements that require or permit fair
value measurements. Accordingly, SFAS 157 does not require any new fair value
measurements. However, for some entities, the application of SFAS 157 will
change current practice. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. The future
implementation of SFAS 157 is not expected to have a significant effect on our
financial statements.


F-9
 Table of Contents


2.           Liquidity




Our
principal sources of liquidity are cash on hand and cash generated from current
operations. As of December 31, 2007, we had cash and cash equivalents of $2.6
million.  While we generated net income for the year ended December
31, 2007, we generated a net loss for the year ended December 31, 2006, and have
an accumulated deficit of $108 million as of December 31, 2007.  We
have incurred operating losses and negative cash flow in the past and may incur
operating losses and negative cash flow in the future.  We continue to
pursue sales efforts with (a) new retailers to create new communities,
(b) small to medium size suppliers for the use of the supply chain software
and (c) suppliers that will become subscribers to our advanced commerce
services within existing and new hub communities.  Our existing cash
and cash equivalents, and expected cash flow from operations, are expected to be
sufficient to meet our operating and capital requirements for the next 12
months.




During
the year ended December 31, 2007, $2.0 million was provided by our operating
activities.




Our
Financing Agreement with Sand Hill allows us to assign certain accounts
receivable to Sand Hill and for Sand Hill to advance up to $1.0 million to us in
contemplation of the collection of those accounts receivable. As of December 31,
2007, no amounts were owed to Sand Hill under the terms of the Financing
Agreement. (See Note 6).




On
July 31, 2006, we entered into the Settlement Agreement with Tak. In
connection with the Settlement Agreement, we issued a three
year secured promissory note, in the amount of $2,558,348, that bears interest
at the prime rate plus 2% (9.25% at December 31, 2007) (Tak
Note).  The Tak Note is payable at a rate of $30,000 per month which
includes interest with the remaining amounts of principal and interest, equal to
approximately $2,152,000, due in August  2009.  (See Note
7).





3.
            Goodwill and Other Intangible
      Assets




As of
December 31, 2007 and 2006, the remaining goodwill balance was
$17,257,483.  Our goodwill impairment analysis, which was performed as
of December 31, 2007, did not result in an impairment charge.





The gross
carrying amount and accumulated amortization of the Company’s other intangible
assets as of December 31, 2007 and 2006 are as follows:




December
      31, 2007
            
            
            December
      31, 2006Gross
              Carrying
              Amount
            
            
            Accumulated
              Amortization
            
            
            Gross
              Carrying
              Amount
            
            
            Accumulated
              AmortizationAmortized
      Intangible AssetsSoftware
      and customer contract rights
            
            $
            2,200,000
            
            
            $
            1,110,000
            
            
            $
            2,200,000
            
            
            $
            740,000Trademark
      valuation
            
            
            300,000
            
            
            
            90,000
            
            
            
            300,000
            
            
            
            60,000Domain
      Name
            
            
            62,500
            
            
            
            62,500
            
            
            
            62,500
            
            
            
            62,500Total
            
            $
            2,562,500
            
            
            $
            1,262,500
            
            
            $
            2,562,500
            
            
            $
            862,500




Amortization
expense recorded on intangible assets for the years ended December 31, 2007 and
2006 was $400,000 and $443,750, respectively. The estimated amortization expense
for the Company’s other intangible assets for the five succeeding fiscal years
is as follows:




December 31,2008
            
            $
            400,0002009
            
            
            400,0002010
            
            
            100,0002011
            
            
            100,0002012
            
            
            100,000




4.         Furniture, Equipment and Leasehold
Improvements




Furniture,
equipment and leasehold improvements at December 31, 2007 and 2006 consisted of
the following:




2007
            
            
            2006Furniture
      and fixtures
            
            $
            181,119
            
            
            $
            181,119Computer
      equipment
            
            
            3,023,325
            
            
            
            2,948,440Computer
      software
            
            
            2,316,393
            
            
            
            2,302,301Leasehold
      improvements
            
            
            68,514
            
            
            
            68,5145,589,351
            
            
            
            5,500,374Less:
      accumulated depreciation
            
            
            (5,389,294)
            
            
            
            (5,317,063)Furniture,
      equipment and leasehold improvements, net
            
            $
            200,057
            
            
            $
            183,311


Depreciation
expense was approximately $72,200 and $65,800 for the years ended December 31,
2007 and 2006, respectively.


F-10
 Table of Contents




5.
            Accrued
      Expenses




Accrued
expenses at December 31, 2007 and 2006 consisted of the following:




December 31,2007
            
            
            2006Accrued
      employee compensation
            
            $
            239,333
            
            
            $
            189,993Accrued
      professional fees and contract labor
            
            
            183,548
            
            
            
            148,880Accrued
      damages to stockholders
            
            
            141,750
            
            
            
            121,500Other
      accrued expenses
            
            
            68,017
            
            
            
            110,938Total
      accrued expenses
            
            $
            632,648
            
            
            $
            571,311




6.
            Accounts Receivable and Financing
      Agreement




On
May 25, 2006, we entered into the Financing Agreement with Sand Hill, which
allows us to assign certain accounts receivable to Sand Hill and for Sand Hill
to advance 80% of the underlying receivable for domestic receivables and 65% for
foreign receivables, up to a $1.0 million total advance to us in contemplation
of the collection of those accounts receivable. The remaining balance (20% for
domestic, 35% for foreign) less interest of approximately 1.9% per month
plus other administration fees, is paid to us once the customer has paid. As of
December 31, 2007, no accounts receivable were assigned to Sand Hill, and there
were no borrowings under the Financing Agreement. Sand Hill is entitled to full
recourse against us for any uncollected accounts. Accordingly, the Financing
Agreement is accounted for as a debt instrument collateralized by accounts
receivable. We address the risk of loss associated with these repurchased
receivables in our allowance for doubtful accounts. The Financing Agreement has
an initial term of one year with automatic renewals on an annual basis, but
either party may terminate it at any time upon notice to the other.




To secure
prompt payment and performance of all fees, amounts and obligations we now or
hereafter owe to Sand Hill, we granted Sand Hill a security interest in all of
our property, now owned or hereafter acquired, including all assets and
available credit facilities or the proceeds thereof (collectively the
“Collateral). The Collateral shall not include any equipment acquired in
connection with financing provided by a lender other than Sand Hill, or any
equipment which, as of May 25, 2006 was subject to a lien or purchase money
security interest in favor of a lender other than Sand Hill.




7.
            Note Payable and Tak
      Settlement




On
July 31, 2006, we entered into the Settlement Agreement with Tak. The
Settlement Agreement was approved by the holders of two-thirds of our Series E
Convertible Preferred Stock on August 10, 2006 and the transaction closed
on August 25, 2006. The Settlement Agreement resolved a dispute arising
from the May 4, 2005 Common Stock and Warrant Purchase Agreement and a
concurrently executed Outsourcing Agreement.




Upon the
approval of the Settlement Agreement we issued on August 25, 2006 a
three-year promissory note in favor of Tak in the principal amount of $2,558,348
(Tak Note). The Tak Note bears interest at the prime rate plus 2% (9.25% at
December 31, 2007) which is payable at a rate of $30,000 per month including
interest, with the remaining amounts of principal and interest, equal to
approximately $2,152,000 due August 2009. In addition, in the event that we
close any equity or equity based financing with gross proceeds totaling at least
$1,000,000, we are required to prepay a portion of the Tak Note equal to 15% of
the proceeds from such financing, up to $500,000 in the aggregate. The Tak Note
is secured by all of our assets, subordinated only to the rights of Sand Hill,
or any such replacement financing providing working capital to us in an
aggregate principal amount not to exceed $1.0 million.




As part
of the Settlement Agreement, on August 25, 2006, we issued to Tak a warrant
to purchase 1,000,000 shares of our common stock at an exercise price equal to
$0.0825 per share. The warrant expired December 31, 2006.  The fair
value of the warrant was $28,600 which was recorded as a discount to the note
payable and is being amortized to interest expense over the term of the Tak
Note.  At December 31, 2007, the unamortized discount on the Tak Note
payable is $15,889. During the years ended December 31, 2007 and 2006, we
recorded interest expense of $9,533 and $3,176, respectively, related to the
amortization of debt discount.




As of
December 31, 2007, the outstanding principal balance on the Tak Note, net of
discount, is $2,398,010, of which the current portion due is
$169,696  and the remaining balance is classified as long term debt in
the amount of $2,228,314, which is net of the discount of $15,889.




F-11
 Table of Contents


The terms
of the Settlement Agreement also provided for the termination of the Outsourcing
Agreement with Tak; the cancellation of all of Tak’s equity securities in
Prescient (10,231,612 shares of our common stock and warrants to purchase
1,534,091 shares of our common stock); and a mutual general release by Tak and
us of all claims against each other. We recorded a loss on settlement of $1.2
million for the year ended December 31, 2006. This loss, resulting from the
recognition of costs and fees, reversal of certain accruals and the effect of
recapitalization related to this settlement, is summarized as
follows:




Year
      ended December 31, 2006Fair
      value of common stock cancelled
            
            $
            777,603Release
      of accrued expenses for Data Center usage and
    penalties
            
            
            600,000Balance
      due from Tak
            
            
            (13,151
            )Note
      payable issued
            
            
            (2,558,348
            )Loss
      on Tak Settlement
            
            $
            (1,193,896
            )




The fair
value of the common stock was determined based upon the average stock price a
few days before and after the transaction date. Penalty expense represents
previously accrued expenses due under a registration right
agreement.




8.
            Common Stock and Earnings per
      Share




A
reconciliation of the numerator and the denominator used in the calculation of
earnings (loss) per share is as follows:




For
      the Years ended
              December 31,2007
            
            
            2006Basic
      and diluted:Net
      loss applicable to common stockholder
            
            $
            (1,196,121
            )
            
            $
            (4,252,451
            )Weighted
      average common shares outstanding
            
            
            33,398,626
            
            
            
            39,942,178Net
      loss per common share
            
            $
            (0.04
            )
            
            $
            (0.11
            )




For the
year ended December 31, 2007 we had outstanding (a) options to purchase
7,066,093 shares at a weighted average exercise price of $0.72, (b) 9,865,879
shares of common stock to be issued upon the conversion of Series E
Preferred Stock at a conversion price of $1.68 per share, (c) 10,905,909
shares of common stock to be issued upon the conversion of Series G Preferred
Stock at a conversion price of $.44 per share, and (d) warrants to purchase
5,685,568 common shares at exercise prices in the following table.





For the
year ended December 31, 2006 we had outstanding (a) options to purchase
2,941,944 shares at a weighted average exercise price of $1.66
(b) 8,629,047 million shares of common stock to be issued upon the
conversion of Series E Preferred Stock at a conversion price of $1.92 per
share (c) 10,905,909 shares of common stock to be issued upon the
conversion of Series G Preferred Stock at a conversion price of $.44 per share,
and (d) warrants to purchase 5,685,568 common shares at exercise prices in
the following table.




These
securities were outstanding but were not included in the computation of diluted
earnings per share because the effect of these outstanding options, stock
issuable upon conversion of Preferred Stock and warrants would be
anti-dilutive.





There
were no warrants issued or exercised during 2007.  Below is a summary
of the warrants outstanding as of December 31, 2006 and 2007:




Underlying
      Common Shares attributable to outstanding warrants at December 31, 2006
      and 2007
            
            
            Exercise
      Price
            
            Expiration
      Date10,459
            
            
            $
            
            0.02
            
            August
      2009409,091
            
            
            $
            
            0.48
            
            May
      20082,766,018
            
            
            $
            
            0.85
            
            May
      20082,500,000
            
            
            $
            
            2.00
            
            August
      20095,685,568





All
warrants are currently exercisable.





F-12
 Table of Contents


9.
            Stock Option and Stock Purchase
      Plans




Stock Option and Grant Plans—On September 26, 2007, the shareholders approved the 2007 Equity
Incentive Plan (2007 Plan) which replaced the 1999 Stock Option Plan/Stock
Issuance Plan (1999 Plan). The 2007 Plan offers certain employees, outside
directors and consultants the opportunity to acquire a proprietary interest in
the Company by the grant of awards in the form of options (non-statutory and
incentive), restricted stock and stock appreciation rights on stock
units.  The aggregate number of shares of common stock that may be
issued under the 2007 Plan pursuant to all types of awards shall not exceed
6,065,674 which includes, 65,674 shares which remained for issuance under the
1999 Plan. In addition, options previously granted under the 1999 Plan also
remain outstanding until they are either exercised of
forfeited.  However, any forfeitures under the 1999 Plan will not
increase availability under the 2007 Plan.  Options may be granted
under the 2007 Plan at an exercise price per share not less than the fair market
value per share of common stock on the option grant date.  Options are
granted with a term of up to 10 years and generally become exercisable in
installments over periods of up to six years.  Awards of restricted
stock may be granted under the 2007 Plan and may or may not be subject to
vesting.  Vesting shall incur in full installments upon satisfaction
of the conditions specified in the restricted stock agreement.  As of
December 31, 2007 there were 3,380,935 shares of common stock available to be
issued under the 2007 Plan.





We
adopted SFAS No. 123R effective January 1, 2006. For the years ended
December 31, 2007 and 2006, we recorded $204,653 and $300,297, respectively, of
compensation cost for share-based payment arrangements. No stock options were
exercised during the year ended December 31, 2007 or 2006.





The fair
value of restricted stock is determined based on the market values as of the
date of the grant.  The fair value of stock options is determined
using the Black-Scholes valuation model. The fair value of each stock option
award was determined as of the date of grant using the Black-Scholes
option-pricing model with the following assumptions in each of the years ended
December 31:




2007
            
            2006Expected
      volatility
            89%-102%
            
            105%-110%Expected
      term (years)
            5.5
      - 6.0
            
            6.0Risk-free
      interest rate
            4.3%
      - 4.6%
            
            4.7%
      - 5.3%Expected
      dividend yield
            0%
            
            0%Forfeiture
      rate
            0%-17%
            
            0%-9%Resulting
      weighted average grant date fair value
            $0.07
            
            $0.17




Expected
volatility is based solely on historical volatility of our common stock over the
period commensurate with the expected term of the stock options.  We
rely solely on historical volatility because our traded options do not have
sufficient trading activity to allow us to incorporate the mean historical
implied volatility from traded options into our estimate of future volatility.
The expected term calculation for stock options is based on the “simplified”
method described in Staff Accounting Bulletin No. 107, Share-Based Payment. The
risk-free interest rate is based on the U.S. Treasury yield in effect at the
time of grant for an instrument with a maturity that is commensurate with the
expected term of the stock options. The dividend yield of zero is based on the
fact that we have never paid cash dividends on our common stock, and we have no
present intention to pay cash dividends.  The forfeiture rate is estimated
at 17% for most options, with options granted to directors estimated at a 0%
forfeiture rate.




As of December 31, 2007, there was
approximately $97,000 of total unrecognized compensation cost, which includes
the impact of expected forfeitures related to unvested share-based compensation
arrangements. That cost is expected to be recognized over a weighted-average
period of 1.6 years.





A summary
of the stock option activity and related information for the year ended December
31, 2007 and 2006 is as follows:





Number
      of Shares
            
            
            Weighted
      Average Exercise Price
            
            
            Aggregate
      Intrinsic Value
            
            
            Weighted
      Average Remaining Contractual Life (years)Outstanding
      at January 1, 2006
            
            
            2,958,411
            
            
            $
            2.02
            
            
            
            -Granted
            
            
            680,000
            
            
            
            0.20
            
            
            
            -Exercised
            
            
            -
            
            
            
            -Expired
            
            
            (270,023
            )
            
            
            4.13
            
            
            
            -Forfeited
            
            
            (426,444
            )
            
            
            0.21
            
            
            
            -Outstanding
      at December 31, 2006
            
            
            2,941,944
            
            
            $
            1.66
            
            
            
            -
            
            
            7.60Granted
            
            
            4,494,434
            
            
            
            0.09Exercised
            
            
            -
            
            
            
            -Expired
            
            
            (188,511
            )
            
            
            1.36Forfeited
            
            
            (181,774
            )
            
            
            0.15Outstanding
      December 31, 2007
            
            
            7,066,093
            
            
            $
            0.72
            
            
            $
            24,112
            
            
            
            8.09Vested at December 31, 2007 and expected to vest
            
            
            6,888,917
            
            
            $
            0.73
            
            
            $
            23,473
            
            
            
            8.06Exercisable at December 31, 2007
            
            
            3,988,165
            
            
            $
            1.21
            
            
            $
            -
            
            
            
            7.10





F-13
 Table of Contents


The
following table summarizes information about stock options outstanding at
December 31, 2007:


Options
      Outstanding
              
              
              
              Options
      ExercisableRange
      of Exercise Price
              Outstanding
              
              Weighted Average Exercise $
              
              Weighted
      Average Remaining Life
              
              Exercisable
              
              Weighted
      Average Exercise $$0.07
              2,411,158
              
              0.07
              
              9.42
              
              -
              
              -$0.09
              1,388,890
              
              0.09
              
              8.34
              
              1,388,890
              
              0.09$0.10
              50,000
              
              0.10
              
              8.53
              
              23,612
              
              0.10$0.12
              50,000
              
              0.12
              
              7.99
              
              33,335
              
              0.12$0.14
              529,557
              
              0.14
              
              9.36
              
              -
              
              -$0.19
      to $0.21
              2,075,240
              
              0.21
              
              7.06
              
              1,981,080
              
              0.21$1.00
              257,844
              
              1.00
              
              4.57
              
              257,844
              
              1.00$1.90
      to $2.00
              102,400
              
              2.00
              
              5.86
              
              102,400
              
              2.00$2.30
              45,000
              
              2.30
              
              4.69
              
              45,000
              
              2.30$2.49
              48,230
              
              2.49
              
              3.14
              
              48,230
              
              2.49$5.00
              22,575
              
              5.00
              
              3.82
              
              22,575
              
              5.00$5.20
      to $5.40
              19,475
              
              5.25
              
              3.71
              
              19,475
              
              5.25$5.67
              33,390
              
              5.67
              
              0.88
              
              33,390
              
              5.67$11.80
              2,400
              
              11.80
              
              3.59
              
              2,400
              
              11.80$15.00
              16,134
              
              15.00
              
              0.75
              
              16,134
              
              15.00$20.80
              450
              
              20.80
              
              3.53
              
              450
              
              20.80$32.00
              300
              
              32.00
              
              3.50
              
              300
              
              32.00$58.76
              1,200
              
              58.76
              
              3.25
              
              1,200
              
              58.76$72.25
      to $76.25
              1,600
              
              74.75
              
              1.91
              
              1,600
              
              74.75$120.00
              1,000
              
              120.00
              
              1.78
              
              1,000
              
              120.00$178.12
              4,750
              
              178.12
              
              2.74
              
              4,750
              
              178.12$201.20
              400
              
              201.20
              
              2.43
              
              400
              
              201.20$304.38
              3,300
              
              304.38
              
              1.97
              
              3,300
              
              304.38$805.00
              800
              
              805.00
              
              2.19
              
              800
              
              805.00At
      December 31, 2007
              7,066,093
              
              0.72
              
              
              
              3,988,165
              
              1.21At
      December 31, 2006
              2,941,944
              
              1.66
              
              
              
              2,478,610
              
              1.94





In
addition to the outstanding options detailed above, 273,581 shares of restricted
stock were awarded to five senior executives under the 2007 Plan in September
2007.  Under the restricted stock agreements, 100% of the grants will
vest in May 2008 as long as the recipient remains employed by the Company. 
The restricted stock was granted with a weighted average price per share of
$0.07, which was the market value of the stock at the date of
grant.





10.
            Convertible Preferred
      Stock




Series
E




As of
December 31, 2007 and December 31, 2006 there were a total of 1,657 shares of
Series E Preferred Stock outstanding. The Series E Preferred Stock was
convertible into shares of our common stock at an initial conversion price of
$2.00 per share, and in July 2006 the Series E preferred shares began
accumulating dividends at a rate of 4% per annum calculated from the date
of issuance, which increased to 8% per annum July 2007. Accumulated earned
but undeclared dividends were $2,322,208 and $1,325,420 as of December 31, 2007
and 2006, respectively.   Since these dividends have not yet been
declared, they are not recognized as a liability, but are reflected in loss
applicable to common stockholders. The dividends will be recognized as a
liability when declared by the board of directors. At our option, the dividends
can be paid in cash or in shares of common stock. In connection with dilutive
issuances of stock options and warrants, the conversion price for the Series E
Preferred Stock was subsequently reduced to $1.92 per share as of December 31,
2006, and further reduced to $1.68 per share in September 2007. As a result, we
recognized a deemed dividend to the Series E Preferred Stockholders in the
amount of $1,222,740 and $359,477 for the years ended December 31, 2007 and
2006, respectively. The liquidation preference for the Series E Preferred Stock
is $10,000 per share plus accumulated dividends.




Series
G




As of
December 31, 2007 and December 31, 2006, we had 479.9 shares of Series G
Preferred Stock outstanding.  The Series G Preferred Stock earns no
dividends and can be converted to common stock at an exchange rate of $0.44. The
liquidation preference for the Series G Preferred Stock is $10,000 per
share.





We are
contractually obligated to register with the Securities and Exchange Commission
(SEC) certain shares of our common stock, including shares underlying
outstanding warrants and preferred stock.  Under such contractual
arrangements, we are required to pay penalties if we do not meet certain
timelines in such required registration.  We did not meet these
timelines for these stockholders and therefore we accrued monthly cash penalty
payments through the end of the quarter ending June 30, 2007.  Under
EITF 00-19 “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock”, we have estimated that the fair value of the
liability of such rights was $141,750 and $121,500 as of December 31, 2007 and
December 31, 2006, respectively. Because of the availability of Rule 144 under
the Securities Act of 1933, which provides for the resale of restricted
securities provided certain requirements have been met, no further liabilities
beyond July 1, 2007 have been recorded.




F-14
 Table of Contents


11.
Income Taxes





The
reconciliation between income taxes at the U.S. federal statutory rate and the
amount recorded in the accompanying consolidated financial statements is as
follows:





Year ended
      December 31,2007
            
            
            2006Tax
      at U.S. federal statutory rate
            
            $
            364,727
            
            
            $
            (847,723
            )(Decrease)
      increase in valuation allowance
            
            
            (530,411
            )
            
            
            292,587Expenses
      not deductible for tax purposes
            
            
            169,231
            
            
            
            172,540Effect
      of net change in foreign valuation allowance and difference between U.S.
      and foreign rates
            
            
            -
            
            
            
            (9,268
            )State
      income taxes, net of federal benefit
            
            
            64,364
            
            
            
            (152,295
            )Other
            
            
            (38,840
            )
            
            
            544,159Provision
      for income taxes
            
            $
            29,071
            
            
            $
            -





The
components of the Company's deferred tax assets (liabilities) at
December 31, 2007 and 2006 are as follows:





December 31,2007
            
            
            2006Deferred
      tax assets and liabilities:Net
      operating loss carry forwards
            
            $
            34,449,666
            
            
            $
            34,975,044Allowance
      for doubtful accounts
            
            
            17,063
            
            
            
            54,000Compensated
      Absences
            
            
            28,693
            
            
            
            35,357Deferred
      rent
            
            
            3,585
            
            
            
            3,457Deferred
      service fees
            
            
            557,097
            
            
            
            567,989Property
      and equipment
            
            
            (31,930
            )
            
            
            (52,191
            )Tax
      credit carry forwards
            
            
            33,210
            
            
            
            4,13935,057,384
            
            
            
            35,587,795Less:
      Valuation allowance
            
            
            (35,057,384
            )
            
            
            (35,587,795
            )$
            -
            
            
            $
            -





As of December 31, 2007, the
Company had generated Federal tax loss carry forwards of approximately $101.2
million and state tax loss carry forwards of $0.4 million, both of which expire
from 2012 to 2026.  Our ability to utilize the tax loss carry forwards
to reduce future taxable income has likely been limited under Internal Revenue
Code Section 382 as a result of our change in ownership as a result of our 2004
acquisition of Prescient Systems.




FASB
Statement No. 109, “Accounting for Income Taxes” (SFAS 109),  requires
the recording of a valuation allowance when it is more likely than not that some
portion or all of the deferred tax assets will not be realized.  The
ultimate realization of the deferred tax asset depends on our ability to
generate sufficient taxable income in the future.  We have recognized
a full valuation allowance for the amount of the net deferred tax asset at
December 31, 2007 and 2006 since there is uncertainty of
realization.  The valuation allowance decreased $0.5 million and
increased $0.3 million during 2007 and 2006, respectively.




On
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109” (FIN 48).  FIN 48 provides recognition criteria and a related
measurement model for uncertain tax positions taken or expected to be taken in
income tax returns.  FIN 48 requires that a position taken or expected
to be taken in a tax return be recognized in the financial statements when it is
more likely than not that the position would be sustained upon examination by
tax authorities.  Tax positions that meet the more likely than not
threshold are then measured using a probability weighted approach recognizing
the largest amount of tax benefit that is greater than 50% likely of being
realized upon ultimate settlement.   The Company had no tax
positions relating to open income tax returns that were considered to be
uncertain.  Accordingly, we have not recorded a liability for
unrecognized tax benefits upon adoption of FIN 48.  There continues to
be no liability related to unrecognized tax benefits at December 31,
2007.


F-15
 Table of Contents





The
Company’s 2004, 2005 and 2006 tax years remain subject to examination by the
IRS.  The expiration of the statute of limitations related to various
state income tax returns varies by state.  The Company’s consolidated
Federal tax returns and any significant state tax returns are not currently
under examination.




In May
2006, the state of Texas enacted House Bill 3, which replaces the state’s
current franchise tax with a “margin tax”.  This legislation significantly
affects the tax system for most corporate taxpayers.  The margin tax,
which is based on revenues less certain allowed deductions, will be accounted
for as an income tax, following the provisions of SFAS 109.  The
Company has reviewed the provisions of this legislation and has concluded that
the impact on its deferred taxes is immaterial.





The tax
deduction for stock-based compensation for prior periods in 2001 through 2004
exceeds the cumulative expense for those options and warrants recognized for
financial statement purposes by approximately $12.2 million.  This
excess deduction is a component of the tax loss carry forwards for which a
deferred tax asset and corresponding valuation allowance of approximately $4.9
million have been recorded at December 31, 2007.  When the loss carry
forwards are subsequently utilized, this portion of the benefit will be credited
directly to additional paid-in capital.




12.
            Related
      Parties




On
August 4, 2006, we entered into a services agreement with Fastech
Integrated Solutions, LLC (Fastech) for hardware relocation/migration services
and on demand hosting services. The services agreement shall remain in effect
for a period of 36 months and shall renew each term for a consecutive 36 month
period until terminated by one party 120 days prior to the expiration of the
then current term. Michael A. DiPiano is a member of our Board of Directors and
a General Partner of NewSpring Ventures, which is one of our significant
stockholders. Mr. DiPiano is also an affiliate of a significant debt holder
of Fastech, NewSpring Capital. During 2007 and 2006 we recorded expense of
$477,020 and $164,000, respectively, under the services agreement, of which
approximately $40,000 is included in accounts payable at December 31,
2007.




Future
minimum payments under the services agreement at December 31, 2007 are as
follows:




Service
              Agreement2008
            
            $
            477,0002009
            
            
            255,0002010
            
            -Future
      minimum lease payments
            
            $
            732,000





On May 8,
2007, we entered into a letter of intent (LOI) with Fastech for the purchase by
us of all of the assets of Fastech.  The LOI was subsequently
terminated effective July 17, 2007.





The
Company pays Mr. Rumsey, our Chairman of the Board of Directors and Interim
Chief Financial Officer, $10,000 per month in consideration for his services as
principal financial and accounting officer of the Company.  In
addition, Mr. Rumsey is paid $3,000 quarterly for his service on the Board of
Directors, consistent with our Director compensation policy.




13.
            Commitments and
      Contingencies




We lease
our office and storage space under operating leases. The terms range from
month-to-month up to five years. We also lease office equipment under various
non-cancelable lease agreements. Total facility and equipment rental expense in
2007 and 2006 were $306,000 and 395,000, respectively.




Future
minimum lease payments under non-cancelable operating leases at December 31,
2007 are as follows:




Operating
              Leases2008
            
            $
            360,0002009
            
            
            345,0002010
            
            
            245,0002011
            
            
            68,0002012
            
            
            -Future
      minimum lease payments
            
            $
            1,018,000




14.
            Retirement
      Plan




We have a
401(k) /profit sharing plan (Retirement Plan) for certain eligible employees who
have attained the age of 18 and completed one year of service. Participant
contributions are discretionary to a maximum of 15% of eligible compensation,
for any Retirement Plan year. Starting in 2007, the Company matches 33% of the
employees’ contributions up to 6% of employee compensation.  The
Company has the right to make additional discretionary
contributions.  There were no discretionary contributions in 2007 or
2006.  For the years ended December 31, 2007 and 2006, employer
contributions were $47,000 and $0, respectively.


F-16
 Table of Contents




15.
            Selected Quarterly Data
      (unaudited)




Selected
unaudited quarterly data are as follows:




2007March 31,
            
            
            June 30,
            
            
            September 30,
            
            
            December 31,Revenues
            
            $
            2,444,375
            
            
            $
            2,510,765
            
            
            $
            2,442,968
            
            
            $
            2,005,495Income
      from operations
            
            
            287,747
            
            
            
            400,024
            
            
            
            432,002
            
            
            
            218,287Net
      income
            
            
            218,117
            
            
            
            330,695
            
            
            
            365,012
            
            
            
            129,833Net
      loss applicable to common stockholder
            
            
            (288,013
            )
            
            
            (27,589
            )
            
            
            (676,274
            )
            
            
            (204,245)Net
      loss applicable to common stockholder per share
            
            $
            (0.01
            )
            
            $
            (0.00
            )
            
            $
            (0.02
            )
            
            $
            (0.01)




2006March
      31,
            
            
            June
      30,
            
            
            September
      30,
            
            
            December
      31,Revenues
            
            $
            2,412,541
            
            
            $
            2,379,233
            
            
            $
            1,986,331
            
            
            $
            2,466,120(Loss)
      income from operations
            
            
            (606,039
            )
            
            
            (405,266
            )
            
            
            (298,111
            )
            
            
            176,077Net
      loss
            
            
            (608,065
            )
            
            
            (451,177
            )
            
            
            (1,529,391
            )
            
            
            95,329Net
      loss applicable to common stockholder
            
            
            (691,740
            )
            
            
            (451,177
            )
            
            
            (2,997,324
            )
            
            
            (112,210
            )Net
      loss applicable to common stockholder  per
      share
            
            $
            (0.02
            )
            
            $
            (0.01
            )
            
            $
            (0.08
            )
            
            $
            0.00





F-17