**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-K**




**x**
            **Annual
                report pursuant to section 13 or 15(d) of the Securities Exchange Act
                of 1934.******
              **For
                the fiscal year ending December 31,
                2007**




**Or**





**o**
            **Transition
                report pursuant to Section 13 or 15(d) of the Securities Exchange Act
                of 1934.******************
              **For
                the transition period from
                ________    to ________.**




**Commission
      file number  001-32623**




**CONVERSION
      SERVICES INTERNATIONAL, INC.**


(Exact
      name of registrant as specified in its charter)




**Delaware**
            
            **20-0101495**(State
                or other jurisdiction
              of
                incorporation or organization)
            
            (IRS
                Employer
              Identification
                number)**100
                Eagle Rock Avenue, East Hanover, NJ**
            
            **07936**(Address
                of Principal Executive Offices)
            
            (Zip
                Code)




**973-560-9400**


(Registrant’s
      Telephone Number, Including Area Code)




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




**Title
                of Each Class**
            
            **Name
                of Each Exchange**
              **On
                Which Registered**Common
                Stock, $.001 par value
            
            American
                Stock Exchange





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




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




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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the preceding 12 months (or for such shorter period that the registrant was
      required to file such reports) and (2) has been subject to such filing
      requirements for the past 90 days.


YES x  NO o










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





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





Large
                accelerated filero
            Accelerated
                filero
            Non-accelerated
                filero
            Smaller
                reporting companyý




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




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the registrant was approximately $6,228,593 as of June
      29, 2007 (based on the closing price for such stock as of June 29,
      2007).





As
      of
      March 28, 2008, there were 114,831,697  shares of common stock, par value
      $0.001 per share, of the registrant outstanding.





DOCUMENTS
      INCORPORATED BY REFERENCE





None







**TABLE
      OF CONTENTS**





**PART
                I****Item
                1.**
            **Business**
            3**Item
                1A.**
            **Risk
                Factors**
            16**Item
                1B.**
            **Unresolved
                Staff Comments**
            28**Item
                2.**
            **Properties**
            28**Item
                3.**
            **Legal
                Proceedings**
            28**Item
                4.**
            **Submission
                of Matters to a Vote of Security Holders**
            29**PART
                II****Item
                5.**
            **Market
                For Registrant's Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities**
            29**Item
                6.**
            **Selected
                Financial Data**
            30**Item
                7.**
            **Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations**
            30**Item 7A.**
            **Quantitative
                and Qualitative Disclosures About Market Risk**
            45**Item
                8.**
            **Financial
                Statements and Supplementary Data**
            45**Item
                9.**
            **Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure**
            45**Item 9A.**
            **Controls
                and Procedures**
            45**Item 9B.**
            **Other
                Information**
            46**PART
                III****Item
                10.**
            **Directors
                and Executive Officers of the Registrant**
            46**Item
                11.**
            **Executive
                Compensation**
            51**Item
                12.**
            **Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters**
            54**Item
                13.**
            **Certain
                Relationships and Related Transactions**
            56**Item
                14.**
            **Principal
                Accounting Fees and Services**
            56**PART
                IV****Item
                15.**
            **Exhibits**
            57




2





**PART
      I**




**ITEM
      1.  BUSINESS**




References
      in this Form 10-K to the “Company,” “CSI,” “we,” “our” and “us” refer to
      Conversion Services International, Inc. and our consolidated subsidiaries.
      We
      are a technology and business process management firm providing professional
      services to the Global 2000 as well as mid-market clientele. Our core competency
      areas include strategic consulting, data warehousing, business intelligence,
      business process optimization, change management, Lean and Six Sigma consulting
      and data management consulting. Our clients are primarily in the financial
      services, pharmaceutical, healthcare and telecommunications industries, although
      we do have clients in other industries. Our clients are primarily located in
      the
      northeastern United States. We enable organizations to leverage their corporate
      information assets by providing strategy, process, methodology, data
      warehousing, business intelligence, enterprise reporting and analytic solutions.
      Our organization delivers value to our clients, utilizing a combination of
      business acumen, technical proficiency, experience and a proven set of “best
      practices” methodologies to deliver cost effective services primarily through
      time and material engagements.





We
      believe that we possess the following attributes which differentiate us from
      our
      competitors:





·
            role
                as a full life-cycle solution provider;·
            ability
                to provide strategic guidance and ensure that business requirements
                are
                properly supported by technology;


·
            ability
                to provide solutions that integrate people, improve process and integrate
                technologies;


·
            full
                range of service offerings relating to data warehousing, business
                intelligence, strategy and data
                quality;


·
            perspective
                regarding the accuracy of data and our data purification
                process;


·
            best
                practices methodology, process and
                procedures;


·
            experience
                in architecting, recommending and implementing large and complex
                data
                warehousing and business intelligence solutions;


·
            understanding
                of data management solutions;


·
            ability
                to consolidate inefficient environments into robust, scalable, reliable
                and manageable enterprise solutions; andl
            end-to-end
                process review and design
                capabilities.





Our
      goal
      is to be the premier provider of data warehousing, business intelligence,
      business process optimization solutions and related strategic consulting
      services for organizations seeking to leverage their corporate information.
      In
      support of this goal we intend to:





·
            enhance
                our brand and mindshare;




3





·
            continue
                growth both organically and via
                acquisition;





·
            increase
                our geographic coverage;





·
            expand
                our client relationships;





·
            introduce
                new and creative service offerings;
                and





·
            leverage
                our strategic alliances.




We
      are
      committed to being a leader in data warehousing and business intelligence
      consulting. As a data warehousing and business intelligence specialist, we
      approach business intelligence from a strategic perspective, providing
      integrated data warehousing and business intelligence strategy and technology
      implementation services to clients that are attempting to leverage their
      enterprise information. Our matrix of services includes strategy consulting,
      data warehousing and business intelligence architecture and implementation
      solutions, data quality solutions and data management solutions. We have
      developed a methodology which provides a framework for each stage of a client
      engagement, from helping the client conceive its strategy, to architecting,
      engineering and extending its information. We believe that our integrated
      methodology allows us to deliver reliable, robust, scalable, secure and
      extensible business intelligence solutions in rapid timeframes based on accurate
      information. We also strive to be the leading provider of business process
      optimization solutions for organizations seeking to transform their businesses.
      We bring full-service implementation capabilities to handle any business,
      process or technical change. We provide value to our business process
      optimization clients through end-to-end review and design capabilities, by
      providing business/technology alignment to support continuous process
      improvement and we employ experienced change management professionals with
      functional expertise in their industries.





We
      are a
      Delaware corporation formerly named LCS Group, Inc. In January 2004, a
      privately-held company named Conversion Services International, Inc. (“Old CSI”)
      merged with and into our wholly owned subsidiary, LCS Acquisition Corp. In
      connection with such transaction: (i) a 14-year old information technology
      business (formed in 1990) became our operating business, (ii) the former
      stockholders of Old CSI assumed control of our Board of Directors and were
      issued approximately 75.9% of the outstanding shares of our common stock at
      that
      time (due to subsequent events, that percentage of ownership has decreased),
      and
      (iii) we changed our name to “Conversion Services International, Inc.”





On
      September 21, 2005, our common stock began trading on the American Stock
      Exchange under the symbol “CVN”.





Our
      offices are located at 100 Eagle Rock Avenue, East Hanover, New Jersey 07936,
      and our telephone number is (973) 560-9400.





**Our
      Services**





As
      a full
      service strategic consulting, business intelligence, data warehousing and data
      management firm, we offer services in the following solution
      categories:





**Strategic
      Consulting:** Involves
      planning and assessing both process and technology, performing gap analysis,
      making recommendations regarding technology and business process improvements
      to
      help our clients realize their business goals and maximize their investments
      in
      people and technology.





Business
      and Process Consulting


·
              Information,
                  Process and Infrastructure (IPI) Diagrams (Claritypath) - A blueprinting
                  process and service that facilitates and accelerates the strategic
                  planning process.




4





·
            Change
                Management Consulting - Assist clients with implementing project
                management governance and best practices for large scale change
                initiatives, including consolidations, conversions, integration of
                new
                business processes and systems
                applications.





·
            Integration
                Management, Mergers and Acquisitions - Work with clients to implement
                best
                practices for mergers and acquisitions. Support all aspects of the
                integration process from initial assessment through implementation
                support.·
            Acquisition
                Readiness - Work with clients to better prepare them for large scale
                acquisitions in the financial services domain. This includes building
                best
                practices, mapping and gapping and implementing a strategic roadmap
                to
                integrate multiple companies.





·
            Process
                Improvement (Lean, Six Sigma) - Provide a full array of products
                and
                services in support of Lean and Six Sigma, including training, process
                improvement, project management and implementation
                support.





·
            Regulatory
                Compliance (The Health Insurance Portability and Accountability Act
                of
                1996, Basel II) - Work with clients to analyze, design and implement
                operational control, procedures and business intelligence that will
                align
                the organization to meet new regulatory requirements.





·
            Project
                Management (PMO) - Setting up an internal office at a client location,
                staffed with senior/certified project managers that act in accordance
                with
                the policies and procedures identified in CSI Best Practices for
                Project
                Management.





·
            Request
                For Proposal Creation and Responses - Gather user and technical
                requirements and develop Requests For Proposals (RFP) on behalf of
                our
                clients. Respond to client RFPs with detailed project plans, solutions
                and
                cost.





Technology
      Consulting





·
            Data
                Warehousing and Business Intelligence Strategic Planning - Helping
                clients
                develop a strategic roadmap to align with a data warehouse or business
                intelligence implementation. These engagements are focused on six
                strategic domains that have been identified and documented by CSI:
                Business Case, Program Formulation, Organizational Design, Program
                Methodologies, Architecture and Operations and Servicing.·
            Business
                Technology Alignment - A strategic offering that consists of a series
                of
                interviews including both the business and technology constituents
                to
                collect information regarding user satisfaction, user requirements
                and
                expectations, as well as the technology groups understanding of needs
                and
                current and future deliverables. The result is a set of recommendations
                that will better align the user and technology groups and deliver
                more
                perceived value.





·
            Business
                Intelligence Strategy - Helping clients develop a roadmap to leverage
                a
                business intelligence platform throughout the enterprise aligning
                the
                client with best practices.





·
            BI/DW
                Software Selection - Evaluation, analysis and recommendation of
                appropriate software tools for deploying business intelligence/data
                warehousing solutions. Gather business and technical requirements
                and
                measure those requirements against the capabilities of available
                tools in
                the current marketplace. Software evaluated and recommended include
                reporting, ad-hoc query, analytics, extract, transform and load processes
                (ETL), data profiling, database and data
                modeling.




5





**Business
      Intelligence:** A
      category of applications and technologies for gathering, storing, analyzing
      and
      providing access to data to help enterprise users make better and quicker
      business decisions.





·
            Business
                Intelligence, Architecture and Implementation - Develop architecture
                plans
                and install all tools required to implement a business intelligence
                solution, including enterprise reporting, ad-hoc reporting, analytical
                views and data mining. Solutions are typically developed using tools
                such
                as Cognos, Business Objects, MicroStrategy, SAS and Crystal
                Reports.·
            Business
                Intelligence Competency Center - Set up an internal office at a client
                location, staffed with a mix of senior business intelligence developers
                and business intelligence architects that will implement best practices,
                policies, procedures, standards and provide training and mentoring
                to
                further increase the use of the data warehouse and facilitate the
                business
                owners embracing of the business intelligence
                solution.





·
            Analytics
                and Dashboards - Identify and document dashboard requirements. These
                requirements are typically driven by Key Performance Indicators (KPIs)
                identified by upper management. Architect a supporting database structure
                to support the identified hierarchies, drill-downs and slice and
                dice
                requirements, implement a dashboard tool, provide training and
                education.





·
            Business
                Performance Management - Leveraging a new or existing business
                intelligence implementation to monitor and manage both business process
                and IT events through key performance
                indicators.





·
            Data
                Mining - Implementing data mining tools that extract implicit, previously
                unknown, and potentially useful information from data. These tools
                typically use statistical and visualization techniques to discover
                and
                present knowledge in a form which is easily comprehensible. Business
                intelligence tools will answer questions based on information that
                has
                already been captured (history). Data mining tools will discover
                information and project information based on historic
                information.





·
            Proof
                of Concepts and Prototypes - Gather requirements, design and implement
                a
                small scale business intelligence implementation called a Proof of
                Concept. The Proof of Concept will validate the technology and/or
                business
                case, as well as “sell” the concept of business intelligence to
                management.





·
            Outsourcing
                - Development of new reports offsite/offshore and redeployment of
                reports
                in new technologies in support of technology
                consolidation.





·
            Training
                and Education - Provide formal classroom training for Business Objects
                software products. Provide training in data warehousing and business
                intelligence methodologies and best practices, as well as technology
                tool
                training, including business intelligence tools such as Cognos and
                MicroStrategy.





**Data
      Warehousing:** A
      consolidated view of high quality enterprise information, making it simpler
      and
      more efficient to analyze and report on that information.





·
            Data
                Warehousing and Data Mart Design, Development and Implementation
                - Design,
                development and implementation of custom data warehouse solutions.
                These
                solutions are based on our methodology and best
                practices.




6




·
            Proof
                of Concepts and Prototypes - Gather requirements, design and implement
                a
                small scale data warehouse that is called a Proof of Concept. The
                Proof of
                Concept will validate the technology and/or business case, as well
                as
                “sell” the concept of data warehousing to management.·
            Extract,
                Transformation and Loading (ETL) - Design, development and implementation
                of data integration solutions with particular expertise and best
                practices
                for integrating ETL tools with other data warehouse
                tools.





·
            Enterprise
                Information Integration (EII) - Enterprise Information Integration
                tools
                are used to integrate information by providing a logical view of
                data
                without moving any data. This is particularly useful when bridging
                a
                business intelligence tool to multiple data marts or data
                warehouses.





·
            Outsourcing
                - Implementing and supporting a client data warehouse solution at
                a CSI
                location.





**Data
      Management:** Innovative
      solutions for managing data (information) throughout an enterprise.





·
            Enterprise
                Information Architecture - Leveraging our Information, Process and
                Infrastructure (IPI) Diagrams to create a “snapshot” of the current
                information flow and desired information flow throughout the enterprise.·
            Metadata
                Management - Based on our Data Warehouse Framework, we will build
                a
                metadata repository that is integrated with all tools used in a data
                warehouse implementation and will be leveraged by the business
                intelligence environment.


·
            Data
                Quality Center of Excellence - Set up an internal office at a client
                location, staffed with a mix of senior data quality developers and
                data
                quality architects that will implement best practices, policies,
                procedures, standards and provide training and mentoring to further
                increase the level of data quality throughout the enterprise and
                increase
                the awareness and importance of data quality as it pertains to decision
                making.


·
            Data
                Quality/Cleansing/Profiling - Leveraging profiling as an automated
                data
                analysis process that significantly accelerates the data analysis
                process.
                Leveraging our best practices to identify data quality concerns and
                provide rules to cleanse and purify the
                information.


·
            Data
                Migrations and Conversions - Design, development and implementation
                of
                custom data migrations. These solutions are based on our methodology
                and
                best practices.


·
            Quality
                Assurance Testing (Verification, Validation, Certification) - We
                have
                developed a quality assurance process referred to as Verification,
                Validation, Certification (VVC) of information. This is a repeatable
                process that will insure that all data has been validated to be accurate,
                consistent and trustworthy.


·
            Application
                Development - Custom application development or integration to support
                data management or data warehouse initiatives. This may include
                modification of existing enterprise applications to capture additional
                information required in the warehouse or may be a standalone application
                developed to facilitate improved integration of existing
                information.




7





·
            Infrastructure
                Management and Support - An infrastructure must be in place to support
                any
                data warehouse or data management initiative. This may include servers,
                cables, disaster recovery or any process and procedure needed to
                support
                these types of initiatives.





**Recent
      Financings**





The
      Company effectuated the following financing transactions since January 1,
      2007:





*Taurus
      Advisory Group / TAG Virgin Islands, Inc.*





On
      February 1, 2007, the Company issued a 10% Unsecured Promissory Note to an
      investor represented by TAG Virgin Islands, Inc. for $705,883, maturing on
      March
      1, 2007. This note was retired and included as part of the March 1, 2007 10%
      Unsecured Promissory Note in the principal amount of $4,000,000.





In
      March
      2007, we issued 10% Convertible Unsecured Notes to certain investors represented
      by TAG Virgin Islands, Inc. for $4.0 million.  The 10% Convertible
      Unsecured Notes were to automatically convert into 13,333,333 shares of our
      common stock, upon the effectiveness of the Information Statement on Schedule
      14C, filed with the SEC on March 8, 2007. The Information Statement related
      to
      the increase in the number of authorized shares of common stock, from
      100,000,000 to 200,000,000. The investors were also granted warrants to
      purchase 13,333,333 shares of our common stock, exercisable at a price of $0.33
      per share (subject to adjustment).   The warrants are exercisable for
      a period of five years. The note was subsequently amended in March 2007 to
      $4.25
      million and the number of shares of common stock that the note will convert
      into
      was increased to 14,166,667 shares of our common stock. Additionally, the
      warrant was also amended to entitle the investor to purchase 14,166,667 shares
      of our common stock, exercisable at a price of $0.33 per share (subject to
      adjustment). The warrant is exercisable for a period of five years. In June
      2007, the note automatically converted to equity and the 14,166,667 shares
      were
      issued to the investor.




On
      April
      27, 2007, the Company issued a 10% Convertible Unsecured Note (the “Note”) to
      certain investors represented by TAG Virgin Islands, Inc. for $250,000. The
      Note
      would automatically convert into 833,333 shares of common stock upon the
      effectiveness of the Information Statement on Schedule 14C, filed preliminarily
      by the Company with the Securities and Exchange Commission on March 8, 2007,
      amended on April 9, 2007 and filed definitively on May 1, 2007. The investor
      was
      also granted a warrant to purchase 833,333 shares of common stock, exercisable
      at a price of $0.33 per share (subject to adjustment), and is exercisable for
      a
      period of five years.  In
      June
      2007, the note automatically converted to equity and the 833,333 shares were
      issued to the investor.





On
      June
      6, 2007, the Company issued a 10% Convertible Unsecured Note (the "Note") to
      certain investors represented by TAG Virgin Islands, Inc. for $250,000. This
      note is due on demand and is convertible into 833,333 shares of common stock
      at
      the option of the holder. **** In
      the
      event that the Company obtains financing of at least $500,000, whether in the
      form of debt or equity, this Note is to be repaid to the investor immediately
      upon closing. **** The
      investor was also granted a warrant to purchase 833,333 shares of common stock,
      exercisable at a price of $0.33 per share (subject to adjustment), and is
      exercisable for a period of five years. This note was extinguished on December
      21, 2007 in exchange for 1,666,667 shares of Company Common Stock and a warrant
      to purchase an equal number of shares of Company Common Stock. The warrant
      has a
      $0.165 exercise price and is exercisable for five years.


8





On
      June
      27, 2007, the Company issued 10% Convertible Unsecured Notes (the "Notes")
      to
      certain investors represented by TAG Virgin Islands, Inc. for $400,000. These
      notes are due on demand and are convertible into 1,333,333 shares of common
      stock at the option of the holders. In the event that the Company obtains
      financing of at least $500,000, whether in the form of debt or equity, these
      Notes are to be repaid to the investors immediately upon closing. **** The
      investors were also granted warrants to purchase 1,333,333 shares of common
      stock, exercisable at a price of $0.33 per share (subject to adjustment), and
      are exercisable for a period of five years. These notes were extinguished on
      December 21, 2007 in exchange for 2,666,668 shares of Company Common Stock
      and
      warrants to purchase an equal number of shares of Company Common Stock. The
      warrants have a $0.165 purchase price and are exercisable for five
      years.





On
      August
      24, 2007, the Company entered into a Stock Purchase Agreement with an investor
      represented by TAG Virgin Islands, Inc., pursuant to which the Company issued
      550,000 shares of the Company's common stock, $0.001 par value, and the Company
      received proceeds of $115,500. Pursuant to the Stock Purchase Agreement, the
      Investor was also granted a warrant to purchase 550,000 shares of the Company's
      common stock, exercisable at a price of $0.22 per share (subject to adjustment).
      The warrant is exercisable for a period of five years. This transaction is
      also
      subject to a Registration Rights Agreement dated August 24, 2007.





On
      September 4, 2007, the Company entered into a Stock Purchase Agreement with
      certain investors represented by TAG Virgin Islands, Inc., pursuant to which
      the
      Company issued 1,140,000 shares of the Company's common stock, $0.001 par value,
      and the Company received proceeds of $239,400. Pursuant to the Stock Purchase
      Agreement, the Investors were also granted a warrant to purchase 1,140,000
      shares of the Company's common stock, exercisable at a price of $0.22 per share
      (subject to adjustment). The warrant is exercisable for a period of five years.
      This transaction is also subject to a Registration Rights Agreement dated
      September 4, 2007.





As
      of
      October 19, 2007, the Company and TAG Virgin Islands, Inc., as agent for the
      purchasers (the “Purchasers”), executed a Stock Purchase Agreement (the
“Agreement”). Pursuant to this Agreement, the Purchasers purchased from the
      Company $4.7 million in Company common stock, par value $0.001, in multiple
      closings prior to December 28, 2007. The purchase price of each share of common
      stock purchased was the higher of $0.10 per share or the per share closing
      price
      on the day that each purchase was effected. The Purchasers were also issued
      warrants to purchase Company common stock, the number of which was equal to
      the
      number of shares of common stock purchased. The warrants are exercisable at
      a
      price equal to 10% above the purchase price of the shares purchased and are
      exercisable for five years. Pursuant to a Registration Rights Agreement, the
      Company agreed to file a registration statement covering the shares of common
      stock underlying the Agreement and the warrant. Between October 19, 2007 and
      December 31, 2007, the Company received $2.2 million cash and exchanged $2.5
      million of outstanding debt for Company common stock. A total of 30,407,144
      shares of common stock were issued and 30,407,144 warrants to purchase common
      stock were issued. 1,875,000 of these warrants are exercisable at a price of
      $0.22 per share (subject to adjustment), 18,300,004 of these warrants are
      exercisable at a price of $0.165 per share (subject to adjustment), 7,375,000
      of
      these warrants are exercisable at a price of $0.175 per share (subject to
      adjustment) and 2,857,140 of these warrants are exercisable at a price of $0.154
      per share. The warrants are exercisable for a period of five years.





In
      March
      2008, the Company and TAG Virgin Islands, Inc. executed a Note Conversion
      Agreement whereby certain investors represented by TAG Virgin Islands, Inc.
      converted $600,000 of debt due to them under an Unsecured Convertible Line
      of
      Credit Note dated June 7, 2004 in Company Common Stock. The Company issued
      4,615,385 shares of Common Stock to the investors. The number of shares of
      common stock acquired was based on the $0.13 closing price of the Company’s
      stock on the American Stock Exchange on the date of conversion. Warrants to
      purchase 4,615,385 shares of Company Common Stock were provided to the investors
      as an inducement to convert. The warrants are exercisable at a price of $0.143
      per share, and are exercisable for five years.





*Laurus*





In
      March
      2007, we repaid in full the Overadvance Side Letter, dated as of February 1,
      2006, with a cash payment of $2,601,084 and the issuance of a warrant to
      purchase 1,785,714 shares of Common Stock at an exercise price of $0.01 (after
      making the first two payments in February 2007, we were to pay Laurus
      approximately $258,424 per month until the aggregate principal amount of
      $3,101,084 was paid in full by December 31, 2007).  Further, we satisfied
      in full the outstanding amount on the Term Note with a cash payment of
      approximately $409,722. Laurus partially exercised the February 1, 2006 warrant
      and purchased 1,767,857 shares of the Company’s common stock during 2007. A
      warrant to purchase the remaining 17,857 shares remains outstanding at December
      31, 2007.


9





In
      December 2007 ,
      t he
      Company and Laurus agreed to reduce the amount available under the revolving
      line of credit from $10,000,000 to $3,000,000 and extend the maturity date
      of
      the line of credit from December 31, 2007 to March 31, 2008 in exchange for
      a
      $25,000 fee.





As
      of
      December 31, 2007, approximately $2.1 million was outstanding under the
      revolving line of credit. The interest rate on the revolving line was 8.25%
      as
      of December 31, 2007.




*Sands*





On
      September 22, 2005, upon maturity of the three subordinated secured convertible
      promissory notes equaling $1.0 million (the “Notes”) issued to Sands Brothers
      Venture Capital LLC, Sands Brothers Venture Capital III LLC and Sands Brothers
      Venture Capital IV LLC (collectively, “Sands”) in September 2004, the Company
      issued to Sands three new subordinated secured convertible promissory notes
      equaling $1.080 million, each with an annual interest rate of 12% expiring
      on
      January 1, 2007.





Between
      January and March 2007, we executed several extension agreements with three
      affiliates of Sands Brothers Venture Capital (“Sands”) and in exchange for a
      $15,000 extension fee, Sands agreed to extend the Maturity Date of the Notes
      from January 1, 2007 to February 1, 2007 and then, upon maturity and in exchange
      for a $150,000 payment to be applied against the principal balance outstanding
      on the Notes, agreed to extend the maturity date to March 1, 2007. On March
      1,
      2007, the Company and Sands agreed that the Company would pay the Funds an
      additional $900,000 cash during 2007, as well as issue shares of Common Stock
      and warrants to purchase Common Stock as final payment to satisfy the Sands
      Notes in full. In total, the Company paid $1,050,000 cash, issued 1,088,169
      shares of Common Stock to Sands and issued warrants to purchase a total of
      1,082,758 shares of Company Common Stock in order to settle the debt in full.
      The warrants to purchase Company Common Stock were issued in three tranches
      as
      follows: 263,512 shares, 541,379 shares and 277,867 shares with exercise prices
      of $0.34 per share, $0.50 per share and $0.22 per share, respectively. The
      warrants are exercisable for a period of three years.




*Access
      Capital*





The
      Company’s line of credit with Laurus Master Fund, Ltd. expired on December 31,
      2007 and, in exchange for a $25,000 fee, the maturity date was extended until
      March 31, 2008.





The
      Company executed a replacement revolving line of credit agreement in March
      2008
      with Access Capital, Inc. The Access Capital line of credit provides for
      borrowing up to a maximum of $3,500,000, based upon collateral availability,
      a
      90% advance rate against eligible accounts receivable, has a three year term,
      and an interest rate of prime (which was 5.25% as of March 26, 2008) plus 2.75%.
      The Company must comply with a minimum working capital covenant which requires
      the Company to maintain minimum monthly working capital of $400,000.
      Additionally, during the first year of the three year term the Company must
      maintain an average minimum monthly borrowing of $2,000,000 which increases
      to
      $2,250,000 in the second year and to $2,500,000 in the third year. The Company
      must also pay an annual facility fee equal to 1% of the maximum available under
      the facility and a $1,250 per month collateral management fee.





**Clients**





For
      18
      years, we have helped our clients develop strategies and implement technology
      solutions to help them leverage corporate information.


10





Our
      clients are primarily in the financial services, pharmaceutical, healthcare
      and
      telecommunications industries and are primarily located in the northeastern
      United States. During 2007, the Company had sales to two major customers, Bank
      of America (17.4%) and ING (10.5%), which accounted collectively for
      approximately 27.9% of revenues. During 2006, the Company had sales to three
      major customers, Bank of America (25.2%), Comsys (9.7%), and LEC, a related
      party (9.7%), which accounted collectively for approximately 44.6% of revenues.
      During the year ended December 31, 2005, two of our clients, LEC, a related
      party (13.4%), and Bank of America (27.2%), accounted collectively for
      approximately 40.6% of total revenues. As we continue to pursue and consummate
      acquisitions, our dependence on these customers should be less significant.
      We
      do not have long-term contracts with any of these customers. The loss of any
      of
      our largest customers could have a material adverse effect on our business.
      We
      have not had any collections problems with any of these customers to
      date.





**Marketing**





We
      currently market our services through our internal marketing group and our
      sales
      force comprised of 19 employees as of December 31, 2007. We also receive new
      business opportunities through referrals from current clients, strategic
      partners, independent industry analysts and industry associations. We are
      engaging in the following specific sales related programs and activities to
      expand our brand awareness and generate sales leads:





·
            *Advertising
                and Sponsorships*:
                Through advertising and sponsorship programs within the leading industry
                publications, we obtain new business leads and further increase our
                brand
                awareness. Throughout the year, we sponsor publications and newsletters
                published by DM Review, The Business Intelligence Network, The Data
                Warehousing Institute and iSix Sigma. Most of these sponsorships
                include
                web banner advertising and registration vehicles to promote CSI white
                papers and best practices research.





·
            *Web
                Site Promotion*:
                Our website (www.csiwhq.com)
                provides a comprehensive view of our service offerings and promotes
                our
                subject matter expertise via white papers, articles and industry
                presentations. We are currently promoting our website through internet
                search engine advertising, direct marketing and through reciprocity
                from
                partner sites.




·
            *Trade
                Show and Conference Participation*:
                Our participation in trade shows and conferences has helped our position
                within our industry. There are a number of trade shows and conferences
                within our target industry that provide significant exposure to
                prospective customers, business and trade media and industry analysts,
                as
                well as collaborative networking with technology partners. As with
                most
                trade show events, the higher the level of sponsorship, the greater
                exposure and benefits received, such as the location of our booth,
                banner
                and advertising space, and position on the conference agenda. In
                2008 we
                plan to be speaking or attending the following tradeshows and conferences:
                2008 DAMA International Conference, Rome BI Conference, TDWI World
                Conference, Lean Six Sigma & Process Improvement
                Summit.





·
            *Web
                Seminars:*Participation in web seminars provides exposure to new sales prospects
                and
                affords us the opportunity to demonstrate our subject matter expertise.
                We
                plan to perform approximately ten web seminars in 2008, in addition
                to
                participating as guest presenters at partner and vendor sponsored
                web
                seminars.





·
            *Thought
                Leadership:*We
                continually demonstrate our thought leadership by writing and promoting
                our white papers via our web site and through direct mail. Monthly
                articles by our consultants are published in DM Review, on The Business
                Intelligence Network and the iSix Sigma financial services channel.
                We
                intend to continue and expand all our publishing activities, including
                blogs, by-line articles and expert web channels where our experts
                respond
                to end-user questions (searchCRM and
                searchDataManagement.com).




11





·
            *Sponsorships
                of Vendor Marketing Activities*: 
                We expect that joint marketing activities with leading software vendors
                should also stimulate new business prospect generation.  This
                participation also enhances the market perception of CSI as experts
                in
                individual product areas by co-sponsoring and participating in vendor
                marketing activities. We are invited to write white papers and articles
                for vendors such as Microsoft and Business Objects. We sponsor and
                present
                at the Annual User Conferences for Business Objects and Teradata,
                as well
                as new product launch seminars with Business
                Objects.




·
            *Expanded
                Direct Sales Activities:*We
                are continually updating and increasing our direct contact programs
                for
                lead generation, cross selling and up-selling. We conduct direct
                sales
                activities, such as email and direct mail campaigns, telemarketing,
                networking and attending partnership functions to generate leads
                for
                direct sales opportunities. We have engaged inside sales firms to
                generate
                additional leads and appointments. In addition, we have developed
                a number
                of best practices service offerings which encompass selection, deployment,
                implementation, maintenance and knowledge transfer. In some cases,
                these
                service offerings include methodologies and best practices for integrating
                several vendor technology platforms resulting in cross selling and
                up
                selling opportunities when
                applicable.





·
            *Vendor
                Relations*:
                We are continually identifying key vendor relationships. With the
                ability
                to leverage our 18 year history, we intend to continue to forge and
                maintain relationships with technical, service and industry vendors.
                We
                have solidified and continue to develop strategic relationships with
                technology vendors in the data warehousing and business intelligence
                arena. These relationships designate our status as a systems integration
                and/or reseller which authorizes us to provide consulting services
                and to
                resell select vendor software. We employ certified consultants in
                our
                vendor partner technology platforms. We maintain vendor independence
                by
                consistently evaluating the respective vendors’ technologies in our lab
                located at our headquarters in East Hanover, New Jersey.  We
                regularly attend vendor partnership events, including partner summits
                and
                user group meetings, in support of our partnership programs. We currently
                maintain relationships with the
                following:




**Database
                Vendors:****Oracle**
            We
                are part of the Oracle Partner Program (OPP) as a Certified Solution
                Provider (CSP). We also employ certified Oracle professionals and
                our
                partnership allows us to utilize Oracle support channels for technical
                advisement.**Microsoft**
            We
                are a Gold Microsoft Certified Solution Provider. We maintain the
                required
                number of Microsoft certified professionals to hold this
                designation.**Netezza**
            We
                are a Systems Integration and Reseller Partner.**ParAccel**
            We
                are a strategic marketing and Reseller Partner.**Business
                Intelligence Vendors:****Business
                Objects**
            We
                are a Platinum Systems Integration and Reseller Partner. We employ
                and
                maintain a staff of professionals that are certified in the vendor’s
                technology.


12





**Cognos**
            We
                are a Systems Integration and Reseller Partner. We employ and maintain
                a
                staff of professionals that are certified in the vendor’s
                technology.**Informatica**
            We
                are a Systems Integration and Reseller Partner.**APOS**
            We
                are a Systems Integration and Reseller Partner.**Data
                Warehousing Vendors:****Appfluent**
            We
                are a strategic marketing and reseller partner.**Master
                Data Management Vendors:****Kalido**
            We
                are a Systems Integration and Reseller Partner.**Siperian**
            We
                are a Systems Integration and Reseller
                Partner.





**Protection
      Against Disclosure of Client Information**





As
      our
      core business relates to the storage and use of client information, which is
      often confidential, we have implemented policies to prevent client information
      from being disclosed to unauthorized parties or used inappropriately. Our
      employee handbook which every employee receives and acknowledges, mandates
      that
      it is strictly prohibited for employees to disclose client information to third
      parties. Our handbook further mandates that disciplinary action be taken against
      those who violate such policy, including possible termination. Our outside
      consultants sign non-disclosure agreements prohibiting disclosure of client
      information to third parties, among other things, and we perform background
      checks on employees and outside consultants.





**Intellectual
      Property**





The
      trademarks “TECH SMART BUSINESS WISE”, “QUALITY MANAGEMENT OFFICE”, “QMO” and
      DQXPRESS have been registered with the United States Patent and Trademark
      Office. We use non-disclosure agreements with our employees, independent
      contractors and clients to protect information which we believe are proprietary
      or constitute trade secrets.





**Competition**





To
      our
      knowledge, there are no publicly-traded competitors that focus solely on data
      warehousing and business intelligence consulting and strategy. However, we
      have
      several competitors in the general marketplace, including data warehouse and
      business intelligence practices within large international, national and
      regional consulting and implementation firms, as well as smaller boutique
      technology firms. Many of our competitors are large companies that have
      substantially greater market presence, longer operating histories, more
      significant client bases, and financial, technical, facilities, marketing,
      capital and other resources than we have. We believe that we compete with these
      firms on the basis of the quality of our services, industry reputation and
      price. **** We
      believe our competitors include firms such as:





·
            Accenture·
            Cap
                Gemini Ernst & Young




13




·
            IBM
                Global Services





·
            Fujitsu





·
            Bearing
                Point





·
            Answerthink





·
            Hitachi
                Consulting·
            Hewlett
                Packard




**Employees**





As
      of
      December 31, 2007, we had 32 outside consultants, 78 consultants on the payroll
      and 35 non-consultant employees. Outside consultants are not our employees,
      and
      as such, do not receive benefits or have taxes withheld.   These
      consultants are members or employees of separate corporations, they are
      responsible for providing us with a current certificate of insurance and they
      are responsible for filing and payment of their own taxes.  Consultants on
      the payroll may be either full time or hourly employees. Such consultants are
      billable to clients, and they have taxes withheld similar to other
      employees.





None
      of
      our employees are represented by a labor union or subject to a collective
      bargaining agreement. We have never experienced a work stoppage and we believe
      that our relations with employees are good.




**Available
      Information**





We
      file
      annual, quarterly and current reports, proxy statements and other information
      with the Securities and Exchange Commission (the “Commission”). You may read and
      copy any document we file with the Commission at the Commission's public
      reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549, 233 Broadway,
      New York, New York 10279, and Citicorp Center, 500 West Madison Street, Suite
      1400, Chicago, Illinois 60661-2511. Please call the Commission at 1-800-SEC-0330
      for further information on the public reference rooms. Our Commission filings
      are also available to the public from the Commission's Website at
      "http://www.sec.gov." We make available free of charge our annual, quarterly
      and
      current reports, proxy statements and other information upon request. To request
      such materials, please send a written request to William Hendry, our Chief
      Financial Officer, at our address as set forth above or at (973)
      560-9400.





We
      maintain a website at www.csiwhq.com (this is not a hyperlink, you must visit
      this website through an internet browser). Our website and the information
      contained therein or connected thereto are not incorporated into this Annual
      Report on Form 10-K.




***SPECIAL
      NOTE ON FORWARD LOOKING STATEMENTS***




*In
      addition to historical information, this Annual Report on Form 10-K contains
      forward looking statements within the meaning of the Private Securities
      Litigation Reform Act of 1995.  The forward-looking statements are subject
      to certain risks and uncertainties that could cause actual results to differ
      materially from those reflected in such forward-looking statements. 
Factors that might cause such a difference include, but are not limited to,
      those discussed in the sections entitled “Business”, “Risk Factors”, and
“Management’s Discussion and Analysis or Plan of Operation.”  Readers are
      cautioned not to place undue reliance on these forward-looking statements,
      which
      reflect management’s opinions only as of the date thereof.  We undertake no
      obligation to revise or publicly release the results of any revision of these
      forward-looking statements.  Readers should carefully review the risk
      factors described in this Annual Report and in other documents that we file
      from
      time to time with the Securities and Exchange Commission.*




14





*In
      some cases, you can identify forward-looking statements by terminology such
      as
“may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” “proposed,” “intended,” or “continue” or
      the negative of these terms or other comparable terminology. You should read
      statements that contain these words carefully, because they discuss our
      expectations about our future operating results or our future financial
      condition or state other “forward-looking” information. There may be events in
      the future that we are not able to accurately predict or control. You should
      be
      aware that the occurrence of any of the events described in these risk factors
      and elsewhere in this Annual Report could substantially harm our business,
      results of operations and financial condition, and that upon the occurrence
      of
      any of these events, the trading price of our securities could decline. Although
      we believe that the expectations reflected in the forward-looking statements
      are
      reasonable, we cannot guarantee future results, growth rates, levels of
      activity, performance or achievements.*





*Except
      as required by applicable law, including the securities laws of the United
      States, we do not intend to update any of the forward-looking statements to
      conform these statements to actual results. The following discussion should
      be
      read in conjunction with our financial statements and the related notes that
      appear elsewhere in this report.*





*We
      cannot give any guarantee that these plans, intentions or expectations will
      be
      achieved. All forward-looking statements involve risks and uncertainties, and
      actual results may differ materially from those discussed in the forward-looking
      statements as a result of various factors, including those factors described
      in
      the “Risk Factors” section of this Annual Report. Listed below and discussed
      elsewhere in this Annual Report are some important risks, uncertainties and
      contingencies that could cause our actual results, performances or achievements
      to be materially different from the forward-looking statements included in
      this
      Annual Report. These risks, uncertainties and contingencies include, but are
      not
      limited to, the following:*




·
            *our
                ability to finance our operations on acceptable terms, either through
                the
                raising of capital, the incurrence of convertible or other indebtedness
                or
                through strategic financing
                partnerships;*




·
            *our
                ability to retain members of our management team and our
                employees;*




·
            *our
                ability to retain existing clients or attract new
                clients;*·
            *our
                ability to adapt to the rapid technological change constantly occurring
                in
                the areas in which we provide
                services;*





·
              
              ·
            *our
                ability to offer pricing for services which is acceptable to clients;*
              
              *our
                ability to pay our debts;*





·
            *the
                competition that may arise in the future;
                and*





·
            *identifying
                suitable acquisition candidates and integrating new
                acquisitions.*





*The
      foregoing does not represent an exhaustive list of risks. Please see “Risk
      Factors” below for additional risks which could adversely impact our business
      and financial performance. Moreover, new risks emerge from time to time and
      it
      is not possible for our management to predict all risks, nor can we assess
      the
      impact of all risks on our business or the extent to which any risk, or
      combination of risks, may cause actual results to differ from those contained
      in
      any forward-looking statements. All forward-looking statements included in
      this
      Report are based on information available to us on the date of this Report.
      Except to the extent required by applicable laws or rules, we undertake no
      obligation to publicly update or revise any forward-looking statement, whether
      as a result of new information, future events or otherwise. All subsequent
      written and oral forward-looking statements attributable to us or persons acting
      on our behalf are expressly qualified in their entirety by the cautionary
      statements contained throughout this Report.*


15





**Item
      1A. Risk Factors**





The
      following factors should be considered carefully in evaluating the Company
      and
      its business:




**Risks
      Relating to Our Business**




**Because
      we depend on a small number of key clients, non-recurring revenue and contracts
      terminable on short notice, our business could be adversely affected if we
      fail
      to retain these clients and/or obtain new clients at a level sufficient to
      support our operations and/or broaden our client base.**





During
      the year ended December 31, 2007, services provided to two of our clients,
      Bank
      of America (17.4%) and ING (10.5 %) accounted for an aggregate of approximately
      27.9% of total revenues. During the year ended December 31, 2006, services
      provided to three of our clients, Bank of America (25.2%), Comsys (9.7%) and
      LEC
      (9.7%) accounted for an aggregate of approximately 44.6% of total revenues.
      Further, the majority of our current assets consist of accounts receivable,
      and
      as of December 31, 2007, receivables relating to Bank of America and ING
      accounted for 14.2%, and 17.8% of our accounts receivable balance, respectively.
      With the acquisition of new businesses and our objective of acquiring more
      over
      the next year, we believe that our reliance on these clients should continue
      to
      decline in the future. The loss of any of our largest clients could have a
      material adverse effect on our business. In addition, our contracts provide
      that
      our services are terminable upon short notice, typically not more than 30 days.
      Non-renewal or termination of contracts with these or other clients without
      adequate replacements could have a material and adverse effect upon our
      business. In addition, a large portion of our revenues are derived from
      information technology consulting services that are generally non-recurring
      in
      nature. There can be no assurance that we will:





·
            obtain
                additional contracts for projects similar in scope to those previously
                obtained from our clients;





·
            be
                able to retain existing clients or attract new
                clients;





·
            provide
                services in a manner acceptable to
                clients;




·
            offer
                pricing for services which is acceptable to clients; or





·
            broaden
                our client base so that we will not remain largely dependent upon
                a
                limited number of clients that will continue to account for a substantial
                portion of our revenues.





**Our
      internal controls and procedures have been materially deficient, and we are
      in
      the process of correcting internal control deficiencies.**




Our
      management, under the supervision and with the participation of our CEO and
      CFO,
      has evaluated the effectiveness of our disclosure controls and procedures as
      defined in Exchange Act Rules 13a-15(e) and15d-15(e) as of the end of the period
      covered by this Report based upon the framework in Internal Control—Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO). Based on such evaluation, our management has made an
      assessment that our internal control over financial reporting is not effective
      as of December 31, 2007.


16




We
      did
      not maintain effective financial reporting processes due to lack of
      documentation of certain review and approval functions.





There
      is
      a lack of segregation of duties at the Company due to the small number of
      employees dealing with general administrative and financial matters and general
      controls over information technology security and user access. This constitutes
      a weakness in financial reporting. Furthermore, the Company’s Chief Financial
      Officer is the only person with an appropriate level of accounting knowledge,
      experience and training in the selection, application and implementation of
      generally accepted accounting principles as it relates to complex transactions
      and financial reporting requirements.





If
      we
      cannot rectify these material weaknesses through remedial measures and
      improvements to our systems and procedures, management may encounter
      difficulties in timely assessing business performance and identifying incipient
      strategic and oversight issues. Management is currently focused on remedying
      internal control deficiencies, and this focus will require management from
      time
      to time to devote its attention away from other planning, oversight and
      performance functions.





We
      cannot
      provide assurances as to the timing of the completion of these efforts. We
      cannot be certain that the measures we take will ensure that we implement and
      maintain adequate internal controls in the future. Any failure to implement
      required new or improved controls, or difficulties encountered in their
      implementation, could harm our operating results or cause us to fail to meet
      our
      reporting obligations.





**Certain
      client-related complications may materially adversely affect our
      business.**





We
      may be
      subject to additional risks relating to our clients that could materially
      adversely affect our business, such as delays in clients paying their
      outstanding invoices, lengthy client review processes for awarding contracts,
      delay, termination, reduction or modification of contracts in the event of
      changes in client policies or as a result of budgetary constraints, and/or
      increased or unexpected costs resulting in losses under fixed-fee contracts,
      which factors could also adversely affect our business.





**We
      have a history of losses and we could incur losses in the
      future.**





During
      the years ended December 31, 2006 and 2007, we sustained operating losses and
      cannot be sure that we will operate profitably in the future. During the year
      ended December 31, 2007, we recorded a net loss in the approximate amount of
      ($10.2 million). During the fiscal year ended December 31, 2006, we reported
      a
      net loss in the approximate amount of ($9.6 million). If we do not become
      profitable, we could have difficulty obtaining funds to continue our operations.
      We have incurred net losses since our merger with LCS Group, Inc. We will
      continue to generate losses from the ongoing business prior to returning to
      profitability.





**We
      have a significant amount of debt, which, in the event of a default, could
      have
      material adverse consequences upon us.**





Our
      total
      debt as of December 31, 2007 was approximately $7.1 million. The degree to
      which
      we are leveraged could have important consequences to us, including the
      following:





·
            A
                portion of our cash flow must be used to pay interest on our indebtedness,
                and therefore is not available for use in our
                business;




·
            Our
                indebtedness increases our vulnerability to changes in general economic
                and industry conditions;




17





·
            Our
                ability to obtain additional financing for working capital, capital
                expenditures, general corporate purposes or other purposes could
                be
                impaired;





·
            Our
                failure to comply with restrictions contained in the terms of our
                borrowings could lead to a default which could cause all or a significant
                portion of our debt to become immediately payable;
                and





·
            If
                we default, the loans will become due and we may not have the funds
                to
                repay the loans, and we could discontinue our business and investors
                could
                lose all their money.





In
      addition, certain terms of such loans require the prior consent of Laurus Master
      Fund, Ltd. on many corporate actions including, but not limited to, mergers
      and
      acquisitions--which is part of our ongoing business strategy.





**If
      an event of default occurs under our notes with Laurus and Access Capital,
      it
      could seriously harm our operations.**





As
      of
      December 31, 2007 we had outstanding a secured non-convertible term note to
      Laurus of which $2.0 million was outstanding at December 31, 2007 and
      contained various events of default. This note matured and was paid in full
      during March 2008. In March 2008, we executed a loan and security agreement
      with
      Access Capital in the amount of up to $3.5 million. The note and related
      agreements contain several events of default which include:





·
            failure
                to pay interest, principal payments or other fees when
                due;





·
            failure
                to pay taxes when due unless such taxes are being contested in good
                faith;





·
            breach
                by us of any material covenant or term or condition of the notes
                or any
                agreements made in connection
                therewith;





·
            default
                on any indebtedness to which we or our subsidiaries are a party which
                has
                a material adverse effect;





·
            breach
                by us of any material representation or warranty made in the notes
                or in
                any agreements made in connection
                therewith;





·
            attachment
                is made or levy upon collateral securing the Access Capital debt
                which is
                valued at more than $25,000 and is not timely
                mitigated;





·
            any
                lien created under the notes and agreements is not valid and perfected
                having a first priority interest;





·
            assignment
                for the benefit of our creditors, or a receiver or trustee is appointed
                for us;




·
            bankruptcy
                or insolvency proceeding instituted by or against us and not dismissed
                within 45 days;





·
            the
                inability to pay debts as they become due or cease business
                operations;





·
            sale,
                assignment, transfer or conveyance of any assets except as
                permitted;




18





·
            a
                person or group becomes a beneficial owner of 20% on a fully diluted
                basis
                of the outstanding voting equity interest or the present directors
                cease
                to be the majority on the Board of
                Directors;





·
            indictment
                or threatened criminal indictment, or commencement of threatened
                commencement of any criminal or civil proceeding against us or any
                executive officer; and





·
            take
                any action which would be prohibited under the provisions of any
                subordination agreement or make any payment on subordinated debt
                that any
                person was not entitled to receive under the provisions of the applicable
                subordination agreement.





If
      we
      default on the notes and the holder demands all payments due and payable, the
      cash required to pay such amounts would most likely come out of working capital,
      which may not be sufficient to repay the amounts due. The default payment shall
      be the outstanding principal amount of the note, plus accrued but unpaid
      interest, all other fees then remaining unpaid, and all other amounts payable
      thereunder. In addition, since we rely on our working capital for our day to
      day
      operations, such a default on the note could materially adversely affect our
      business, operating results or financial condition to such extent that we are
      forced to restructure, file for bankruptcy, sell assets or cease operations.
      Further, our obligations under the notes are secured by substantially all of
      our
      assets. Failure to fulfill our obligations under the notes and related
      agreements could lead to loss of these assets, which would be detrimental to
      our
      operations.





**Our
      operating results are difficult to forecast.**





We
      may
      increase our general and administrative expenses in the event that we increase
      our business and/or acquire other businesses, while our operating expenses
      for
      sales and marketing and costs of services for technical personnel to provide
      and
      support our services also increases. Additionally, although many of our clients
      are large, creditworthy entities, at any given point in time, we may have
      significant accounts receivable balances with clients that expose us to credit
      risks if such clients either delay or elect not to pay or are unable to pay
      such
      obligations. If we have an unexpected shortfall in revenues in relation to
      our
      expenses, or significant bad debt experience, our business could be materially
      and adversely affected.




Our
      profitability, if any, will suffer if we are not able to retain existing clients
      or attract new clients. A continuation of current pricing pressures could result
      in permanent changes in pricing policies and delivery capabilities.





Our
      gross
      profit margin is largely a function of the rates we are able to charge for
      our
      information technology services. Accordingly, if we are not able to maintain
      the
      pricing for our services or an appropriate utilization of our professionals
      without corresponding cost reductions, our margins will suffer. The rates we
      are
      able to charge for our services are affected by a number of factors,
      including:





·
            our
                clients' perceptions of our ability to add value through our
                services;





·
            pricing
                policies of our competitors;





·
            our
                ability to accurately estimate, attain and sustain engagement revenues,
                margins and cash flows over increasingly longer contract
                periods;





·
            the
                use of globally sourced, lower-cost service delivery capabilities
                by our
                competitors and our clients; and





19





·
            general
                economic and political conditions.





Our
      gross
      margins are also a function of our ability to control our costs and improve
      our
      efficiency. If the continuation of current pricing pressures persists it could
      result in permanent changes in pricing policies and delivery capabilities and
      we
      must continuously improve our management of costs.





**Unexpected
      costs or delays could make our contracts unprofitable.**





In
      the
      future, we may have many types of contracts, including time-and-materials
      contracts, fixed-price contracts and contracts with features of both of these
      contract types. Any increased or unexpected costs or unanticipated delays in
      connection with the performance of these engagements, including delays caused
      by
      factors outside our control, could make these contracts less profitable or
      unprofitable, which would have an adverse effect on all of our margins and
      potential net income.





**Our
      business could be adversely affected if we fail to adapt to emerging and
      evolving markets.**





The
      markets for our services are changing rapidly and evolving and, therefore,
      the
      ultimate level of demand for our services is subject to substantial uncertainty.
      Most of our historic revenue was generated from providing information technology
      services only. During the last several years, we have focused our efforts on
      providing data warehousing services in particular since we believe that there
      is
      going to be an increased need in this area. Any significant decline in demand
      for programming, applications development, information technology or data
      warehousing consulting services could materially and adversely affect our
      business and prospects.





Our
      ability to achieve growth targets is dependent in part on maintaining existing
      clients and continually attracting and retaining new clients to replace those
      who have not renewed their contracts. Our ability to achieve market acceptance,
      including for data warehousing, will require substantial efforts and
      expenditures on our part to create awareness of our services.





**If
      we should experience rapid growth, such growth could strain our managerial
      and
      operational resources, which could adversely affect our
      business.**





Any
      rapid
      growth that we may experience would most likely place a significant strain
      on
      our managerial and operational resources. If we continue to acquire other
      companies, we will be required to manage multiple relationships with various
      clients, strategic partners and other third parties. Further growth (organic
      or
      by acquisition) or an increase in the number of strategic relationships may
      increase this strain on existing managerial and operational resources,
      inhibiting our ability to achieve the rapid execution necessary to implement
      our
      growth strategy without incurring additional corporate expenses.





**Lack
      of detailed written contracts could impair our ability to collect fees, protect
      our intellectual property and protect ourselves from liability to
      others.**





We
      try to
      protect ourselves by entering into detailed written contracts with our clients
      covering the terms and contingencies of the client engagement. In some cases,
      however, consistent with what we believe to be industry practice, work is
      performed for clients on the basis of a limited statement of work or verbal
      agreements before a detailed written contact can be finalized. To the extent
      that we fail to have detailed written contracts in place, our ability to collect
      fees, protect our intellectual property and protect ourselves from liability
      from others may be impaired.




**Failure
      to achieve and maintain effective internal controls in accordance with Section
      404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect
      on
      our business and operating results. In addition, current and potential
      stockholders could lose confidence in our financial reporting, which could
      have
      a material adverse effect on our stock price.**


20





Effective
      internal controls are necessary for us to provide reliable financial reports
      and
      effectively prevent fraud. If we cannot provide reliable financial reports
      or
      prevent fraud, our operating results could be harmed.





We
      are
      required to document and test our internal control procedures in order to
      satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which
      requires annual management assessments of the effectiveness of our internal
      controls over financial reporting and, effective in 2009, a report by our
      independent registered public accounting firm addressing these assessments.
      During the course of our testing, we may identify deficiencies which we may
      not
      be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley
      Act for compliance with the requirements of Section 404. In addition, if we
      fail
      to maintain the adequacy of our internal controls, as such standards are
      modified, supplemented or amended from time to time, we may not be able to
      ensure that we can conclude on an ongoing basis that we have effective internal
      controls over financial reporting in accordance with Section 404 of the
      Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal
      control environment could also cause investors to lose confidence in our
      reported financial information, which could have a material adverse effect
      on
      our stock price.





**Compliance
      with changing regulation of corporate governance and public disclosure may
      result in additional expenses.**





Changing
      laws, regulations and standards relating to corporate governance and public
      disclosure, including the Sarbanes-Oxley Act, new SEC regulations and exchange
      rules (although not, as of the date of this Annual Report, applicable to us),
      are creating uncertainty for companies such as ours. These new or changed laws,
      regulations and standards are subject to varying interpretations in many cases
      due to their lack of specificity, and as a result, their application in practice
      may evolve over time as new guidance is provided by regulatory and governing
      bodies, which could result in continuing uncertainty regarding compliance
      matters and higher costs necessitated by ongoing revisions to disclosure and
      governance practices. We are committed to maintaining high standards of
      corporate governance and public disclosure. As a result, our efforts to comply
      with evolving laws, regulations and standards have resulted in, and are likely
      to continue to result in, increased general and administrative expenses and
      a
      diversion of management time and attention from revenue-generating activities
      to
      compliance activities. In particular, our efforts to comply with Section 404
      of
      the Sarbanes-Oxley Act and the related regulations regarding our required
      assessment of our internal controls over financial reporting and our independent
      registered public accounting firm's audit of that assessment will require the
      commitment of significant financial and managerial resources. Further, our
      Board
      members, chief executive officer and chief financial officer could face an
      increased risk of personal liability in connection with the performance of
      their
      duties. As a result, we may have difficulty attracting and retaining qualified
      Board members and executive officers, which could harm our business. If our
      efforts to comply with new or changed laws, regulations and standards differ
      from the activities intended by regulatory or governing bodies due to
      ambiguities related to practice, our reputation may be harmed.




**We
      face intense competition and our failure to meet this competition could
      adversely affect our business.**





Competition
      for our information technology consulting services, including data warehousing,
      is significant and we expect that this competition will continue to intensify
      due to the low barriers to entry. We may not have the financial resources,
      technical expertise, sales and marketing or support capabilities to adequately
      meet this competition. We compete against numerous large companies, including,
      among others, multi-national and other major consulting firms. These firms
      have
      substantially greater market presence, longer operating histories, more
      significant client bases and greater financial, technical, facilities,
      marketing, capital and other resources than we have. If we are unable to compete
      against such competitors, our business will be adversely
      affected.


21





Our
      competitors may respond more quickly than us to new or emerging technologies
      and
      changes in client requirements. Our competitors may also devote greater
      resources than we can to the development, promotion and sales of our services.
      If one or more of our competitors develops and implements methodologies that
      result in superior productivity and price reductions without adversely affecting
      their profit margins, our business could suffer. Competitors may
      also:





·
            engage
                in more extensive research and
                development;





·
            undertake
                more extensive marketing campaigns;





·
            adopt
                more aggressive pricing policies;
                and





·
            make
                more attractive offers to our existing and potential employees and
                strategic partners.





In
      addition, current and potential competitors have established or may establish
      cooperative relationships among themselves or with third parties that could
      be
      detrimental to our business.





New
      competitors, including large computer hardware, software, professional services
      and other technology companies, may enter our markets and rapidly acquire
      significant market share. As a result of increased competition and vertical
      and
      horizontal integration in the industry, we could encounter significant pricing
      pressures. These pricing pressures could result in substantially lower average
      selling prices for our services. We may not be able to offset the effects of
      any
      price reductions with an increase in the number of clients, higher revenue
      from
      consulting services, cost reductions or otherwise.




In
      addition, professional services businesses are likely to encounter consolidation
      in the future, which could result in decreased pricing and other
      competition.





**We
      depend on our management and qualified personnel. If we fail to retain key
      personnel, our business could be adversely affected.**





There
      is
      intense competition for qualified personnel in the areas in which we operate.
      The loss of existing personnel or the failure to recruit additional qualified
      managerial, technical and sales personnel, as well as expenses in connection
      with hiring and retaining personnel, particularly in the emerging area of data
      warehousing, could adversely affect our business. We also depend upon the
      performance of our executive officers and key employees in particular, Messrs.
      Scott Newman and Glenn Peipert. Although we have entered into employment
      agreements with Messrs. Newman and Peipert, the loss of either of these
      individuals could have a material adverse effect upon us. In addition, we have
      not obtained "key man" life insurance on the lives of Messrs. Newman and
      Peipert.





We
      will
      need to attract, train and retain more employees for management, engineering,
      programming, sales and marketing, and client service and support positions.
      As
      noted above, competition for qualified employees, particularly engineers,
      programmers and consultants, continues to be intense. Consequently, we may
      not
      be able to attract, train and retain the personnel we need to continue to offer
      solutions and services to current and future clients in a cost effective manner,
      if at all.





**If
      we fail to raise capital that we may need to support and increase our
      operations, our business could be adversely affected.**





Our
      future capital uses and requirements will depend on several factors,
      including:





·
            the
                extent to which our solutions and services achieve market
                acceptance;




22





·
            the
                level of revenues from current and future solutions and
                services;





·
            the
                expansion of operations;




·
            the
                costs and timing of product and service developments and sales and
                marketing activities;





·
            the
                costs related to acquisitions of technology or businesses;
                and





·
            competitive
                developments.





We
      will
      require additional capital in order to continue to support and increase our
      sales and marketing efforts, continue to expand and enhance the solutions and
      services we are able to offer to current and future clients and fund potential
      acquisitions. This capital may not be available on terms acceptable to us,
      if at
      all. In addition, we may be required to spend greater-than-anticipated funds
      if
      unforeseen difficulties arise in the course of these or other aspects of our
      business. As a consequence, we will be required to raise additional capital
      through public or private equity or debt financings, collaborative
      relationships, bank facilities or other arrangements. We cannot assure that
      such
      additional capital will be available on terms acceptable to us, if at all.
      Further, if we raise capital through an equity or debt financing at a reduced
      exercise or conversion price, it could trigger certain anti-dilution provisions
      with other investors. Any additional equity financing is expected to be dilutive
      to our stockholders, and debt financing, if available, may involve restrictive
      covenants and increased interest costs. Our inability to obtain sufficient
      financing may require us to delay, scale back or eliminate some or all of our
      expansion programs or to limit the marketing of our services. This could have
      a
      material and adverse effect on our business.





**We
      could have potential liability for intellectual property infringement, personal
      injury, property damage or breach of contract to our clients that could
      adversely affect our business.**





Our
      services involve development and implementation of computer systems and computer
      software that are critical to the operations of our clients' businesses. If
      we
      fail or are unable to satisfy a client's expectations in the performance of
      our
      services, our business reputation could be harmed or we could be subject to
      a
      claim for substantial damages, regardless of our responsibility for such failure
      or inability. In addition, in the course of performing services, our personnel
      often gain access to technologies and content which include confidential or
      proprietary client information.





Although
      we have implemented policies to prevent such client information from being
      disclosed to unauthorized parties or used inappropriately, any such unauthorized
      disclosure or use could result in a claim for substantial damages. Our business
      could be adversely affected if one or more large claims are asserted against
      us
      that are uninsured, exceed available insurance coverage or result in changes
      to
      our insurance policies, including premium increases or the imposition of large
      deductible or co-insurance requirements. Although we maintain general liability
      insurance coverage, including coverage for errors and omissions, there can
      be no
      assurance that such coverage will continue to be available on reasonable terms
      or will be available in sufficient amounts to cover one or more large
      claims.




**We
      do not intend to pay dividends on shares of our common stock in the foreseeable
      future.**





We
      have
      never paid cash dividends on our common stock. Our current Board of Directors
      does not anticipate that we will pay cash dividends in the foreseeable future.
      Instead, we intend to retain future earnings for reinvestment in our business
      and/or to fund future acquisitions. In addition, our security agreement with
      Laurus Master Fund, Ltd. and Loan and Security Agreement with Access Capital
      requires that we obtain their consent prior to paying any dividends on our
      common stock.


23





**Our
      management group owns or controls a significant number of the outstanding shares
      of our common stock and will continue to have significant ownership of our
      voting securities for the foreseeable future.**





As
      of
      December 31, 2007, Scott Newman and Glenn Peipert, executive officers of the
      Company and two of our directors, beneficially own approximately 17.6% and
      9.3%,
      respectively, of our outstanding common stock. This concentration of ownership
      of our common stock may:





·
            delay
                or prevent a change in the control;





·
            impede
                a merger, consolidation, takeover or other transaction involving
                us;
                or





·
            discourage
                a potential acquirer from making a tender offer or otherwise attempting
                to
                obtain control of us.





**The
      authorization and issuance of “blank check” preferred stock could have an
      anti-takeover effect detrimental to the interests of our
      stockholders.**





Our
      certificate of incorporation allows the Board of Directors to issue 20,000,000
      shares of preferred stock with rights and preferences set by our Board without
      further stockholder approval. The issuance of shares of this "blank check
      preferred" under particular circumstances could have an anti-takeover effect.
      For example, in the event of a hostile takeover attempt, it may be possible
      for
      management and the Board to endeavor to impede the attempt by issuing shares
      of
      blank check preferred, thereby diluting or impairing the voting power of the
      other outstanding shares of common stock and increasing the potential costs
      to
      acquire control of us. Our Board of Directors has the right to issue blank
      check
      preferred without first offering them to holders of our common stock, as the
      holders of our common stock have no preemptive rights. To date, the Company
      has
      issued 19,000 shares of Series A Convertible Preferred Stock to investors
      represented by TAG Virgin Islands, Inc. and 20,000 shares of Series B
      Convertible Preferred Stock to an individual investor.





**Our
      services or solutions may infringe upon the intellectual property rights of
      others.**





We
      cannot
      be sure that our services and solutions, or the solutions of others that we
      offer to our clients, do not infringe on the intellectual property rights of
      third parties, and we may have infringement claims asserted against us or
      against our clients. These claims may harm our reputation, cost us money and
      prevent us from offering some services or solutions. In some instances, the
      amount of these expenses may be greater than the revenues we receive from the
      client. Any claims or litigation in this area, whether we ultimately win or
      lose, could be time-consuming and costly, injure our reputation or require
      us to
      enter into royalty or licensing arrangements. We may not be able to enter into
      these royalty or licensing arrangements on acceptable terms. To the best of
      our
      knowledge, we have never infringed upon the intellectual property rights of
      another individual or entity.




**We
      could be subject to systems failures that could adversely affect our
      business.**





Our
      business depends on the efficient and uninterrupted operation of our computer
      and communications hardware systems and infrastructure. We currently maintain
      our computer systems in our facilities at our offices in New Jersey and
      elsewhere. We do not have complete redundancy in our systems and therefore
      any
      damage or destruction to our systems would significantly harm our business.
      Although we have taken precautions against systems failure, interruptions could
      result from natural disasters as well as power losses, telecommunications
      failures and similar events. Our systems are also subject to human error,
      security breaches, computer viruses, break-ins, "denial of service" attacks,
      sabotage, intentional acts of vandalism and tampering designed to disrupt our
      computer systems. We also lease telecommunications lines from local and regional
      carriers, whose service may be interrupted. Any damage or failure that
      interrupts or delays network operations could materially and adversely affect
      our business.


24





**Our
      business could be adversely affected if we fail to adequately address security
      issues.**





We
      have
      taken measures to protect the integrity of our technology infrastructure and
      the
      privacy of confidential information. Nonetheless, our technology infrastructure
      is potentially vulnerable to physical or electronic break-ins, viruses or
      similar problems. If a person or entity circumvents our security measures,
      it
      could jeopardize the security of confidential information stored on our systems,
      misappropriate proprietary information or cause interruptions in our operations.
      We may be required to make substantial additional investments and efforts to
      protect against or remedy security breaches. Security breaches that result
      in
      access to confidential information could damage our reputation and expose us
      to
      a risk of loss or liability.





**Risks
      Relating To Acquisitions**


**We
      face intense competition for acquisition candidates, and we may have limited
      cash available for such acquisitions.**





There
      is
      a high degree of competition among companies seeking to acquire interests in
      information technology service companies such as those we may target for
      acquisition. We are expected to continue to be an active participant in the
      business of seeking business relationships with, and acquisitions of interests
      in, such companies. A large number of established and well-financed entities,
      including venture capital firms, are active in acquiring interests in companies
      that we may find to be desirable acquisition candidates. Many of these
      investment-oriented entities have significantly greater financial resources,
      technical expertise and managerial capabilities than we do. Consequently, we
      may
      be at a competitive disadvantage in negotiating and executing possible
      investments in these entities as many competitors generally have easier access
      to capital, on which entrepreneur-founders of privately-held information
      technology service companies generally place greater emphasis than obtaining
      the
      management skills and networking services that we can provide. Even if we are
      able to compete with these venture capital entities, this competition may affect
      the terms and conditions of potential acquisitions and, as a result, we may
      pay
      more than expected for targeted acquisitions. If we cannot acquire interests
      in
      attractive companies on reasonable terms, our strategy to build our business
      through acquisitions may be inhibited.




**We
      will encounter difficulties in identifying suitable acquisition candidates
      and
      integrating new acquisitions.**





A
      key
      element of our expansion strategy is to grow through acquisitions. If we
      identify suitable candidates, we may not be able to make investments or
      acquisitions on commercially acceptable terms. Acquisitions may cause a
      disruption in our ongoing business, distract management, require other resources
      and make it difficult to maintain our standards, controls and procedures. We
      may
      not be able to retain key employees of the acquired companies or maintain good
      relations with their clients or suppliers. We may be required to incur
      additional debt and to issue equity securities, which may be dilutive to
      existing stockholders, to effect and/or fund acquisitions.





**We
      cannot assure you that any acquisitions we make will enhance our
      business.**





We
      cannot
      assure you that any completed acquisition will enhance our business. Since
      we
      anticipate that acquisitions could be made with both cash and our common stock,
      if we consummate one or more significant acquisitions, the potential impacts
      are:





·
            a
                substantial portion of our available cash could be used to consummate
                the
                acquisitions and/or we could incur or assume significant amounts
                of
                indebtedness;





·
            losses
                resulting from the on-going operations of these acquisitions could
                adversely affect our cash flow; and




25





·
            our
                stockholders could suffer significant dilution of their interest
                in our
                common stock.





Also,
      we
      are required to account for acquisitions under the purchase method, which would
      likely result in our recording significant amounts of goodwill. The inability
      of
      a subsidiary to sustain profitability may result in an impairment loss in the
      value of long-lived assets, principally goodwill and other tangible and
      intangible assets, which would adversely affect our financial statements.
      Additionally, we could choose to divest any acquisition that is not
      profitable.




**Risks
      Relating To Our Common Stock**




**We
      may be de-listed from the AMEX if we do not meet continued listing
      requirements.**





Our
      common stock commenced trading on the AMEX on September 21, 2005. On June 29,
      2006, we received a letter from AMEX indicating that we are below certain of
      the
      AMEX’s continued listing standards as set forth in Sections 1003(a)(i),
      1003(a)(ii) and 1003(a)(iv) of the AMEX Company Guide. We were afforded the
      opportunity to submit a plan of compliance to the Exchange by July 31, 2006
      that
      demonstrates our ability to regain compliance with Section 1003 of the AMEX
      Company Guide within 18 months. We submitted our plan to AMEX on July 31, 2006,
      and AMEX accepted our plan on September 26, 2006. We were granted an extension
      until December 28, 2007 to regain compliance with the continued listing
      standards.





In
      April
      2007, the Company announced that it had been notified by the Hearings Department
      of the AMEX that the Company’s hearing had been cancelled. The Hearings
      Department indicated that the AMEX Listing Qualifications Staff recommended
      cancellation of the Company’s hearing after a review of the Company’s submission
      dated April 11, 2007, and other publicly available information. As a result,
      the
      Company will continue to be monitored by AMEX on a quarterly basis, however,
      is
      not currently subject to delisting proceedings.





In
      connection with our efforts to regain compliance, in October 2007, we entered
      into a stock purchase agreement whereby $4.7 million of our common stock were
      sold to certain investors in multiple closings prior to December 28, 2007 and
      paid for through a combination of $2.2 million of cash and $2.5 million of
      conversion of debt. Pro forma financial statements were filed with the SEC
      and
      submitted to AMEX on January 9, 2008 reflecting this transaction. We are subject
      to periodic review by the Exchange Staff during the extension period. Failure
      to
      make progress consistent with the plan or to regain compliance with the
      continued listing standards by the end of the extension period could result
      in
      our common stock being delisted from the Exchange.




Separately,
      as a result of failing to file our Annual Report on Form 10-KSB/A for fiscal
      2005 in a timely fashion, we failed to meet the continued listing requirements
      of AMEX from its due date on April 17, 2006 until April 21, 2006. In the future,
      if we fail to timely file our required reports, we could be subject to
      delisting.





If
      our
      common stock is delisted by the AMEX, trading of our common stock would
      thereafter likely be conducted on the OTC Bulletin Board. In such case, the
      market liquidity for our common stock would likely be negatively affected,
      which
      may make it more difficult for holders of our common stock to sell their
      securities in the open market and we could face difficulty raising capital
      necessary for our continued operations.





**The
      limited prior public market and trading market may cause possible volatility
      in
      our stock price.**





There
      has
      only been a limited public market for our securities and there can be no
      assurance that an active trading market in our securities will be maintained.
      In
      addition, the overall market for securities in recent years has experienced
      extreme price and volume fluctuations that have particularly affected the market
      prices of many smaller companies. The trading price of our common stock is
      expected to be subject to significant fluctuations including, but not limited
      to, the following:


26





·
            quarterly
                variations in operating results and achievement of key business
                metrics;




·
            changes
                in earnings estimates by securities analysts, if
                any;





·
            any
                differences between reported results and securities analysts' published
                or
                unpublished expectations;





·
            announcements
                of new contracts or service offerings by us or our
                competitors;





·
            market
                reaction to any acquisitions, divestitures, joint ventures or strategic
                investments announced by us or our
                competitors;





·
            demand
                for our services and products;





·
            shares
                being sold pursuant to Rule 144 or upon exercise of warrants;
                and





·
            general
                economic or stock market conditions unrelated to our operating
                performance.





These
      fluctuations, as well as general economic and market conditions, may have a
      material or adverse effect on the market price of our common stock.





**Additional
      shares of our common stock and preferred stock may adversely affect the
      market.**





We
      are
      authorized to issue 200,000,000 shares of our common stock.  As of March
      28, 2008, there were 114,831,697 shares of common stock issued and outstanding.
      However, the total number of shares of our common stock issued and outstanding
      does not include shares reserved in anticipation of the conversion of notes
      or
      the exercise of options or warrants. As of March 28, 2008, we had 666,667 shares
      of common stock underlying convertible notes.  As of March 28, 2008, we had
      outstanding stock options and warrants to purchase approximately 67,967,665
      shares of our common stock, the exercise prices of which range between $0.001
      and $5.25 **** per
      share, and we will have reserved shares of our common stock for issuance in
      connection with the potential exercise thereof.  Of the reserved shares, a
      total of 10,000,000 shares are currently reserved for issuance in connection
      with our 2003 Incentive Plan.  To the extent such options or warrants are
      exercised, the holders of our common stock will experience further dilution.
       In addition, in the event that any future financing should be in the form
      of, be convertible into or exchangeable for, equity securities, and upon the
      exercise of options and warrants, investors may experience additional
      dilution.




The
      exercise of the outstanding convertible securities will reduce the percentage
      of
      common stock held by our stockholders. Further, the terms on which we could
      obtain additional capital during the life of the convertible securities and
      warrants may be adversely affected, and it should be expected that the holders
      of the convertible securities and warrants would exercise them at a time when
      we
      would be able to obtain equity capital on terms more favorable than those
      provided for by such convertible securities. As a result, any issuance of
      additional shares of common stock may cause our current stockholders to suffer
      significant dilution which may adversely affect the market.





In
      addition to the above-referenced shares of common stock which may be issued
      without stockholder approval, we have 20,000,000 shares of authorized preferred
      stock, the terms of which may be fixed by our Board of Directors. To date,
      we
      have issued 19,000 shares of Series A Convertible Preferred Stock to Taurus
      Advisory Group LLC (convertible into 3,800,000 shares of common stock) and
      20,000 shares of Series B Convertible Preferred Stock (convertible into up
      to
      4,000,000 shares of common stock based upon the lowest contractual conversion
      price) to an individual investor. While we presently have no plans to issue
      any
      more additional shares of preferred stock, our Board of Directors has the
      authority, without stockholder approval, to create and issue one or more series
      of such preferred stock and to determine the voting, dividend and other rights
      of holders of such preferred stock. The issuance of any of such series of
      preferred stock may have an adverse effect on the holders of common stock.


27





**Shares
      eligible for future sale may adversely affect the market.**





From
      time
      to time, certain of our stockholders may be eligible to sell all or some of
      their shares of common stock by means of ordinary brokerage transactions in
      the
      open market pursuant to Rule 144, promulgated under the Securities Act of 1933,
      as amended, which we refer to herein as the Securities Act, subject to certain
      limitations. In general, pursuant to Rule 144, after satisfying a six month
      holding period: (i) affiliated stockholder (or stockholders whose shares are
      aggregated) may, under certain circumstances, sell within any three month period
      a number of securities which does not exceed the greater of 1% of the then
      outstanding shares of common stock or the average weekly trading volume of
      the
      class during the four calendar weeks prior to such sale and (ii) non-affiliated
      stockholders may sell without such limitations, provided we are current in
      our
      public reporting obligations. Rule 144 also permits the sale of securities
      by
      non-affiliates that have satisfied a one year holding period without any
      limitation or restriction. Any substantial sale of our common stock pursuant
      to
      Rule 144 or pursuant to any resale prospectus may have a material adverse effect
      on the market price of our securities.




**Director
      and officer liability is limited.**





As
      permitted by Delaware law, our certificate of incorporation limits the liability
      of our directors for monetary damages for breach of a director's fiduciary
      duty
      except for liability in certain instances. As a result of our charter provision
      and Delaware law, stockholders may have limited rights to recover against
      directors for breach of fiduciary duty. In addition, our certificate of
      incorporation provides that we shall indemnify our directors and officers to
      the
      fullest extent permitted by law.





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None.





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




The
      Company's corporate headquarters are located at 100 Eagle Rock Avenue, East
      Hanover, New Jersey 07936, where it operates under an amended lease agreement
      expiring December 31, 2010. In addition to minimum rentals, the Company is
      liable for its proportionate share of real estate taxes and operating expenses,
      as defined. DeLeeuw Associates, Inc. has an office at Suite 1460, Charlotte
      Plaza, 201 South College Street, Charlotte, North Carolina 28244. DeLeeuw
      Associates leases this space which has a stated expiration date of December
      31,
      2010.





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




In
      July
      2005, in conjunction with the acquisition of ISI, the Company issued a
      subordinated promissory note in the principal amount of $165,000 payable to
      Adam
      Hock and Larry Hock (the “Hocks”), the former principal stockholders of ISI.
      This note, along with $35,000 cash, was to be held in escrow for 15 months.
      This
      note matured on October 28, 2006. Pursuant to the indemnification provisions
      of
      the merger agreement among the Company and the Hocks, the $200,000 was to be
      held in escrow to cover any liabilities by any failure of any representation
      or
      warranty of ISI or the Hocks to be true and correct at or before the closing,
      and any act, omission or conduct of ISI and the Hocks prior to the closing,
      whether asserted or claimed prior to, or at or after, the closing. After the
      note matured, the Hocks requested the entire $200,000 from the Company, while
      the Company, after offsetting certain undisclosed liabilities, responded that
      the entire amount owed is significantly less. The Hocks then filed a lawsuit
      in
      the State of Florida on December 22, 2006 for recovery of the entire $200,000.
      On March 1, 2007, a circuit court in Hillsborough County, Florida denied the
      Company’s motion to dismiss the lawsuit for lack of jurisdiction without
      explanation to its ruling. A settlement of this dispute was reached in November
      2007 which requires the Company to pay to the Hock’s a total of $115,000 to be
      made to the Hock’s beginning with an initial payment of $15,000 and then twelve
      equal monthly installments in the amount of $8,333, ending in November
      2008.


28





In
      March
      2007, CSI commenced an action in the Superior Court of New Jersey, Morris County
      Chancery Division, for breach of contract, unfair competition, misappropriation
      of trade secrets and related claims against two former CSI employees and their
      start-up business.  In the spring of 2007, the court granted CSI’s request
      for a temporary restraining order based upon violation of a restrictive
      covenant.  The lawsuit is presently in the discovery phase, and CSI intends
      to litigate its claims aggressively in order to preserve its business from
      unfair competition and its confidential information from misappropriation.
      The
      defendants to the lawsuit have filed in response a counterclaim against CSI
      alleging tortious interference with economic advantage, abuse of process and
      breach of contract.  Although CSI is unable to predict the outcome of this
      litigation matter, management has been advised that based upon the discovery
      exchanged to date, the likelihood of a materially adverse outcome on the
      counterclaim against the Company is remote.





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




No
      matters were submitted to a vote of security holders during the fourth quarter
      of the fiscal year ended December 31, 2007.





**PART
      II**




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




*(a)*  ***Market
      Information*** .
      The
      following chart sets forth the closing high and low sales prices of our common
      stock for each quarter from January 1, 2006 through December 31,
      2007.




**High**
            
            **Low****2007
                by Quarter**January
                1 - March 31
            
            $
            0.40
            
            $
            0.20April
                1 - June 30
            
            $
            0.40
            
            $
            0.21July
                1 - September 30
            
            $
            0.29
            
            $
            0.18October
                1 - December 31
            
            $
            0.23
            
            $
            0.12**2006
                by Quarter**January
                1 - March 31
            
            $
            1.49
            
            $
            0.41April
                1 - June 30
            
            $
            1.15
            
            $
            0.65July
                1 - September 30
            
            $
            1.01
            
            $
            0.52October
                1 - December 31
            
            $
            0.56
            
            $
            0.25





On
      March
      17, 2008, the closing price for shares of our common stock, as reported by
      the
      American Stock Exchange, was $0.15.





No
      prediction can be made as to the effect, if any, that future sales of shares
      of
      our common stock or the availability of our common stock for future sale will
      have on the market price of our common stock prevailing from time-to-time.
      The
      additional registration of our common stock and the sale of substantial amounts
      of our common stock in the public market could adversely affect the prevailing
      market price of our common stock.


29





*(b)*  ***Record
      Holders*** .
      As of
      March 28, 2008, there were 507 registered holders of our common stock. As of
      March 28, 2008, there were 114,831,697 shares of common stock issued and
      outstanding.





*(c)*  ***Dividends*** .
      We have
      not paid dividends on our common stock in the past and do not anticipate doing
      so in the foreseeable future. We currently intend to retain future earnings,
      if
      any, to fund the development and growth of our business. In addition, the
      security agreement with Laurus Master Fund, Ltd. and the Loan and Security
      Agreement with Access Capital requires that we obtain their consent prior to
      paying any dividends.




*(d)*  ***Sales
      of Unregistered Securities***




Pursuant
      to a Securities Purchase Agreement dated October 19, 2007 filed as an exhibit
      to
      the Quarterly Report filed with the Securities and Exchange Commission on
      November 13, 2007, we sold 30,407,144 shares of our common stock and issued
      30,407,144 warrants exercisable at prices between $0.154 and $0.22 per share
      for
      an aggregate consideration of $4,700,000 to certain investors under the
      exemption from registration as provided in Section 4(2) and Regulation D under
      the Securities Act of 1933, as amended.





During
      the period covered by this report we did not issue any other securities that
      were not registered under the Securities Act of 1933, as amended, except
      previously disclosed in a quarterly report on Form 10-Q or a current report
      on
      Form 8-K.




**ITEM
        6. **SELECTED FINANCIAL DATA****




We
      are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
      providing the information contained in this item pursuant to Regulation
      S-K.




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




**Overview
      of our Business**





Management’s
      Discussion and Analysis contains statements that are forward-looking. These
      statements are based on current expectations and assumptions that are subject
      to
      risks and uncertainties. Actual results could differ materially because of
      factors discussed in “Risk Factors” and elsewhere in this report. The Company
      undertakes no duty to update any forward-looking statement to conform the
      statement to actual results or changes in the Company’s expectations.





Conversion
      Services International, Inc. provides professional services to the Global 2000,
      as well as mid-market clientele relating to strategic consulting, data
      warehousing, business intelligence and data management and, through strategic
      partners, the sale of software. The Company’s services based clients are
      primarily in the financial services, pharmaceutical, healthcare and
      telecommunications industries, although it has clients in other industries
      as
      well. The Company’s clients are primarily located in the northeastern United
      States.





The
      Company began operations in 1990. Its services were originally focused on
      e-business solutions and data warehousing. In the late 1990s, the Company
      strategically repositioned itself to capitalize on its data warehousing
      expertise in the fast growing business intelligence/data warehousing space.
      The
      Company became a public company via its merger with a wholly owned subsidiary
      of
      LCS Group, Inc., effective January 30, 2004.


30





The
      Company’s core strategy includes capitalizing on the already established
      in-house business intelligence/data warehousing (“BI/DW”) technical expertise
      and its strategic consulting division. This is expected to result in organic
      growth through the addition of new customers. In addition, this foundation
      will
      be leveraged as the Company pursues targeted strategic acquisitions.




The
      Company derives a majority of its revenue from professional services
      engagements. Its revenue depends on the Company’s ability to generate new
      business, in addition to preserving present client engagements. The general
      domestic economic conditions in the industries the Company serves, the pace
      of
      technological change, and the business requirements and practices of its clients
      and potential clients directly affects its ability to accomplish these goals.
      When economic conditions decline, companies generally decrease their technology
      budgets and reduce the amount of spending on the type of information technology
      (IT) consulting provided by the Company. The Company’s revenue is also impacted
      by the rate per hour it is able to charge for its services and by the size
      and
      chargeability, or utilization rate, of its professional workforce. If the
      Company is unable to maintain its billing rates or sustain appropriate
      utilization rates for its professionals, its overall profitability may decline.
      Several large clients have changed their business practices with respect to
      consulting services. Such clients now require that we contract with their vendor
      management organizations in order to continue to perform services. These
      organizations charge fees generally based upon the hourly rates being charged
      to
      the end client. Our revenues and gross margins are being negatively affected
      by
      this practice.




The
      Company will continue to focus on a variety of growth initiatives in order
      to
      improve its market share and increase revenue. Moreover, as the Company
      endeavors to achieve top line growth, through entry on new approved vendor
      lists, penetrating new vertical markets, and expanding its time and material
      business, the Company will concentrate its efforts on improving margins and
      driving earnings to the bottom line.




In
      addition to the conditions described above for growing the Company’s current
      business, the Company expects to continue to grow through acquisitions. 
One of the Company’s objectives is to make acquisitions of companies offering
      services complementary to the Company’s lines of business. This is expected to
      accelerate the Company’s business plan at lower costs than it would generate
      internally and also improve its competitive positioning and expand the Company’s
      offerings in a larger geographic area. The service industry is very fragmented,
      with a handful of large international firms having data warehousing and/or
      business intelligence divisions, and hundreds of regional boutiques throughout
      the United States.  These smaller firms do not have the financial
      wherewithal to scale their businesses or compete with the larger players. 
To that end, the service industry has experienced consolidation during the
      past
      48 months and the Company has been a participant in this consolidation. The
      Company has been active in acquiring companies during the last four
      years:




·
            In
                March 2004, the Company acquired DeLeeuw Associates, a management
                consulting firm in the information technology sector with core competency
                in delivering Change Management Consulting, including both Six Sigma
                and
                Lean domain expertise to enhance service delivery, with proven process
                methodologies resulting in time to market improvements within the
                financial services and banking industries. Historically, the DeLeeuw
                Associates business was involved in the operational integration of
                mergers
                and acquisitions, and would prescribe the systems integration work
                necessary. DeLeeuw Associates has now begun to sell the expanded
                suite of
                services offered by the Company, from operational integration to
                systems
                integration.





·
            In
                May 2004, the Company acquired 49% of all issued and outstanding
                shares of
                common stock of Leading Edge Communications Corporation (“LEC”). LEC
                provides enterprise software and services solutions for technology
                infrastructure management.





·
            In
                June 2004, the Company acquired substantially all of the assets and
                assumed substantially all of the liabilities of Evoke Software
                Corporation, which designed, developed, marketed and supported software
                programs for data analysis, data profiling and database migration
                applications and provides related support and consulting services.
                In July
                2005, the Company divested substantially all of the assets of Evoke
                Software Corporation. The market for software has changed, and the
                Company
                determined that data profiling should no longer be a standalone product
                and needed to be part of a suite of tools. This is evidenced by the
                subsequent acquisition of the Evoke software product by Similarity
                Systems
                in July 2005 and then Informatica in January
                2006.




31





·
            In
                July 2005, the Company acquired McKnight Associates, Inc. Since inception,
                McKnight Associates has focused on successfully designing, developing
                and
                implementing data warehousing and business intelligence solutions
                for its
                clients in numerous industries. Mr. William McKnight, the founder
                of
                McKnight Associates who joined the Company as Senior Vice President
                - Data
                Warehousing, is a well-known industry leader, frequently speaks at
                national trade shows and contributes to major data management trade
                publications.





·
            In
                July 2005, the Company acquired Integrated Strategies, Inc. (“ISI”). ISI
                is a professional services firm with a solutions-oriented approach
                to
                complex business and technical challenges. Similar to our wholly
                owned
                subsidiary, DeLeeuw Associates, which is best known for its large-scale
                merger integration management and business process change programs
                for the
                financial services markets, ISI also counts industry leaders in this
                sector among its customers. Because of this shared focus, the operations
                of ISI were merged into DeLeeuw Associates.





The
      Company’s most significant costs are personnel expenses, which consist of
      consultant fees, benefits and payroll-related expenses.





**Years
      Ended December 31, 2007 and 2006**





The
      Company’s revenues are primarily comprised of billing to clients for consulting
      hours worked on client projects. Revenues of $21.5 million for the year ended
      December 31, 2007 decreased by $4.2 million, or 16.4%, compared to revenues
      of
      $25.7 million for the year ended December 31, 2006.





Revenues
      for the Company are categorized by strategic consulting, business intelligence
      and data warehousing and data management. The chart below reflects revenue
      by
      line of business for the years ended December 31, 2007 and 2006.





For
                the year ended December 31,2007
            
            2006$
            
            % of total
              revenues
            
            $
                (1)
            
            %
                of total
              revenues
                (1)Strategic
                consulting
            
            $
            8,651,242
            
            
            40.3
            %
            $
            11,534,137
            
            
            44.9
            %Business
                intelligence and data warehousing
            
            
            9,801,955
            
            
            45.7
            %
            
            11,016,668
            
            
            42.9
            %Data
                management
            
            
            1,881,803
            
            
            8.8
            %
            
            2,478,342
            
            
            9.7
            %Reimbursable
                expenses
            
            
            946,880
            
            
            4.4
            %
            
            570,121
            
            
            2.2
            %Other
            
            
            184,457
            
            
            0.8
            %
            
            74,789
            
            
            0.3
            %$
            21,466,337
            
            
            100.0
            %
            $
            25,674,057
            
            
            100.0
            %





(1)
Certain
      amounts have been reclassified to conform with the current year
      presentation.




Strategic
      Consulting





The
      strategic consulting line of business includes work related to planning and
      assessing both process and technology for clients, performing gap analysis,
      making recommendations regarding technology and business process improvements
      to
      assist clients to realize their business goals and maximize their investments
      in
      both people and technology. The Company performs strategic consulting work
      through its DeLeeuw Associates subsidiary (which includes the Integrated
      Strategies division).


32





Strategic
      consulting revenues of $8.7 million, or 40.3% of total revenues, for the year
      ended December 31, 2007, decreased by $2.9 million, or 4.6% points, as compared
      to revenues of $11.5 million, or 44.9% of total revenues, for the comparable
      prior year period. The $2.9 million decrease is primarily due to a $2.9 million
      decline in revenues from Bank of America due to a restructuring and resource
      reorganization at the bank which resulted in consultant layoff’s and a project
      budget freeze. Additionally, revenues derived from our Integrated Strategies
      division have declined $2.1 million from the prior year due to a continuing
      decline in consultant headcount resulting from the completion of projects by
      the
      consultants in the division. Partially offsetting this decline were $2.1 million
      of revenues derived from a new process re-engineering project performed at
      ING
      during 2007.





Business
      Intelligence and Data Warehousing





The
      business intelligence line of business includes work performed with various
      applications and technologies for gathering, storing, analyzing and providing
      clients with access to data in order to allow enterprise users to make better
      and faster business decisions. This type of work is primarily invoiced to
      clients on a time and materials basis.





The
      data
      warehousing line of business includes work performed for client companies to
      provide a consolidated view of high quality enterprise information. CSI provides
      services in the data warehouse and data mart design, development and
      implementation, proof of concept preparation, implementation of data warehouse
      solutions and integration of enterprise information.





Business
      intelligence and data warehousing (“BI/DW”) revenues of $9.8 million, or 45.7%
      of total revenues, for the year ended December 31, 2007, decreased by $1.2
      million, but increased by 2.8% points of total revenues, as compared to BI/DW
      revenues of $11.0 million, or 42.9% of total revenues, for the comparable prior
      year period. The decrease in BI/DW revenues for the year ended December 31,
      2007
      is primarily due to a significant reduction in headcount in the BI/DW business
      resulting from the Company’s restructuring and employee turnover experienced in
      this line of business during the third and fourth quarters of the prior year.
      The Company has experienced an average 11 person headcount reduction in this
      line of business during 2007 as compared to 2006, resulting in a significant
      decline in billable hours in the current year. Several large projects which
      provided approximately $4.3 million of 2006 revenue were completed in 2006
      and
      early 2007 **** and,
      therefore, did not contribute significantly to current year results. Partially
      offsetting this revenue decline were new 2007 projects which contributed
      approximately $3.1 million of revenue.





Data
      Management





The
      data
      management line of business includes such activities as Enterprise Information
      Architecture, Metadata Management, Data Quality/Cleansing/Profiling. The Company
      performs these activities through its exclusive subcontractor agreement with
      its
      related party, LEC.





Data
      management revenues of $1.9 million, or 8.8% of total revenues, for the year
      ended December 31, 2007, declined by $0.6 million, or 0.9% points, as compared
      to data management revenues of $2.5 million, or 9.7% of total revenues, for
      the
      comparable prior year period. This decline in current year revenue is primarily
      due to a 4 person reduction in headcount required by LEC to support their client
      requirements during 2007, resulting in a 28% reduction in billable hours during
      2007 as compared to the prior year.





***Cost
      of revenue***





Cost
      of
      revenue includes payroll and benefit and other direct costs for the Company’s
      consultants. Cost of revenue of $16.3 million was 75.7% of total revenues for
      the year ended December 31, 2007, decreasing by $3.6 million, and also
      decreasing as a percent of total revenue by 1.9% points as compared to cost
      of
      revenue of $19.9 million, or 77.6% of total revenues, for the comparable prior
      year period.




33





*Services*





Cost
      of
      services was $13.5 million, or 73.2% of services revenue, for the year ended
      December 31, 2007, decreasing by $3.4 million, or 1.6% points, as compared
      to
      cost of services of $16.9 million, or 74.8% of services revenue, for the year
      ended December 31, 2006. This decline in cost of services is primarily due
      to an
      average 21.0% current year decline in the number of consultants on billing
      as
      compared to the prior year. This decline in the number of consultants is the
      result of the Company’s 18.2% decline in services revenue in the current year
      period. The Company’s average billable consultant headcount in the services
      category was 102 and 129 for the years ended December 31, 2007 and 2006,
      respectively.





The
      1.6%
      point decline in cost of services as a percentage of services revenue is
      primarily due to a $0.2 million decrease in stock compensation expense, and
      $0.1
      million of placement fees with no associated cost.





*Related
      Party Services*





Cost
      of
      related party services was $1.7 million, or 90.2% of related party services
      revenue, for the year ended December 31, 2007, representing a decrease of $0.6
      million, or 2.8% points, as compared to $2.3 million, or 93.0%, of related
      party
      services revenue for the year ended December 31, 2006. Cost of related party
      services decreased by $0.6 million in the current year primarily due to a
      reduction in consultant headcount required by LEC to support their client
      requirements. The average number of billable consultants utilized by LEC was
      13
      and 17 for the periods ended December 31, 2007 and 2006, respectively,
      representing a 23.5% decline in consultants billable to LEC as compared to
      the
      prior year period.





***Gross
      profit***




Gross
      profit of $5.2 million or 24.3% of total revenue for the year ended December
      31,
      2007, decreased by $0.5 million, but increased as a percentage of revenue by
      1.9% points as compared to gross profit of $5.7 million or 22.4% of total
      revenues for the comparable prior year period.





*Services*





Gross
      profit from services was $4.9 million, or 26.8% of services revenue, for the
      year ended December 31, 2007, decreasing by $0.7 million, but increasing as
      a
      percentage of services revenue by 1.6% points, as compared to $5.7 million,
      or
      25.2% of services revenue, for the year ended December 31, 2006. These gross
      profit changes as compared to the prior year have been outlined in the revenue
      and cost of revenue analysis.





*Related
      Party Services*





Gross
      profit from related party services was $0.2 million, or 9.8% of related party
      services revenue, for the year ended December 31, 2007, increasing by $11,000,
      or 2.8% points, as compared to gross profit from related party services of
      $0.2
      million, or 7.0% of related party services revenue, for the year ended December
      31, 2006. These
      gross profit changes as compared to the prior year have been outlined in the
      revenue and cost of revenue analysis.





***Selling
      and marketing***





Selling
      and marketing expenses include payroll, employee benefits and other
      headcount-related costs associated with sales and marketing personnel and
      advertising, promotions, tradeshows, seminars and other programs.  Selling
      and marketing expenses of $3.2 million, or 15.1% of revenue for the year ended
      December 31, 2007, decreased by $1.8 million, or 4.7% points of total revenue,
      as compared to $5.1 million, or 19.8% of total revenue, for the year ended
      December 31, 2006. The $1.8 million decrease in selling and marketing expense
      is
      due to a $0.7 million reduction in payroll expense primarily due to a five
      person reduction in headcount which included the termination of three Company
      executives that were previously classified in selling and marketing, a $1.0
      million reduction in stock compensation charges, and $0.1 million of various
      expense reductions including reduced immigration fees, dues & subscriptions,
      trade shows, travel and advertising.


34





***General
      and administrative***





General
      and administrative costs include payroll, employee benefits and other
      headcount-related costs associated with the finance, legal, facilities, certain
      human resources and other administrative headcount, and legal and other
      professional and administrative fees.  General and administrative costs of
      $4.2 million or 19.4% of revenue for the year ended December 31, 2007, decreased
      by $1.3 million or 1.8% points of total revenues as compared to $5.5 million,
      or
      21.2% of total revenues for the year ended December 31, 2006. The $1.3 million
      decrease in general and administrative expense is primarily due to a $0.5
      million reduction in payroll expense due to both a one person reduction in
      headcount and salary reductions taken by two corporate officers during the
      current period, a $0.5 million reduction in stock compensation charges, a $0.2
      million reduction in accounting and legal fees and a $0.1 million reduction
      in
      rental expense.





***Lease
      impairment***





Effective
      February 2007, the Company subleased a portion of its East Hanover, New Jersey
      corporate office space for the remainder of the lease term. 7,154 square feet
      of
      the Company’s 16,604 square feet of rented office space were subleased from
      February 15, 2007 to December 31, 2010. The sublease provides for three months
      of free rent to the sub lessee, monthly rent equal to $5,962 per month from
      May
      15, 2007 to December 31, 2007, $8,942 per month from January 1, 2008 to December
      31, 2009, and $11,923 per month from January 1, 2010 to December 31, 2010.
      Additionally, the Company will receive a fixed rental for electric of $10,731
      per annum payable in equal monthly installments throughout the term of the
      lease.





The
      Company has recorded a lease impairment resulting from this sublease in the
      amount of $210,765 during the year ended December 31, 2007. This impairment
      charge reflects the unreimbursed costs relating to the subleased space which
      will be incurred by the Company during the remaining term of the lease. These
      costs include the differential between the Company’s rental rate for the
      subleased space and the amount being paid by the sub lessee, and unreimbursed
      common area fees and real estate taxes.




***Goodwill
      and intangibles impairment***





During
      the twelve months ended December 31, 2007, the Company learned that several
      Integrated Strategies (“ISI”) consultants were to be ending their projects.
      Additionally, the continued margin pressure exerted by the vendor management
      organization structure utilized by ISI’s largest customer continues to
      unfavorably impact the economics of this division. Statement of Financial
      Accounting Standards No. 142 (“SFAS No. 142”), “ *Goodwill
      and Other Intangible Assets”,* instructs the Company to test intangible assets for impairment annually, or
      more
      frequently if events or changes in circumstances indicate that the asset might
      be impaired. Due to the change in this business, the Company recorded a goodwill
      impairment of $0.7 million during the year ended December 31, 2007. Goodwill
      impairment of $0.3 million for the year ended December 31, 2006 also resulted
      primarily from an unfavorable change with respect to the economics of the
      Integrated Strategies business.




35


*Depreciation
        and amortization*
  Depreciation
        expense is recorded on the Company’s property and equipment, which is generally
        depreciated over a period between three to seven years. Amortization of
        leasehold improvements is taken over the shorter of the estimated useful
        life of
        the asset or the remaining term of the lease. The Company amortizes deferred
        financing costs utilizing the effective interest method over the term of
        the
        related debt instrument. Acquired software is amortized on a straight-line
        basis
        over an estimated useful life of three years. Acquired contracts are amortized
        over a period of time that approximates the estimated life of the contracts,
        based upon the estimated annual cash flows obtained from those contracts,
        generally five to six years.  Depreciation
        and amortization expenses were $0.6 million for the year ended December 31,
        2007, decreasing by $0.2 million as compared to $0.8 million for the year
        ended
        December 31, 2006. The $0.2 million decrease in depreciation and amortization
        expense for the year ended December 31, 2007 is primarily due to both the
        approved vendor status intangible asset and the Laurus deferred financing
        costs
        becoming fully amortized as well as a decline in depreciation expense as
        some
        assets became fully depreciated during the current period.


***Other
      income (expense)***





The
      Company reported a gain on financial instruments of $19,329 during 2007 as
      compared to a loss on financial instruments of ($0.4 million) during 2006.
      All
      contracts that required the Company to account for the financial instruments
      were extinguished in March 2007.





The
      loss
      on extinguishment of debt of ($2.5 million) in 2007 related to accounting for
      the extinguishments of notes payable to Laurus, Sands, TAG investors and the
      Hock’s. The 2006 loss on extinguishment of debt of ($2.3 million) related to the
      extinguishment of debt to both Laurus and Taurus.




Interest
      expense, net of $4.0 million for the year ended December 31, 2007 increased
      by
      $0.9 million, or 29.6%, from interest expense, net of $3.1 million for the
      year
      ended December 31, 2006. The $0.9 million increase in interest expense is
      primarily due to $2.2 million of charges related to the relative fair value
      of
      warrants issued, $0.1 million of interest on notes payable, $0.1 million related
      to beneficial conversion features included in convertible notes payable,
      partially offset by $1.0 million of reduced discount on debt amortization,
      $0.4
      million of reduced Laurus interest expense and $0.1 million of reduced related
      party interest.





***Income
      Taxes***





The
      Company evaluates the amount of deferred tax assets that are recorded against
      expected taxable income over its forecasting cycle which is currently two years.
      As a result of this evaluation, the Company has recorded a valuation allowance
      of $14.7 million and $12.4 million during the years ended December 31, 2007
      and
      2006, respectively. This allowance was recorded because, based on the weight
      of
      available information, it is more likely than not that some, or all, of the
      deferred tax asset may not be realized.




At
      December 31, 2007, the Company had net operating
      loss carryfowards for Federal and State income tax purposes of approximately
      $12.2 million, which begin to expire in 2023. The Tax Reform Act of 1986
      contains provisions that limit the utilization of net operating loss and tax
      credit carryforwards if there has been an ownership change, as defined by the
      tax law. An ownership change as described in Section 382 of the Internal Revenue
      Code, may limit the Company’s ability to utilize its net operating loss and tax
      credit carryforwards on a yearly basis. The Company has issued a substantial
      number of shares of common stock during 2007, which may place limitations on
      the
      current net loss carryforwards.





**LIQUIDITY
      AND CAPITAL RESOURCES**





Cash
      totaled $1.5 million as of December 31, 2007, compared to $0.7 million as of
      December 31, 2006. The Company’s cash balance is primarily derived from customer
      remittances, bank borrowings and acquired cash and is used for general working
      capital needs.





The
      Company’s working capital of $1.5 million as of December 31, 2007 increased by
      $7.8 million as compared to ($6.3 million) **** as
      of
      December 31, 2006. The Company’s working capital position has improved during
      the current year primarily due to proceeds received from the sale of equity
      securities and a corresponding repayment of short-term debt. However, accounts
      receivable has declined due to a decline in current year revenues. Losses
      generated by the Company during the current year have resulted in the need
      for
      the sale of common stock in order to fund working capital.





Cash
      used
      in operating activities during the year ended December 31, 2007 was $2.0
      million, a reduction in cash used in operating activities of $2.8 million from
      $4.8 million for the year ended December 31, 2006.  Cash used in operating
      activities primarily relates to a $2.5 million “cash-based” loss from operating
      activities, as determined by adding the non-cash charges incurred of $7.7
      million to the reported loss from continuing operations of $10.2 million for
      the
      year ended December 31, 2007, a $1.0 million decrease in accounts receivable
      due
      primarily to the reduction in revenues during the current period and a $0.4
      million decrease in accounts payable and accrued expenses during the year
      largely due to a $0.1 million reduction in accrued preferred stock dividends
      which were paid in common stock during 2007 and the timing of accounts payable
      payments at the end of 2006.


36




Cash
      provided by investing activities of $32,000 during 2007 relates to a payment
      received from the sale of the Company’s equity investment in DeLeeuw
      International during 2007, partially offset by costs to purchase computer
      equipment. Cash provided by investing activities was $2.05 million during 2006.
       This was due to a $2.05 million settlement relating to the sale of Evoke
      Software to Similarity Systems.





Cash
      provided by financing activities was $2.8 million during the year ended December
      31, 2007.  During 2007, $7.2 million was raised from the sale of Company
      common stock and $0.65 million from the issuance of a short term note payable.
      However, $3.2 million was paid by the Company to repay the Overadvance Side
      Letter to Laurus, $1.7 million was repaid on short-term notes and $0.1 million
      was paid for deferred financing costs, capital lease obligations and payments
      on
      related party notes.





The
      Company has experienced continued losses that exceeded expectations from 2004
      through 2007. To that extent, the Company has continued to experience negative
      cash flow which has perpetuated the Company’s liquidity issues. To address the
      liquidity issue, the Company entered into various debt and equity instruments
      between August 2004 and December 2007 and, as of December 31, 2007 had
      approximately $3.9 million of debt outstanding in addition to an aggregate
      of
      $3.9 million of Series A and Series B Convertible Preferred Stock which was
      issued in 2006. Additionally, the Company raised approximately $10.0 million
      through the sale of common stock in the Company during 2006 and 2007.




Financing
      transactions effectuated in 2006, and through March 31, 2008, are as
      follows:





*Taurus
      Advisory Group / TAG Virgin Islands, Inc.*





In
      July
      2005, the Company obtained two $250,000 short term loans from certain investors
      represented by Taurus. Both notes bore interest at 8% per annum. The first
      note
      is dated July 6, 2005 and initially matured on September 5, 2005. The second
      note is dated July 22, 2005 and originally matured on September 22, 2005. Each
      of these notes was extinguished on December 21, 2007 in exchange for 1,666,667
      shares of Company Common Stock and warrants to purchase an equal number of
      shares of Company Common Stock. The warrants have a $0.165 purchase price and
      are exercisable for five years.




In
      December 2005, the Company obtained a $1,000,000 short term loan from certain
      investors represented by Taurus. This note bears interest at 8% per annum.
      The
      note is dated December 19, 2005 and initially matured on January 31, 2006.
      These
      short term note holders had agreed to extend their maturity date on a
      month-to-month basis until the Company raises sufficient funds to repay the
      notes.  In conjunction with this note, these investors received a warrant
      to purchase 277,777 shares of our common stock with an exercise price of $0.675
      per share in December 2005, a warrant to purchase 277,777 shares of our common
      stock with an exercise price of $0.75 per share in February 2006 and a
      warrant to purchase 554,000 shares of our common stock with an exercise price
      of
      $1.30 per share in March 2006. These warrants expire in December
      2008, January 2009 and February 2009, respectively. **** This
      note
      was extinguished on December 21, 2007 in exchange for 6,666,668 shares of
      Company Common Stock and warrants to purchase an equal number of shares of
      Company Common Stock. The warrants have a $0.165 purchase price and are
      exercisable for five years.




37


In
        February 2006, we entered into a Securities Purchase Agreement with investors
        represented by Taurus Advisory Group, LLC (“Taurus”), pursuant to which we
        issued 19,000 shares of our newly created Series A Convertible Preferred
        Stock,
        $.001 par value (the “Series A Preferred”). Each share of Series A Preferred has
        a stated value of $100.00. We received proceeds of $1,900,000. The Series
        A
        Preferred has a cumulative annual dividend equal to five percent (5%), which
        is
        payable semi-annually in cash or common stock, at our election, and is
        convertible into shares of the Company’s common stock at any time at a price
        equal to $0.50 per share (subject to adjustment). In addition, the Series
        A
        Preferred has no voting rights, but has liquidation preferences and certain
        other privileges. All shares of Series A Preferred not previously converted
        shall be redeemed by the Company, in cash or common stock, at the election
        of
        the Taurus investors, on February 1, 2011. Pursuant to the Securities Purchase
        Agreement, the Taurus investors were also granted a warrant to purchase
        1,900,000 shares of our common stock exercisable at a price of $0.60 per
        share
        (subject to adjustment), exercisable for a period of five years.


In
      August
      2006, we entered into a Stock Purchase Agreement with an investor represented
      by
      Taurus, pursuant to which we issued 20,000 shares of our newly created
      Series B Convertible Preferred Stock, $.001 par value (the “Series B
      Preferred”). Each share of Series B Preferred has a stated value of $100.00. We
      received proceeds of $2,000,000. The Series B Preferred has a cumulative annual
      dividend equal to the Prime Rate plus one percent (1%), which is payable
      monthly in cash or common stock, at our election, and is convertible into
      shares of our common stock at any time at a price equal to the lower of (1)
      $0.85 or (2) the average daily volume weighted market price for the five
      consecutive trading days immediately prior to the date for which such price
      is
      determined, with a minimum price of $0.50. In addition, the Series B Preferred
      has no voting rights, but has liquidation preferences and certain other
      privileges. Pursuant to the Stock Purchase Agreement, warrants to purchase
      1,276,471 shares of our common stock were issued, exercisable at a price of
      $0.94 per share (subject to adjustment), and exercisable for a period of five
      years.




In
      December 2006, we entered into a Stock Purchase Agreement with certain investors
      pursuant to which we issued 3,000,000 shares of our common stock, and we
      received proceeds of $750,000. The investors were also granted warrants to
      purchase 1,500,000 shares of our common stock, exercisable at a price of $0.30
      per share (subject to adjustment).  The warrant is exercisable for a period
      of five years.




On
      February 1, 2007, the Company issued a 10% Unsecured Promissory Note to an
      investor represented by TAG Virgin Islands, Inc. for $705,883, maturing on
      March
      1, 2007. This note was retired and included as part of the March 1, 2007 10%
      Unsecured Promissory Note in the principal amount of $4,000,000.





In
      March
      2007, we issued a 10% Convertible Unsecured Note to certain investors
      represented by TAG Virgin Islands, Inc. for $4.0 million.  The 10%
      Convertible Unsecured Note will automatically convert into 13,333,333 shares
      of
      our common stock, upon the effectiveness of the Information Statement on
      Schedule 14C, filed with the SEC on March 8, 2007. This Information Statement
      relates to the proposed increase in the number of authorized shares of common
      stock, from 100,000,000 to 200,000,000. The investors were also granted a
      warrant to purchase 13,333,333 shares of our common stock, exercisable at a
      price of $0.33 per share (subject to adjustment).   The warrant is
      exercisable for a period of five years. The note was subsequently amended in
      March 2007 to $4.25 million and the number of shares of common stock that the
      note will convert into was increased to 14,166,667 shares of our common stock.
      Additionally, the warrant was also amended to entitled the investor to purchase
      14,166,667 shares of our common stock, exercisable at a price of $0.33 per
      share
      (subject to adjustment). The warrant is exercisable for a period of five years.
      In June 2007, the note automatically converted to equity and the 14,166,667
      shares were issued to the investor.




On
      April
      27, 2007, The Company issued a 10% Convertible Unsecured Note (the “Note”) to
      certain investors represented by TAG Virgin Islands, Inc. for $250,000. The
      Note
      will automatically convert into 833,333 shares of common stock upon the
      effectiveness of the Information Statement on Schedule 14C, filed preliminarily
      by the Company with the Securities and Exchange Commission on March 8, 2007,
      amended on April 9, 2007 and filed definitively on May 1, 2007. The investor
      was
      also granted a warrant to purchase 833,333 shares of common stock, exercisable
      at a price of $0.33 per share (subject to adjustment), and is exercisable for
      a
      period of five years. In June 2007, the note automatically converted to equity
      and the 833,333 shares were issued to the investor.


38





On
      June
      6, 2007, the Company issued a 10% Convertible Unsecured Note (the “Note”) to
      certain investors represented by TAG Virgin Islands, Inc. for $250,000. This
      note is due on demand and is convertible into 833,333 shares of common stock
      at
      the option of the holder. **** In
      the
      event that the Company obtains financing of at least $500,000, whether in the
      form of debt or equity, this Note is to be repaid to the investor immediately
      upon closing. **** The
      investor was also granted a warrant to purchase 833,333 shares of common stock,
      exercisable at a price of $0.33 per share (subject to adjustment), and is
      exercisable for a period of five years. This note was extinguished on December
      21, 2007 in exchange for 1,666,667 shares of Company Common Stock and a warrant
      to purchase an equal number of shares of Company Common Stock. The warrant
      has a
      $0.165 purchase price and is exercisable for five years.





On
      June
      27, 2007, the Company issued 10% Convertible Unsecured Notes (the “Notes”) to
      certain investors represented by TAG Virgin Islands, Inc. for $400,000. These
      notes are due on demand and are convertible into 1,333,333 shares of common
      stock at the option of the holders. In the event that the Company obtains
      financing of at least $500,000, whether in the form of debt or equity, these
      Notes are to be repaid to the investors immediately upon closing. **** The
      investors were also granted warrants to purchase 1,333,333 shares of common
      stock, exercisable at a price of $0.33 per share (subject to adjustment), and
      are exercisable for a period of five years. These notes were extinguished on
      December 21, 2007 in exchange for 2,666,668 shares of Company Common Stock
      and
      warrants to purchase an equal number of shares of Company Common Stock. The
      warrants have a $0.165 purchase price and are exercisable for five
      years.





On
      August
      24, 2007, the Company entered into a Stock Purchase Agreement with an investor,
      pursuant to which the Company issued 550,000 shares of the Company’s common
      stock, $0.001 par value, and the Company received proceeds of $115,500. Pursuant
      to the Stock Purchase Agreement, the Investor was also granted a warrant to
      purchase 550,000 shares of the Company’s common stock, exercisable at a price of
      $0.22 per share (subject to adjustment). The warrant is exercisable for a period
      of five years. This transaction is also subject to a Registration Rights
      Agreement dated August 24, 2007.





On
      September 4, 2007, the Company entered into a Stock Purchase Agreement with
      certain investors, pursuant to which the Company issued 1,140,000 shares of
      the
      Company’s common stock, $0.001 par value, and the Company received proceeds of
      $239,400. Pursuant to the Stock Purchase Agreement, the Investors were also
      granted a warrant to purchase 1,140,000 shares of the Company’s common stock,
      exercisable at a price of $0.22 per share (subject to adjustment). The warrant
      is exercisable for a period of five years. This transaction is also subject
      to a
      Registration Rights Agreement dated September 4, 2007.





As
      of
      October 19, 2007, the Company and TAG Virgin Islands, Inc., as agent for the
      purchasers (the “Purchasers”), executed a Stock Purchase Agreement (the
“Agreement”). Pursuant to this Agreement, the Purchasers purchased from the
      Company $4.7 million in Company common stock, par value $0.001, in multiple
      closings prior to December 28, 2007. The purchase price of each share of common
      stock purchased was be the higher of $0.10 per share or the per share closing
      price on the day that each purchase is effected. The Purchasers were also issued
      warrants to purchase Company common stock, the number of which were equal to
      the
      number of shares of common stock purchased. The warrants are be exercisable
      at a
      price equal to 10% above the purchase price of the shares purchased and are
      exercisable for five years. Pursuant to a Registration Rights Agreement, the
      Company agreed to file a registration statement covering the shares of common
      stock underlying the Agreement and the warrant. Between October 19, 2007 and
      December 31, 2007, the Company received $2.2 million cash and exchanged $2.5
      million of outstanding debt for Company common stock. A total of 30,407,144
      common shares were issued and 30,407,144 warrants to purchase common stock
      were
      issued. 1,875,000 of these warrants are exercisable at a price of $0.22 per
      share (subject to adjustment), 18,300,004 of these warrants are exercisable
      at a
      price of $0.165 per share (subject to adjustment), 7,375,000 of these warrants
      are exercisable at a price of $0.175 per share (subject to adjustment) and
      2,857,140 of these warrants are exercisable at a price of $0.154 per share.
      The
      warrants are exercisable for a period of five years.


39





In
      March
      2008, the Company and TAG Virgin Islands, Inc. executed a Note Conversion
      Agreement whereby certain investors represented by TAG Virgin Islands, Inc.
      converted $600,000 of debt due to them under an Unsecured Convertible Line
      of
      Credit Note dated June 7, 2004 in Company Common Stock. The Company issued
      4,615,385 shares of Common Stock to the investors. The number of shares of
      common stock acquired was based on the $0.13 closing price of the Company’s
      stock on the American Stock Exchange on the date of conversion. Warrants to
      purchase 4,615,385 shares of Company Common Stock were provided to the investors
      as an inducement to convert. The warrants are exercisable at a price of $0.143
      per share, and are exercisable for five years.





*Laurus*





On
      February 1, 2006, the Company restructured its financing with Laurus Master
      Fund, Ltd. (“Laurus”) by entering into financing agreements with Laurus,
      pursuant to which it, among other things, (a) issued a secured non-convertible
      term note in the principal amount of $1.0 million to Laurus (the “Term Note”),
      (b) issued a secured non-convertible revolving note in the principal amount
      of
      $10.0 million to Laurus (the “Revolving Note”, collectively with the Term Note,
      the “Notes”), and (c) issued an option to purchase up to 3,080,000 shares of the
      Company’s common stock to Laurus (the “Option”) at an exercise price of $.001
      per share. Laurus exercised a portion of this option in 2006 when they purchased
      1,580,000 shares of the Company’s common stock. An option to purchase 1,500,000
      shares remains outstanding as of December 31, 2006. The proceeds from the
      issuance of the Notes were used to refinance the Company’s outstanding
      obligations under the existing facility with Laurus (originally entered into
      in
      August 2004 and subsequently amended in July 2005) at a 5% premium. Amounts
      due
      under the Revolving Note as of February 1, 2006 included $3,101,084 which was
      loaned to the Company under an Overadvance Side Letter. The Notes bear an annual
      interest rate of prime (as reported in the Wall Street Journal, which was 7.25%
      as of December 31, 2007) plus 1.0%, with a floor of 5.0%. Payments of principal
      and interest were to be made in equal monthly amounts until maturity of both
      notes on December 31, 2007.





In
      March
      2007, we repaid in full the Overadvance Side Letter, dated as of February 1,
      2006, with a cash payment of $2,601,084 and the issuance of a warrant to
      purchase 1,785,714 shares of Common Stock at an exercise price of $0.01 (after
      making the first two payments in February 2007, we were to pay Laurus
      approximately $258,424 per month until the aggregate principal amount of
      $3,101,084 was paid in full by December 31, 2007).  Further, we satisfied
      in full the outstanding amount on the Term Note with a cash payment of
      approximately $409,722.





In
      December 2007 ,
      t he
      Company and Laurus agreed to reduce the amount available under the line of
      credit from $10,000,000 to $3,000,000 and extend the maturity date of the
      revolving line of credit from December 31, 2007 to March 31, 2008 in exchange
      for a $25,000 fee.





As
      of
      December 31, 2007, approximately $2.1 million was outstanding under the
      revolving line of credit. The interest rate on the revolving line was 8.25%
      as
      of December 31, 2007.





*Sands*





Between
      January and March 2007, we executed several extension agreements with three
      affiliates of Sands Brothers Venture Capital (“Sands”) to repay certain amended
      subordinated secured convertible promissory notes, in which we agreed to pay
      $1.05 million cash, as well as issue shares of Common Stock and warrants to
      purchase Common Stock, on four separate payment dates of April 2, 2007, July
      2,
      2007, October 1, 2007 and December 31, 2007.  In total, the Company paid
      $1,050,000 cash, issued 1,088,169 shares of Common Stock to Sands and issued
      warrants to purchase a total of 1,082,758 shares of Company Common Stock in
      order to settle the debt in full. The warrants to purchase Company Common Stock
      were issued in three tranches as follows: 263,512 shares, 541,379 shares and
      277,867 shares with exercise prices of $0.34 per share, $0.50 per share and
      $0.22 per share, respectively. The warrants are exercisable for a period of
      three years.


40





*Access
      Capital*




The
      Company’s line of credit with Laurus Master Fund, Ltd. expired on December 31,
      2007 and, in exchange for a $25,000 fee, the maturity date was extended until
      March 31, 2008.





The
      Company executed a replacement revolving line of credit agreement in March
      2008
      with Access Capital, Inc. The Access Capital line of credit provides for
      borrowing up to a maximum of $3,500,000, based upon collateral availability,
      a
      90% advance rate against eligible accounts receivable, has a three year term,
      and an interest rate of prime (which was 5.25% as of March 26, 2008) plus 2.75%.
      The Company must comply with a minimum working capital covenant which requires
      the Company to maintain minimum monthly working capital of $400,000.
      Additionally, during the first year of the three year term the Company must
      maintain an average minimum monthly borrowing of $2,000,000 which increases
      to
      $2,250,000 in the second year and to $2,500,000 in the third year. The Company
      must also pay an annual facility fee equal to 1% of the maximum available under
      the facility and a $1,250 per month collateral management fee.




In
      July
      2005, in conjunction with the acquisition of ISI, the Company issued a short
      term note in the principal amount of $165,000 payable to Adam Hock and Larry
      Hock (the “Hock’s”), the former principle stockholders of ISI. This note bears
      interest at 5% per annum and matured on October 28, 2006. Repayment of this
      note
      had been disputed and the dispute between the Company and the Hock’s was settled
      in November 2007. The settlement requires payments totaling $115,000 to be
      made
      to the Hock’s beginning with an initial payment of $15,000 and then twelve equal
      monthly installments in the amount of $8,333, ending in November
      2008.





There
      are
      currently no material commitments for capital expenditures.





As
      of
      December 31, 2007 and 2006, the Company had accounts receivable due from LEC
      of
      approximately $0.3 million and $0.3 million, respectively. There are no known
      collections problems with LEC.





For
      the
      years ended December 31, 2007 and 2006, we invoiced LEC $1.9 million and $2.5
      million, respectively, for the services of consultants subcontracted to LEC
      by
      us. The majority of LEC’s billing is derived from Fortune 100 clients.  The
      collection process is slow, as these clients require separate approval on their
      own internal systems, which extends the payment cycle.




On
      June
      29, 2006, we received a letter from the American Stock Exchange (the “AMEX”)
      indicating that we are below certain of the AMEX’s continued listing standards
      as set forth in Sections 1003(a)(i), 1003(a)(ii) and 1003(a)(iv) of the AMEX
      Company Guide. We were afforded the opportunity to submit a plan of compliance
      to the AMEX by July 31, 2006 that demonstrates our ability to regain compliance
      with Section 1003 of the AMEX Company Guide within 18 months. We submitted
      our
      plan to the AMEX on July 31, 2006, and the AMEX accepted our plan on September
      26, 2006. We were granted an extension until December 28, 2007 to regain
      compliance with the continued listing standards. We are subject to periodic
      review by the AMEX Staff during the extension period. Failure to make progress
      consistent with the plan or to regain compliance with the continued listing
      standards by the end of the extension period could result in the Company being
      delisted from the AMEX.





On
      January 29, 2007, the Company announced that it received notice from the Staff
      of the American Stock Exchange indicating that the Company no longer complied
      with the Exchange’s continued listing standards due to the Company’s inability
      to maintain compliance with certain AMEX continued listing requirements, as
      set
      forth in Sections 1003(a)(i), 1003(a)(ii) and 1003(a)(iv) of the AMEX Company
      Guide and its plan of compliance submitted in July 2006, and that its securities
      are subject to be delisted from the Exchange.




In
      April
      2007, the Company announced that it had been notified by the Hearings Department
      of the AMEX that the Company’s hearing had been cancelled. The Hearings
      Department indicated that the AMEX Listing Qualifications Staff recommended
      cancellation of the Company’s hearing after a review of the Company’s submission
      dated April 11, 2007, and other publicly available information. As a result,
      the
      Company will continue to be monitored by AMEX on a quarterly basis, however,
      is
      not currently subject to delisting proceedings.


41




As
      of
      December 31, 2006, Mr. Newman had no outstanding loan balance to the Company.
      Mr. Peipert’s outstanding loan balance to the Company was approximately $0.1
      million. The unsecured loan by Mr. Peipert accrues interest at a simple rate
      of
      8% per annum, and has a term expiring on April 30, 2007.





The
      following is a summary of the debt instruments outstanding as of March 12,
      2008:




Lender
            
            Type
                of facility
            
            Outstanding as of
              March 12, 2008 (not
              including interest) (all
              numbers approximate)
            
            Remaining
              Availability (if
              applicable)Laurus
                Master Fund, Ltd.
            
            
            Line
                of Credit
            
            $
            1,200,000
            
            $
            823,000Taurus
                Advisory Group, LLC investors
            
            
            Long
                term debt
            
            $
            1,650,000
            
            $
            0Taurus
                Advisory Group, LLC investors
            
            
            Series
                A and B Convertible Preferred Stock
            
            $
            3,900,000
            
            $
            0Larry
                and Adam Hock
            
            
            Short
                term notes payable
            
            $
            83,000
            
            $
            0Glenn
                Peipert
            
            
            Related
                party note payable
            
            $
            107,000
            
            $
            0TOTAL
            
            
            
            
            $
            6,940,000
            
            $
            0





The
      Company believes existing cash plus funds provided by operations and borrowing
      capacity under the line of credit should be sufficient to fund operations
      through January 1, 2009. Additional financing may be required to fund targeted
      acquisition candidates. Our primary sources of liquidity are cash flows from
      operations, borrowings under our revolving credit facility, and various short
      and long term financings. We plan to continue to strive to increase revenues
      and
      to continue to execute on our expense reduction program which began in 2006
      in
      order to reduce, or eliminate, the operating losses. Additionally, we will
      continue to seek equity financing in order to enable us to continue to meet
      our
      financial obligations until we achieve profitability. Any decision or ability
      to
      obtain financing through debt or equity investment will depend on various
      factors, including, among others, financial and market conditions, strategic
      acquisition and investment opportunities, and developments in the Company’s
      markets. The sale of additional equity securities or future conversion of any
      convertible debt would result in additional dilution to the Company’s
      stockholders. There can be no assurance that any such funding will be available
      to us on favorable terms, or at all. Failure to obtain sufficient equity
      financing would have substantial negative ramifications to the
      Company.




***Off-balance
      sheet arrangements***





The
      Company does not have any transactions, agreements or other contractual
      arrangements that constitute off-balance sheet arrangements.




42





**APPLICATION
      OF CRITICAL ACCOUNTING POLICIES**





***Revenue
      recognition***





Our
      revenue recognition policy is significant because revenues are a key component
      of our results from operations. In addition, revenue recognition determines
      the
      timing of certain expenses, such as incentive compensation. We follow very
      specific and detailed guidelines in measuring revenue; however, certain
      judgments and estimates affect the application of the revenue policy. Revenue
      results are difficult to predict and any shortfall in revenues or delay in
      recognizing revenues could cause operating results to vary significantly from
      quarter to quarter and could result in future operating losses or reduced net
      income.





***Services***





Revenue
      from consulting and professional services is recognized at the time the services
      are performed on a project by project basis. For projects charged on a time
      and
      materials basis, revenue is recognized based on the number of hours worked
      by
      consultants at an agreed-upon rate per hour. For large services projects where
      costs to complete the contract could reasonably be estimated, the Company
      undertakes projects on a fixed-fee basis and recognizes revenues on the
      percentage of completion method of accounting based on the evaluation of actual
      costs incurred to date compared to total estimated costs. Revenues recognized
      in
      excess of billings are recorded as costs in excess of billings. Billings in
      excess of revenues recognized are recorded as deferred revenues until revenue
      recognition criteria are met. Reimbursements, including those relating to travel
      and other out-of-pocket expenses, are included in revenues, and an equivalent
      amount of reimbursable expenses are included in cost of services.




***Business
      Combinations***





We
      are
      required to allocate the purchase price of acquired companies to the tangible
      and intangible assets acquired and liabilities assumed based on their estimated
      fair values. Such a valuation requires us to make significant estimates and
      assumptions, especially with respect to intangible assets. Critical estimates
      in
      valuing certain intangible assets include, but are not limited to, future
      expected cash flows from customer contracts, customer lists, distribution
      agreements and acquired developed technologies, and estimating cash flows from
      projects when completed and discount rates. Our estimates of fair value are
      based upon assumptions believed to be reasonable, but which are inherently
      uncertain and unpredictable and, as a result, actual results may differ from
      estimates. These estimates may change as additional information becomes
      available regarding the assets acquired and liabilities assumed. Additionally,
      in accordance with “EITF 99-12,” the Company values an acquisition based upon
      the market price of its common stock for a reasonable period before and after
      the date the terms of the acquisition are agreed to and announced.





***Impairment
      of Goodwill, Intangible Assets and Other Long-Lived
      Assets***





We
      evaluate our identifiable goodwill, intangible assets, and other long-lived
      assets for impairment on an annual basis and whenever events or changes in
      circumstances indicate that the carrying value of an asset may not be
      recoverable based on expected undiscounted cash flows attributable to that
      asset. Future impairment evaluations could result in impairment charges, which
      would result in an expense in the period of impairment and a reduction in the
      carrying value of these assets.





***Stock-based
      Compensation***





SFAS
      No. 123 (Revised 2004) (“SFAS No. 123R”), “Share-Based Payment,”
issued in December 2004, is a revision of FASB Statement 123, “Accounting for
      Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting
      for Stock Issued to Employees,” and its related implementation guidance. The
      Statement focuses primarily on accounting for transactions in which an entity
      obtains employee services in share-based payment transactions. SFAS
      No. 123R requires a public entity to measure the cost of employee services
      received in exchange for an award of equity instruments based on the grant-date
      fair value of the award (with limited exceptions). That cost will be recognized
      over the period during which an employee is required to provide service in
      exchange for the award. On March 29, 2005, the SEC issued Staff Accounting
      Bulletin No. 107 (“SAB No. 107”), which provides the Staff’s views
      regarding interactions between SFAS No. 123R and certain SEC rules and
      regulations and provides interpretations of the valuation of share-based
      payments for public companies.


43





SFAS
      No. 123R permits public companies to adopt its requirements using one of
      two methods:





(1)
      A
“modified prospective” method in which compensation cost is recognized beginning
      with the effective date (a) based on the requirements of SFAS No. 123R
      for all share-based payments granted after the effective date and (b) based
      on the requirements of SFAS No. 123 for all awards granted to employees
      prior to the effective date of SFAS No. 123R that remain unvested on the
      effective date.





(2)
      A
“modified retrospective” method which includes the requirements of the modified
      prospective method described above, but also permits entities to restate based
      on the amounts previously recognized under SFAS No. 123 for purposes of pro
      forma disclosures either (a) all prior periods presented or (b) prior
      interim periods of the year of adoption.





This
      statement is effective for the beginning of the first annual reporting period
      that begins after June 15, 2005, therefore, we adopted the standard in the
      first quarter of fiscal 2006 using the modified prospective method. As permitted
      by SFAS No. 123, we previously accounted for share-based payments to
      employees using the intrinsic value method prescribed in APB Opinion 25 and,
      as
      such, generally recognized no compensation cost for employee stock options.
      SFAS
      No. 123R also requires the benefits of tax deductions in excess of
      recognized compensation cost to be reported as a financing cash flow, rather
      than as an operating cash flow as required under current literature. This
      requirement will reduce net operating cash flows and increase net financing
      cash
      flows in periods after adoption.




***Deferred
      Income Taxes***





Determining
      the consolidated provision for income tax expense, income tax liabilities and
      deferred tax assets and liabilities involves judgment.  We record a
      valuation allowance to reduce our deferred tax assets to the amount of future
      tax benefit that is more likely than not to be realized. We have considered
      future taxable income and prudent and feasible tax planning strategies in
      determining the need for a valuation allowance. A valuation allowance is
      maintained by the Company due to the impact of the current years net operating
      loss (NOL). In the event that we determine that we would not be able to realize
      all or part of our net deferred tax assets, an adjustment to the deferred tax
      assets would be charged to net income in the period such determination is made.
      Likewise, if we later determine that it is more likely than not that the net
      deferred tax assets would be realized, then the previously provided valuation
      allowance would be reversed. Our current valuation allowance relates
      predominately to benefits derived from the utilization of our
      NOL’s.





**Recent
      Pronouncements**




In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”).
      SFAS No. 141R establishes principles and requirements for how an acquirer
      recognizes and measures in its financial statements the identifiable assets
      acquired, the liabilities assumed, any noncontrolling interest in the acquiree
      and the goodwill acquired. SFAS No. 141R also establishes disclosure
      requirements to enable the evaluation of the nature and financial effects of
      the
      business combination. SFAS No. 141R is effective for fiscal years beginning
      after December 15, 2008.  We are currently evaluating the potential
      impact, if any, of the adoption of SFAS No. 141R on our consolidated
      results of operations and financial condition.




In
      February 2007, the Financial Accounting Standards Board (FASB) issued FASB
      Statement No. 159, “The Fair Value Option for Financial Assets and
      Financial Liabilities — Including an amendment of FASB Statement
      No. 115” (FAS 159). ** FAS 159, which becomes effective for the company on January 1, 2008,
      permits companies to choose to measure many financial instruments and certain
      other items at fair value and report unrealized gains and losses in earnings.
      Such accounting is optional and is generally to be applied instrument by
      instrument. The company does not anticipate that election, if any, of this
      fair-value option will have a material effect on its consolidated financial
      condition, results of operations, cash flows or
      disclosures.


44





In
      September 2006, the FASB issued FAS No. 157 (“FAS 157”), “Fair
      Value Measurements,” which establishes a framework for measuring fair value in
      accordance with GAAP and expands disclosures about fair value measurements.
      FAS
      157 does not require any new fair value measurements but rather eliminates
      inconsistencies in guidance found in various prior accounting pronouncements.
      FAS 157 is effective for fiscal years beginning after November 15, 2007.
      The adoption of this standard has not had a material affect on the Company’s
      financial condition, results of operations, cash flows or
      disclosures.




In
      December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
      Consolidated Financial Statements—an amendment of Accounting Research Bulletin
      No. 51 (“SFAS No. 160”). SFAS No. 160 establishes accounting and
      reporting standards for ownership interests in subsidiaries held by parties
      other than the parent, the amount of consolidated net income attributable to
      the
      parent and to the noncontrolling interest, changes in a parent’s ownership
      interest, and the valuation of retained noncontrolling equity investments when
      a
      subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure
      requirements that clearly identify and distinguish between the interests of
      the
      parent and the interests of the noncontrolling owners. SFAS No. 160 is
      effective for fiscal years beginning after December 15, 2008. We are
      currently evaluating the potential impact, if any, of the adoption of
      SFAS No. 160 on our consolidated results of operations and financial
      condition.




**ITEM
            7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
            RISK**




We
      are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
      providing the information contained in this item pursuant to Regulation
      S-K.




**ITEM
        8 **FINANCIAL STATEMENTS AND SUPPLEMENTARY
        DATA****




Reference
      is made to pages 64  through 98 comprising a portion of this
      Annual Report on Form 10-K.




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




Not
      applicable.


.


**ITEM
            9A.**CONTROLS AND PROCEDURES




**Evaluation
      of disclosure controls and procedures.**




Our
      Chief
      Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), are responsible
      for establishing and maintaining adequate internal control over financial
      reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange
      Act of 1934, as amended (the “Exchange Act”)




Internal
      control over financial reporting is promulgated under the Exchange Act as a
      process designed by, or under the supervision of, our CEO and CFO and effected
      by our board of directors, management and other personnel, to provide reasonable
      assurance regarding the reliability of financial reporting and the preparation
      of financial statements for external purposes in accordance with generally
      accepted accounting principles and includes those policies and procedures that:


45




•  Pertain
      to the maintenance of records that in reasonable detail accurately and fairly
      reflect the transactions and dispositions of our assets;




•  Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being made
      only in accordance with authorizations of our management and directors; and




•  Provide
      reasonable assurance regarding prevention or timely detection of unauthorized
      acquisition or disposition of our assets that could have a material effect
      on
      the financial statements.




Readers
      are cautioned that internal control over financial reporting, no matter how
      well
      designed, has inherent limitations and may not prevent or detect misstatements.
      Therefore, even effective internal control over financial reporting can only
      provide reasonable assurance with respect to the financial statement preparation
      and presentation.




Our
      management, under the supervision and with the participation of our CEO and
      CFO,
      has evaluated the effectiveness of our disclosure controls and procedures as
      defined in Exchange Act Rules 13a-15(e) and15d-15(e) as of the end of the period
      covered by this Report based upon the framework in Internal Control—Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO). Based on such evaluation, our management has made an
      assessment that our internal control over financial reporting is not effective
      as of December 31, 2007.




We
      did
      not maintain effective financial reporting processes due to lack of
      documentation of certain review and approval functions. We have implemented
      policies and procedures whereby all review and approval functions are to be
      appropriately documented.




There
      is
      a lack of segregation of duties at the Company due to the small number of
      employees dealing with general administrative and financial matters and general
      controls over information technology security and user access. This constitutes
      a weakness in financial reporting. Furthermore, the Company’s Chief Financial
      Officer is the only person with an appropriate level of accounting knowledge,
      experience and training in the selection, application and implementation of
      generally accepted accounting principles as it relates to complex transactions
      and financial reporting requirements. Management will continue to evaluate
      the
      segregation of duties issues considering the cost involved to remediate
      them.





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




**ITEM
      9B.**  **OTHER
      INFORMATION**





Not
      applicable.




**PART
      III**





**ITEM
      10.**  **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL**


**PERSONS;
      COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.**





The
      following table sets forth the names and ages of our current directors and
      executive officers, the principal offices and positions with us held by each
      person and the date such person became a director or executive officer. Our
      Board of Directors elects our executive officers annually. Each year the
      stockholders elect the members of our Board of Directors.


46




Our
      directors and executive officers are as follows:





**Name**
            
            **Year**
              **First
                Elected**
              **as
                Director**
              **or
                Officer**
            
            **Age**
            
            **Positions
                Held**Scott
                Newman
            
            2004
            
            48
            
            President,
                Chief Executive Officer and ChairmanGlenn
                Peipert
            
            2004
            
            47
            
            Executive
                Vice President, Chief Operating Officer and DirectorWilliam
                Hendry
            
            2006
            
            47
            
            Vice
                President, Chief Financial Officer, Secretary and
                TreasurerWilliam
                McKnight
            
            2005
            
            42
            
            Senior
                Vice President - Information ManagementBryan
                Carey
            
            2007
            
            50
            
            Senior
                Vice President - Strategic Consulting and Managing Director, DeLeeuw
                Associates, Inc.Lawrence
                K. Reisman*
            
            2004
            
            46
            
            DirectorFrederick
                Lester**
            
            2006
            
            50
            
            DirectorThomas
                Pear***
            
            2006
            
            55
            
            Director




*
      Chair
      of the Audit Committee, and member of the Compensation and Stock Option
      Committee and the Nominating and Corporate Governance Committee.





**
      Chair
      of the Nominating and Corporate Governance Committee, and member of the Audit
      Committee and the Compensation and Stock Option Committee.





***
      Chair
      of the Compensation and Stock Option Committee, and member of the Audit
      Committee and the Nominating and Corporate Governance Committee.




**SCOTT
      NEWMAN** has been
      our President, Chief Executive Officer and Chairman since January 2004. Mr.
      Newman founded the former Conversion Services International, Inc. in 1990
      (before its merger with and into LCS Group, Inc. in 2004). He has over twenty
      years of experience providing technology solutions to major companies
      internationally. Mr. Newman has direct experience in strategic planning,
      analysis, design, testing and implementation of complex big-data solutions.
      He
      possesses a wide range of software and hardware architecture/discipline
      experience, including, client/server, data discovery, distributed systems,
      data
      warehousing, mainframe, scaleable solutions and e-business. Mr. Newman has
      been
      the architect and lead designer of several commercial software products used
      by
      Chase, Citibank, Merrill Lynch and Jaguar Cars. Mr. Newman advises and reviews
      data warehousing and business intelligence strategy on behalf of our Global
      2000
      clients, including AT&T Capital, Jaguar Cars, Cytec and Chase. Mr. Newman is
      a member of the Young Presidents Organization, a leadership organization that
      promotes the exchange of ideas, pursuit of learning and sharing strategies
      to
      achieve personal and professional growth and success. Mr. Newman received his
      B.S. from Brooklyn College in 1980.




**GLENN
      PEIPERT** has been
      our Executive Vice President, Chief Operating Officer and Director since January
      2004. Mr. Peipert held the same positions with the former Conversion Services
      International, Inc. since its inception in 1990. Mr. Peipert has over two
      decades of experience consulting to major organizations about leveraging
      technology to enable strategic change. He has advised clients representing
      a
      broad cross-section of rapid growth industries worldwide. Mr. Peipert has hands
      on experience with the leading data warehousing products. His skills include
      architecture design, development and project management. He routinely
      participates in architecture reviews and recommendations for our Global 2000
      clients. Mr. Peipert has managed major technology initiatives at Chase, Tiffany,
      Morgan Stanley, Cytec and the United States Tennis Association. He speaks
      nationally on applying data warehousing technologies to enhance business
      effectiveness and has authored multiple white papers regarding business
      intelligence. Mr. Peipert is a member of the Institute of Management
      Consultants, as well as TEC International, a leadership organization whose
      mission is to increase the effectiveness and enhance the lives of chief
      executives and those they influence. Mr. Peipert received his B.S. from Brooklyn
      College in 1982.




47





**WILLIAM
      HENDRY** has been
      our Vice President, Chief Financial Officer and Treasurer since October 2006.
      He
      was appointed Secretary of the Company in August 2007. Mr. Hendry previously
      served as the Company’s Controller from 2004-2006. Prior to joining the Company,
      Mr. Hendry was controller of Scientific Games Online Entertainment Systems,
      a
      developer, installer and operator of online, instant and video lottery systems,
      from 2002-2004. From 2000-2002, Mr. Hendry was a consultant to Cipolla Sziklay
      Zak & Co. and Pharmacia. Prior to this, Mr. Hendry served as the corporate
      controller of AlphaNet Solutions, a publicly-held information technology
      professional services company, as the corporate controller of Biosource
      International, a publicly-held international manufacturer of technology
      products, and as vice president - finance of Quarterdeck, a publicly-held
      publisher of utility and software applications. Mr. Hendry began his career
      at
      KPMG LLP. Mr. Hendry has an M.B.A. in finance and a B.S. in accounting from
      Fairleigh Dickinson University, is a certified public accountant in New Jersey,
      and is a member of the American Institute of Certified Public Accountants,
      the
      New Jersey Society of Certified Public Accountants, and the Financial Executive
      Institute.





**WILLIAM
      MCKNIGHT** has been
      our Senior Vice President - Data Warehousing since July 2005. Mr. McKnight
      founded McKnight Associates, Inc. in 1998. Prior to forming his company, from
      1992-1998, Mr. McKnight held various information technology management positions
      at Visa, and Anthem Blue Cross Blue Shield. From 1990-1992, Mr. McKnight was
      a
      consultant for Platinum Technology, and he was a developer of the DB2 product at
      IBM from 1987-1990. Mr. McKnight received his B.S. in Computer Science from
      Southern College in 1987 and received his M.B.A. from Santa Clara University
      in
      1994.




**BRYAN
      CAREY** has been
      our Senior Vice President - Strategic Consulting, and Managing Director of
      our
      wholly owned subsidiary DeLeeuw Associates, since February 2007. Prior to
      joining DeLeeuw Associates in 2000 as a senior vice president of business
      development, Carey spent nearly 20 years as an executive in project and change
      management in the banking industry, including Bank of America. Mr. Carey was
      promoted to executive vice president of DeLeeuw Associates in 2003, where he
      was
      responsible for major account relationships, project oversight and business
      development. Mr. Carey built DeLeeuw Associates’s Lean and Six Sigma practice
      providing the leadership, consulting, training and discipline to grow the
      business from a start-up to a successful, thriving business. Most recently,
      Mr.
      Carey has led Lean Six Sigma roll-out initiatives at NY Independent System
      Operators, Bank of New York, Cendant Corporation and JPMorgan Chase. Mr. Carey
      has spoken at numerous Six Sigma events, as well as authored a number of
      articles on change and project management utilizing Lean and Six Sigma. Mr.
      Carey received his B.S in Philosophy from Notre Dame in 1980 and received his
      M.B.A. in finance from the University of South Carolina in 1983.




**LAWRENCE
      K. REISMAN** has been
      a Director of our company since February 2004, is Chairman of the Board’s Audit
      Committee, and a member of the Compensation and Stock Option Committee and
      the
      Nominating and Corporate Governance Committee. Mr. Reisman is a Certified Public
      Accountant who has been the principal of his own firm, The Accounting Offices
      of
      L.K. Reisman, since 1986. Prior to forming his company, Mr. Reisman was a tax
      manager at Coopers & Lybrand and Peat Marwick Mitchell. He routinely
      provides accounting services to small and medium-sized companies, which services
      include auditing, review and compilation of financial statements, corporate,
      partnership and individual taxation, designing accounting systems and management
      consulting services. Mr. Reisman received his B.S. and M.B.A. in Finance from
      St. John’s University in 1981 and 1985, respectively.




**FREDERICK
      LESTER** has
      been
      a Director of our company since August 2006, is Chairman of the Board’s
      Nominating and Corporate Governance Committee, and a member of the Audit
      Committee and the Compensation and Stock Option Committee. Presently he is
      the
      Regional Consulting Partner, NE Banking & Capital Markets, Teradata
      Corporation. From 2005-2006, Mr. Lester was the Consulting Director at Cognos
      Corporation, and from 1999-2005, he was the Managing Director at Competitive
      Advantage, Inc. Prior to this, Mr. Lester served as Consulting Director for
      KPMG
      and Managing Partner at Teradata. Mr. Lester’s undergraduate studies at Columbia
      University focused on nuclear physics and mathematics.




48





**THOMAS
      PEAR** has
      been
      a Director of our company since August 2006, is Chairman of the Board’s
      Compensation and Stock Option Committee, and a member of the Audit Committee
      and
      the Nominating and Corporate Governance Committee.  Presently he is a
      principal in Saw Mill Sports Management and a management
      consultant.    From 1993 to 2006, Mr. Pear served as chief
      financial officer of The Atlantic Club, and also served as its president
      from 2002 to 2006.  Prior to this, Mr. Pear served as vice president
      and general manager of DM Engineering, vice president and chief financial
      officer of Tennis Equities, and staff accountant at Malkin, Studley and Ramey
      CPA, PC.  Mr. Pear received his B.S. in Accounting from Nichols College in
      1974.





**Code
      of Conduct and Ethics**





Our
      Board
      of Directors has adopted a Code of Conduct and Ethics which is applicable to
      all
      our directors, officers, employees, agents and representatives, including our
      principal executive officer and principal financial officer, principal
      accounting officer or controller, or other persons performing similar functions.
      We have made available on our website copies of our Code of Conduct and Ethics
      and charters for the committees of our Board and other information that may
      be
      of interest to investors.





**Director
      Independence**





The
      Board
      has reviewed each of the directors’ relationships with the Company in
      conjunction with Section 121(A) of the listing standards of the American Stock
      Exchange and has affirmatively determined that three of our directors, Lawrence
      K. Reisman, Frederick Lester and Thomas Pear are independent of management
      and
      free of any relationship that would interfere with the independent judgment
      as
      members of the Board of Directors or any committee thereof.




**Committees
      of the Board of Directors**





The
      Board
      of Directors has established three standing committees: (1) the Audit Committee,
      (2) the Compensation and Stock Option Committee and (3) the Nominating and
      Corporate Governance Committee. Each committee operates under a charter that
      has
      been approved by the Board. Copies of the charters of the Audit Committee,
      the
      Compensation and Stock Option Committee and the Nominating and Corporate
      Governance Committee are posted on our website. Mr. Reisman, Mr. Lester and
      Mr.
      Pear are members of each of such committees.





**Audit
      Committee**





The
      Audit
      Committee was formed in April 2005. The Audit Committee met 4 times in fiscal
      year 2007. Mr. Lester was absent from one meeting, however, and each member
      of
      the Audit Committee was present at the other meetings. The Audit Committee
      is
      responsible for matters relating to financial reporting, internal controls,
      risk
      management and compliance. These responsibilities include appointing,
      overseeing, evaluating and approving the fees of our independent auditors,
      reviewing financial information which is included in our Annual Report on Form
      10-K, discussions with management and the independent auditors the results
      of
      the annual audit and our quarterly financial statements, reviewing with
      management our system of internal controls and financial reporting process
      and
      monitoring our compliance program and system.





The
      Audit
      Committee operates pursuant to a written charter, which sets forth the functions
      and responsibilities of this committee. A copy of the charter can be viewed
      on
      our website. All members of this committee are independent directors under
      the
      SEC rules. The Board of Directors has determined that Lawrence K. Reisman,
      the
      committee’s chairman, meets the SEC criteria of an “audit committee financial
      expert”, as defined in Item 401(h) of Regulation S-K.


49




**Compensation
      and Stock Option Committee**





The
      Compensation Committee and the Stock Option Committee merged in March 2007,
      met
      2 times in fiscal year 2007 and each member of the Compensation and Stock Option
      Committee was present at each meeting, and acted by written consent 1 time
      during fiscal 2007. The Compensation and Stock Option Committee is responsible
      for matters relating to the development, attraction and retention of the
      Company’s management and for matters relating to the Company’s compensation and
      benefit programs. As part of its responsibilities, this committee evaluates
      the
      performance and determines the compensation of the Company’s Chief Executive
      Officer and approves the compensation of our senior officers, as well as to
      fix
      and determine awards to employees of stock options, restricted stock and other
      types of stock-based awards.





The
      Compensation and Stock Option Committee operates under a written charter that
      sets forth the functions and responsibilities of this committee. A copy of
      the
      charter can be viewed on our website. Pursuant to its charter, the Compensation
      and Stock Option Committee must be comprised of at least two (2) Directors
      who,
      in the opinion of the Board of Directors, must meet the definition of
“independent director” within the rules and regulations of the SEC. The Board of
      Directors has determined that all members of this committee are independent
      directors under the SEC rules.




**Nominating
      and Corporate Governance Committee**





The
      Nominating and Corporate Governance Committee is responsible for providing
      oversight on a broad range of issues regarding our corporate governance
      practices and policies and the composition and operation of the Board of
      Directors. These responsibilities include reviewing potential candidates for
      membership on the Board and recommending to the Board nominees for election
      as
      directors of the Company. The Nominating and Corporate Governance Committee
      was
      formed in May 2005 and did not meet during fiscal 2007. A complete description
      of the Nominating and Corporate Governance Committee’s responsibilities is set
      forth in the Nominating and Corporate Governance written charter. A copy of
      the
      charter is available to stockholders on the Company’s website. All members of
      the Nominating and Corporate Governance Committee are independent directors
      as
      defined by the rules and regulations of the SEC. The Nominating and Corporate
      Governance Committee will consider director nominees recommended by
      stockholders. There are no minimum qualifications for consideration for
      nomination to be a director of the Company. The nominating committee will assess
      all director nominees using the same criteria. Nominations made by stockholders
      must be made by written notice received by the Secretary of the Company within
      30 days of the date on which notice of a meeting for the election of directors
      is first given to stockholders. The Nominating and Corporate Governance
      Committee and the Board of Directors carefully consider nominees regardless
      of
      whether they are nominated by stockholders, the Nominating and Corporate
      Governance Committee or existing Board members.





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





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires our officers,
      directors and persons who beneficially own more than 10% of a registered class
      of our equity securities (“ten percent stockholders”) to file reports of
      ownership and changes in ownership with the Securities and Exchange
      Commission.  Officers, directors and ten percent stockholders are charged
      by the SEC regulations to furnish us with copies of all Section 16(a) forms
      they
      file.




Based
      solely upon a review of copies of Section 16(a) reports and representations
      received by us from reporting persons, and without conducting any independent
      investigation of our own, in fiscal year 2007, all Forms 3, 4 and 5 were timely
      filed with the SEC by such reporting persons, except that:


An
      aggregate of three Form 5s for untimely filed by Lawrence K Reisman, Frederick
      Lester and Thomas Pear. Each Form 5 reported a “small acquisition” transaction
      as defined in SEC Rule 16a-6.


50




**ITEM
      11.**  **EXECUTIVE
      COMPENSATION.**





The
      following table summarizes compensation information for the last two fiscal
      years for (i) Mr. Scott Newman, our Principal Executive Officer and
      (ii) the two most highly compensated executive officers other than the
      Principal Executive Officer, who were serving as executive officers at the
      end
      of the fiscal year and who we refer to collectively, the Named Executive
      Officers.




**SUMMARY
      COMPENSATION TABLE**





**Name**
              **and**
              **Principal**
              **Position**
            
            **Year**
            
            **Salary**
            
            **Bonus**
            
            **Stock**
              **Awards**
            
            **Option
                Awards(s)**
            
            **Non-Equity
                Incentive Plan Compensation**
            
            **Non-Qualified**
              **Deferred
                Compensation Earnings**
            
            **All
                Other Compensation**
            
            **Total****($)**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **($)**
            
            
            
            **($)**
            
            **($)**Scott
                Newman
            
            
            2007
            
            
            440,489
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            36,627
            (1)
            
            477,116President,
                Chief Executive
            
            
            2006
            
            
            479,167
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            45,401
            (1)
            
            524,568Officer
                and ChairmanGlenn
                Peipert
            
            
            2007
            
            
            338,983
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            30,195
            (1)
            
            369,178Executive
                Vice President, Chief
            
            
            2006
            
            
            359,375
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            38,300
            (1)
            
            397,675Operating
                Officer and DirectorBryan
                Carey
              Senior
                Vice
            
            
            2007
            
            
            313,476
            
            
            —
            
            
            —
            
            
            62,500
            
            
            —
            
            
            —
            
            
            16,612
            (1)
            
            392,588President,
                Managing Director DeLeeuw Associates
            
            
            2006
            
            
            241,671
            
            
            —
            
            
            —
            
            
            33,000
            
            
            —
            
            
            —
            
            
            *
            (2)
            
            274,671


51





(1)
            Amounts
                shown reflect payments related to medical, dental and life insurance,
                car
                payments and 401(k) contributions by the
                Company.





(2)
            The
                annual amount of perquisites and other personal benefits, if any,
                did not
                exceed $10,000 for each named executive officer and has therefore
                been
                omitted, unless otherwise stated
                above.




The
      following table shows outstanding equity awards at December 31,
      2007:




**Outstanding
      Equity Awards at Fiscal Year-End**





Option
                Awards
            
            Stock
                AwardsName
            
            Number of
                Securities Underlying Unexercised Options
              (#)
                Exercisable
            
            Number of
                Securities Underlying Unexercised Options
              (#)
                Unexercisable
            
            Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options (#)
            
            Option
                Exercise
              Price
              ($)
            
            Option
                Expiration Date
            
            Number
              of
              Shares
              or
                Units
              of
              Stock
                That
              Have
              Not
              Vested
              (#)
            
            Market
                Value
              of
              Shares
              or
              Units
              of
              Stock
              That
              Have
              Not
              Vested
              ($)
            
            Equity
                Incentive Plan Awards: Number
              of
                Unearned Shares, Units or Other Rights That
              Have Not
                Vested
              (#)
            
            Equity
                Incentive Plan Awards: Market
              or Payout
                Value of Unearned Shares, Units or Other Rights That
              have not
                Vested
              ($)(a)
            
            (b)
            
            I
            
            (d)
            
            (e)
            
            (f)
            
            (g)
            
            (h)
            
            (i)
            
            (j)Scott
                Newman
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Glenn
                Peipert
            
            
            166,666
            
            
            83,334
            
            
            —
            
            
            0.83
            
            
            11/16/2010
            
            
            —
            
            
            —
            
            
            —
            
            
            —Bryan
                Carey
            
            
            33,333
            
            
            —
            
            
            —
            
            
            3.00
            
            
            5/28/2014
            
            
            —
            
            
            —
            
            
            —
            
            
            —83,333
            
            
            41,667
            
            
            —
            
            
            0.83
            
            
            11/16/2015
            
            
            —
            
            
            —
            
            
            —
            
            
            —50,000
            
            
            100,000
            
            
            —
            
            
            0.25
            
            
            10/10/2016
            
            
            —
            
            
            —
            
            
            —
            
            
            ——
            
            
            250,000
            
            
            —
            
            
            0.30
            
            
            5/10/2017
            
            
            —
            
            
            —
            
            
            —
            
            
            —





The
      following table shows the details of compensation paid to outside directors
      of
      the Company during 2007:




**Director
      Compensation for 2007**





Name
            
            FeesEarned orPaid
                in Cash
              ($)
            
            StockAwards($)
            
            OptionAwards($)
            
            Non-EquityIncentive PlanCompensation($)
            
            Change inPensionValue andNonqualifiedDeferredCompensationEarnings
            
            All OtherCompensation($)
            
            Total($)(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)
            
            (h)Frederick
                Lester
            
            
            12,000
            
            
            5,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            17,000Thomas
                Pear
            
            
            13,250
            
            
            5,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            18,250Lawrence
                K. Reisman
            
            
            12,750
            
            
            5,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            17,750


52





**Narrative
      Disclosure to Summary Compensation**




Scott
      Newman, our President and Chief Executive Officer, agreed to a five-year
      employment agreement dated as of March 26, 2004. The agreement provides for
      an
      annual salary to Mr. Newman of $500,000 and an annual bonus to be awarded by
      the
      Committee. The agreement also provides for health, life and disability
      insurance, as well as a monthly car allowance. Effective
      August 6, 2007, the Company and Scott Newman executed an amendment to Mr.
      Newman’s employment agreement which reduces Mr. Newman’s annual salary to
      $375,000 per year. All other provisions in the employment remain in full force
      and effect.





Glenn
      Peipert, Executive Vice President and Chief Operating Officer, agreed to a
      five-year employment agreement dated as of March 26, 2004. The agreement
      provides for an annual salary to Mr. Peipert of $375,000 and an annual bonus
      to
      be awarded by the Committee. The agreement also provides for health, life and
      disability insurance, as well as a monthly car allowance. Effective August
      6,
      2007, the Company and Glenn Peipert executed an amendment to Mr. Peipert’s
      employment agreement which reduces Mr. Peipert’s annual salary to $315,000 per
      year. All other provisions in the employment remain in full force and
      effect.





Severance
      Arrangements





The
      following named executive officers have arrangements that provide for payment
      of
      severance payments:





*
            In
                the event that Scott Newman’s employment is terminated other than with
                good cause, Mr. Newman will receive a lump sum payment of 2.99 times
                his
                base salary.





*
            In
                the event that Glenn Peipert’s employment is terminated other than with
                good cause, Mr. Peipert will receive a lump sum payment of 2.99 times
                his
                base salary.


Change-in-Control
      Arrangements





Messrs.
      Newman and Peipert would be entitled to the above severance arrangements on
      a
      change of control. Further, our 2003 Incentive Plan provides that upon a change
      in control, all unvested stock options shall immediately become vested (unless
      the Committee determines otherwise).





At
      present, the named executive officers hold the following unvested stock options
      that would become vested upon a change in control.





Name
            
            Number of Shares
              Underlying Vested
              Options (#)
            
            Number of Shares
              Underlying
              Unvested Options
              (#)Scott
                Newman
            
            
            —
            
            
            —Glenn
                Peipert
            
            
            166,666
            
            
            83,334Bryan
                Carey
            
            
            166,666
            
            
            391,667


53





Stock
      Ownership Requirement for Management





The
      Company does not have a formal policy requiring stock ownership by management.
      One of the key objectives of the 2003 Incentive Plan is to promote ownership
      of
      the Company’s stock by management.





Compensation
      of Members of the Board of Directors





Directors
      of the Company who are not employees of the Company or its subsidiaries are
      entitled to receive compensation for serving as directors in the amount of
      $10,000 per annum. During 2007, 50% of this annual fee was paid to the directors
      in cash and the other 50% was paid in Company Common Stock. This policy was
      changed for 2008 and the entire $10,000 annual compensation will be paid in
      Company Common Stock. The directors also receive $500 per Board meeting attended
      in person, $250 per Board meeting attended via teleconference, $250 per
      Committee meeting attended, and an annual stock option grant.





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




The
      following table sets forth certain information regarding the beneficial
      ownership of our common stock, our only class of outstanding voting securities
      as of March 28, 2008, based on 114,831,697 aggregate shares of common stock
      outstanding as of such date, by: (i) each person who is known by us to own
      beneficially more than 5% of our outstanding common stock with the address
      of
      each such person, (ii) each of our present directors and officers, and (iii)
      all
      officers and directors as a group:





**Name and Address of**
              **Beneficial Owner****(1)(2)**
            
            **Amount of**
              **Common Stock
                Beneficially**
              **Owned**
            
            **Percentage of
                Outstanding Common Stock
                Beneficially Owned**Scott
                Newman(3)
            
            
            19,655,413
            
            
            16.9
            %Glenn
                Peipert(4)
            
            
            10,367,060
            
            
            8.9
            %William
                Hendry(5)
            
            
            100,000
            
            
            
            *William
                McKnight(6)
            
            
            829,091
            
            
            
            *Bryan
                Carey (7)
            
            
            166,666
            
            
            
            *Lawrence
                K. Reisman(8)
            
            
            75,844
            
            
            
            *Frederick
                Lester(9)
            
            
            32,511
            
            
            
            *Thomas
                Pear(10)
            
            
            32,711
            
            
            
            *Matthew
                J. Szulik
            
            
            29,332,644
            
            
            25.2
            %Laurus
                Master Fund, Ltd.
            
            
            6,247,869
            
            
            5.4
            %All
                directors and officers as a group (8 persons)
            
            
            31,259,296
            
            
            26.9
            %







*
            Represents less than 1% of the issued and outstanding Common
                Stock.




(1)
            Each
                stockholder, director and executive officer has sole voting power
                and sole
                dispositive power with respect to all shares beneficially owned by
                him,
                unless otherwise indicated.




(2)
              All
                  addresses are c/o Conversion Services International, Inc., 100
                  Eagle Rock
                  Avenue, East Hanover, New Jersey
                  07936.


54




(3)
            Mr.
                Newman is the Company’s President, Chief Executive Officer and Chairman of
                the Board.




(4)
            Mr.
                Glenn Peipert is the Company’s Executive Vice President, Chief Operating
                Officer and Director. Consists of an option to purchase 166,666 shares
                of
                Common Stock granted on November 16, 2005, and expiring on November
                16,
                2010, at an exercise price of $0.83 per share, and does not include
                an
                option to purchase 83,334 shares of Common Stock which vest on November
                16, 2008.




(5)
            Mr.
                William Hendry is the Company’s Vice President, Chief Financial Officer,
                Secretary and Treasurer. Consists of an option to purchase 30,000
                shares
                of Common Stock granted on May 28, 2004, and expiring on May 28,
                2014, at
                an exercise price of $3.00 per share.****Consists
                of an option to purchase 20,000 shares of Common Stock granted on
                November
                16, 2005, and expiring on November 16, 2015, at an exercise price
                of $0.83
                per share, and does not include an option to purchase 10,000 shares
                of
                Common Stock which vest on May 16, 2008. Consists of an option to
                purchase
                50,000 shares of Common Stock granted on October 10, 2006, and expiring
                on
                October 10, 2016, at an exercise price of $0.25 per share, and does
                not
                include an option to purchase 100,000 shares of Common Stock which
                vests
                as follows: (i) 50,000 on October 10, 2008 and (ii) 50,000 on October
                10,
                2009.




(6)
            Mr.
                McKnight is the Company’s Senior Vice President - Information
                Management.




(7)
            Mr.
                Carey is the Company’s Senior Vice President and Managing Director,
                DeLeeuw Associates, Inc. Consists of an option to purchase 33,333
                shares
                of Common Stock granted on May 28, 2004, and expiring on May 28,
                2014, at
                an exercise price of $3.00 per share.****Consists
                of an option to purchase 83,333 shares of Common Stock granted on
                November
                16, 2005, and expiring on November 16, 2015, at an exercise price
                of $0.83
                per share, and does not include an option to purchase 41,667 shares
                of
                Common Stock which vest on May 16, 2008. Consists of an option to
                purchase
                50,000 shares of Common Stock granted on October 10, 2006, and expiring
                on
                October 10, 2016, at an exercise price of $0.25 per share and does
                not
                include an option to purchase 100,000 shares of Common Stock which
                vests
                as follows: (i) 50,000 on October 10, 2008 and (ii) 50,000 on October
                10,
                2009. Does not include an option to purchase 250,000 shares of Common
                Stock granted on May 10, 2007, and expiring on May 10, 2017, at an
                exercise price of $0.30 per share which vest as follows: (i) 83,333
                on May
                10, 2008, (ii) 83,333 on May 10, 2009 and (iii) 83,334 on May 10,
                2010.





(8)
            Mr.
                Reisman is a Director. Consists of an option to purchase 30,000 shares
                of
                Common Stock granted on May 28, 2004, and expiring on May 28, 2014,
                at an
                exercise price of $3.00 per share.****Consists
                of an option to purchase 13,333 shares of Common Stock granted on
                November
                16, 2005, and expiring on November 16, 2015, at an exercise price
                of $0.83
                per share, and does not include an option to purchase 6,667 shares
                of
                Common Stock which vest on November 16, 2008. Consists of an option
                to
                purchase 8,333 shares of Common Stock granted on October 10, 2006,
                and
                expiring on October 10, 2016, at an exercise price of $0.25 per share
                and
                does not include an option to purchase 16,667 shares of Common Stock
                which
                vest as follows: (i) 8,333 on October 10, 2008, (ii) 8,334 on October
                10,
                2009. Includes 24,178 shares granted in October 2007 as a portion
                of the
                annual director compensation.





(9)
            Mr.
                Lester is a Director.  Consists of an option to purchase 8,333 shares
                of Common Stock granted on October 10, 2006, and expiring on October
                10,
                2016, at an exercise price of $0.25 and does not include an option
                to
                purchase 16,667 shares of Common Stock which vests as follows: (i)
                8,333
                on October 10, 2008 and (ii) 8,334 on October 10, 2009. Includes
                24,178
                shares granted in October 2007 as a portion of the annual director
                compensation.


55





(10)
            Mr.
                Pear is a Director. Consists of an option to purchase 8,333 shares
                of
                Common Stock granted on October 10, 2006, and expiring on October
                10,
                2016, at an exercise price of $0.25 and does not include an option
                to
                purchase 16,667 shares of Common Stock which vests as follows: (i)
                8,333
                on October 10, 2008 and (ii) 8,334 on October 10, 2009. Includes
                24,178
                shares granted in October 2007 as a portion of the annual director
                compensation.




**ITEM
      13.**  **CERTAIN
      RELATIONSHIPS AND RELATED PARTY TRANSACTIONS**





As
      of
      August 23, 2006, approximately $0.6 million and $0.5 million remained
      outstanding to Messrs. Newman and Peipert, respectively, on their loans to
      the
      Company. On August 23, 2006, pursuant to a unanimous resolution of the
      independent members of the Board of Directors, certain loans made to the Company
      by Messrs. Newman and Peipert were converted into shares of common stock of
      the
      Company. Per the Board resolution, the shares of common stock received were
      based on a conversion price of $0.63, or the closing market price of the
      Company's common stock on the American Stock Exchange on the date of conversion
      (August 23, 2006). Mr. Newman received 980,491 shares of restricted common
      stock, and Mr. Peipert received 851,862 shares of restricted common
      stock.




As
      of
      December 31, 2007, Mr. Newman had no outstanding loan balance to the Company,
      and Mr. Peipert’s outstanding loan balance to the Company was $0.1 million. The
      unsecured loan by Mr. Peipert accrues interest at a simple rate of 8% per annum,
      and had a term expiring on April 30, 2007.





Other
      than those described above, during the last fiscal year, we have no material
      transactions which involved or are planned to involve a direct or indirect
      interest of a director, executive officer, greater than 5% stockholder or any
      family of such parties.




**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**





The
      following table sets forth fees billed to us by our independent registered
      public accounting firms during the fiscal years ended December 31, 2007 and
      December 31, 2006 for: (i) services rendered for the audit of our annual
      financial statements and the review of our quarterly financial statements;
      (ii)
      services by our independent registered public accounting firms that are
      reasonably related to the performance of the audit or review of our financial
      statements and that are not reported as Audit Fees; (iii) services rendered
      in
      connection with tax compliance, tax advice and tax planning; and (iv) all other
      fees for services rendered.




December
              31,
                2007
            
            December
              31,
                2006Audit
                Fees
            
            $
            144,003
            
            
            256,367Audit
                Related Fees
            
            $
            2,000
            
            
            2,500Tax
                Fees
            
            $
            39,563
            
            
            93,733All
                Other Fees
            
            $
            13,198
            
            
            18,030$
            198,764
            
            
            370,630





Audit
      Committee Policies





The
      Board
      of Directors is solely responsible for the approval in advance of all audit
      and
      permitted non-audit services to be provided by the independent auditors
      (including the fees and other terms thereof), subject to the de minimus
      exceptions for non-audit services provided by Section 10A(i)(1)(B) of the
      Exchange Act, which services are subsequently approved by the Board of Directors
      prior to the completion of the audit. None of the fees listed above are for
      services rendered pursuant to such de minimus exceptions.


56





**Part
      IV**





**ITEM
      15.**  **EXHIBITS**




2.1  Agreement
      and Plan of Reorganization, dated August 21, 2003, among Registrant, LCS
      Acquisition Corp., Conversion Services International, Inc. and certain
      affiliated stockholders of Conversion Services International, Inc. (filed as
      Appendix A on Schedule 14A on January 5, 2004).





2.2  First
      Amendment to Agreement and Plan of Reorganization, dated November 28, 2003,
      among Registrant, LCS Acquisition Corp., Conversion Services International,
      Inc.
      and certain affiliated stockholders of Conversion Services International, Inc.
      (filed as Appendix A on Schedule 14A on January 5, 2004).





2.3  Certificate
      of Merger, dated January 30, 2004, relating to the merger of LCS Acquisition
      Corp. and Conversion Services International, Inc. (filed as Exhibit 2.3 on
      Form
      8-K on February 17, 2004).





2.4  Acquisition
      Agreement, dated February 27, 2004, among the Company, DeLeeuw Associates,
      Inc.
      and Robert C. DeLeeuw (filed as Exhibit 2.1 on Form 8-K on March 16,
      2004).





2.5  Plan
      and
      Agreement of Merger and Reorganization, dated February 27, 2004, among
      Registrant, DeLeeuw Associates, Inc. and DeLeeuw Conversion LLC filed as Exhibit
      2.1 on Form 8-K on March 16, 2004).





2.6  Asset
      Purchase Agreement, dated May 26, 2004, among Registrant, Evoke Asset Purchase
      Corp. and Evoke Software Corporation (filed as Exhibit 2.1 on Form 8-K on July
      13, 2004).





2.7  Asset
      Purchase Agreement dated July 18, 2005 by and among Registrant, Similarity
      Vector Technologies (Sivtech) Limited (d/b/a Similarity Systems), Similarity
      Systems Inc. and Evoke Software Corporation (filed as Exhibit 2.1 on Form 8-K
      on
      September 27, 2004).





2.8  Agreement
      and Plan of Merger dated July 22, 2005 among Registrant, McKnight Associates,
      Inc., McKnight Associates, Inc. and William McKnight (filed as Exhibit 2 on
      Form
      8-K on July 28, 2005).





2.9  Agreement
      and Plan of Merger dated July 28, 2005 among Registrant, ISI Merger Corp.,
      a
      Delaware corporation, Integrated Strategies, Inc., a Delaware corporation,
      ISI
      Consulting, LLC, a Delaware limited liability company, Adam Hock, and Larry
      Hock
      (filed as Exhibit 2 on Form 8-K on August 2, 2005).





3.1  Certificate
      of Incorporation, as amended (filed as Exhibit 3.1 on Form 10-SB on December
      9,
      1999).





3.2  Certificate
      of Amendment to Certificate of incorporation, dated January 27, 2004, amending,
      among other things, the authorized shares of common and preferred stock (filed
      as Exhibit 3.1 on Form 8-K on February 17, 2004).


57





3.3  Certificate
      of Amendment to Certificate of Incorporation, dated January 30, 2004, changing
      the name of the Company from LCS Group, Inc. to Conversion Services
      International, Inc. (filed as Exhibit 3.2 on Form 8-K on February 17,
      2004).





3.4  Certificate
      of Amendment to Certificate of Incorporation, dated September 20, 2005,
      effecting, among other things, the 1 for 15 reverse stock split (filed as
      Exhibit D on Schedule 14A on July 26, 2005).





3.5  Certificate
      of Amendment to Certificate of Incorporation, dated August 8, 2006, increasing
      the authorized shares of common stock (filed as Exhibit A on Schedule 14A on
      July 17, 2006).




3.6  Certificate
      of Designations of Preferences, Rights and Limitations of Series A Convertible
      Preferred Stock of Registrant dated February 2, 2006 (filed as Exhibit 4.1
      on
      Form 8-K on February 8, 2006).





3.7  Certificate
      of Designations of Preferences, Rights and Limitations of Series B Convertible
      Preferred Stock of Registrant (filed as Exhibit 4.1 on Form 8-K on August 16,
      2006).





3.8  Amended
      and Restated Bylaws (filed as Exhibit 3.3 on Form 8-K on February 17,
      2004).





3.9  Certificate
      of Amendment of Certificate of Designations of Preferences, Rights and
      limitations of Series B Convertible Preferred Stock of Conversion Services
      International, Inc. (filed as Exhibit 4.1 on Form 8-K on June 28,
      2007)





3.10  Amended
      and Restated By-Laws of Conversion Services International, Inc. (filed as
      Exhibit 3.1 on Form 8-K on December 27, 2007).





4.1  Common
      Stock Purchase Warrant, dated August 16, 2004, in favor of Laurus Master Fund,
      Ltd. (filed as Exhibit 4.7 on Form 10-QSB on August 23, 2004).





4.2  Senior
      Subordinated Secured Convertible Promissory Note, dated September 22, 2004,
      in
      favor of Sands Brothers Venture Capital LLC (filed as Exhibit 10.1 on Form
      8-K
      on September 27, 2004).





4.3  Senior
      Subordinated Secured Convertible Promissory Note, dated September 22, 2004,
      in
      favor of Sands Brothers Venture Capital III LLC (filed as Exhibit 10.2 on Form
      8-K on September 27, 2004).





4.4  Senior
      Subordinated Secured Convertible Promissory Note, dated September 22, 2004,
      in
      favor of Sands Brothers Venture Capital IV LLC (filed as Exhibit 10.3 on Form
      8-K on September 27, 2004).





4.5
      Common Stock Purchase Warrant, dated September 22, 2004, in favor of Sands
      Brothers Venture Capital LLC (filed as Exhibit 4.1 on Form 8-K on September
      27,
      2004).




4.6  Common
      Stock Purchase Warrant, dated September 22, 2004, in favor of Sands Brothers
      Venture Capital III LLC (filed as Exhibit 4.2 on Form 8-K on September 27,
      2004).





4.7  Common
      Stock Purchase Warrant, dated September 22, 2004, in favor of Sands Brothers
      Venture Capital IV LLC (filed as Exhibit 4.3 on Form 8-K on September 27,
      2004).


58





4.8  Amended
      And Restated Secured Convertible Term Note dated August 16, 2004 as amended
      and
      restated on July 28, 2005 in favor of Laurus Master Fund, Ltd. (filed as Exhibit
      10.2 on Form 8-K on December 6, 2005).





4.9  Option
      to
      purchase shares of common stock dated February 1, 2006, in favor of Laurus
      Master Fund, Ltd. (filed as Exhibit 4.1 on Form 8-K on February 7,
      2006).





4.10  Secured
      Non-Convertible Revolving Note dated February 1, 2006 in favor of Laurus Master
      Fund, Ltd. (filed as Exhibit 10.1 on Form 8-K on February 7, 2006).





4.11  Common
      Stock Purchase Warrant dated February 2, 2006, in favor of Taurus Advisory
      Group, LLC (filed as Exhibit 10.3 on Form 8-K on February 8, 2006).





4.12  Common
      Stock Purchase Warrant, dated August 11, 2006, in favor of Matthew J. Szulik
      (filed as Exhibit 10.3 on Form 8-K on August 16, 2006).





4.13  Common
      Stock Purchase Warrant, dated August 11, 2006, in favor of Feiner Family Trust
      (filed as Exhibit 10.4 on Form 8-K on August 16, 2006).





4.14  Common
      Stock Purchase Warrant in favor of certain investors represented by Taurus
      Advisory Group, LLC, dated December 29, 2006 (filed as Exhibit 10.3 on Form
      8-K
      on January 5, 2007).




4.15  Common
      Stock Purchase Warrant in favor of investors represented by TAG Virgin Islands,
      Inc., dated March 1, 2007 (filed as Exhibit 10.3 on Form 8-K on March 7,
      2007).





4.16  Common
      Stock Warrant in favor of Laurus Master Fund, Ltd., dated March 1, 2007 (filed
      as Exhibit 10.6 on Form 8-K on March 7, 2007).





4.17  10%
      Convertible Unsecured Note issued to investor represented by TAG Virgin Islands,
      Inc., dated March 1, 2007 (filed as Exhibit 10.1 on Form 8-K on March 7,
      2007).





4.18  Form
      of
      Common Stock Purchase Warrant ( filed
      as
      Exhibit 10.2 on Form 8-K on May 3, 2007)





4.19  10%
      Convertible Unsecured Note issued to the Investor, dated June 6, 2007 (filed
      as
      Exhibit 10.1 on Form 10-Q filed on August 8, 2007).




4.20  Common
      Stock Purchase Warrant issued to the Investor, dated June 6, 2007 (filed as
      Exhibit 10.2 on Form 10-Q filed on August 8, 2007).





4.21  10%
      Convertible Unsecured Note issued to the Investor, dated June 27, 2007 (filed
      as
      Exhibit 10.3 on Form 10-Q filed on August 8, 2007).





4.22  Common
      Stock Purchase Warrant issued to the Investor, dated June 27, 2007 (filed as
      Exhibit 10.4 on Form 10-Q filed on August 8, 2007).




4.23 
      Form of Common Stock Purchase Warrant issued to Investor, dated August 24,
      2007.
      (filed as Exhibit 4.1 on Form 10-Q filed on November 13, 2007).




59


4.24  Form of
        Common Stock Purchase Warrant issued to Investor, dated September 4, 2007
        (filed
        as Exhibit 4.2 on Form 10-Q filed on November 13, 2007.
 
 4.25  Form of
        10% Convertible Unsecured Note issued to Investor, dated as of June 27,
        2007(filed as Exhibit 4.3 on Form 10-Q filed on November 13, 2007.
 
 4.26  Form of
        Common Stock Purchase Warrant issued to Investor, dated as of June 27,
        2007(filed as Exhibit 4.4 on Form 10-Q filed on November 13, 2007.
 
 4.27  Form of
        Common Stock Purchase Warrant issued to Investor, dated October 26, 2007(filed
        as Exhibit 4.5 on Form 10-Q filed on November 13, 2007.
 
 4.28  Form of
        Common Stock Purchase Warrant issued to Investor, dated October 19, 2007(filed
        as Exhibit 4.6 on Form 10-Q filed on November 13, 2007.
  4.29 
Form
        of Common Stock Purchase Warrant issued
        to investors, dated March 26, 2008.


10.1  Employment
      Agreement among Registrant and Scott Newman, dated March 26, 2004 (filed as
      Exhibit 10.1 on Form 8-K/A on April 1, 2004).





10.2  Employment
      Agreement among Registrant and Glenn Peipert, dated March 26, 2004 (filed as
      Exhibit 10.2 on Form 8-K/A on April 1, 2004).





10.3  Employment
      Agreement among Registrant and Mitchell Peipert, dated March 26, 2004 (filed
      as
      Exhibit 10.3 on Form 8-K/A on April 1, 2004).





10.4  Employment
      Agreement among Registrant and Robert DeLeeuw, dated March 26, 2004 (filed
      as
      Exhibit 10.4 on Form SB-2/A on September 30, 2004).





10.5  2003
      Incentive Plan, as amended (filed as Exhibit 4.1 on Form S-8 POS on October
      18,
      2006).





10.6  Security
      Agreement, dated September 22, 2004, among Registrant, Sands Brothers Venture
      Capital LLC, Sands Brothers Venture Capital III LLC and Sands Brothers Venture
      Capital IV LLC (filed as Exhibit 10.4 on Form 8-K on September 27,
      2004).





10.7  Subordination
      Agreement, dated September 22, 2004, among Registrant, Sands Brothers Venture
      Capital LLC, Sands Brothers Venture Capital III LLC, Sands Brothers Venture
      Capital IV LLC and Laurus Master Fund, Ltd. (filed as Exhibit 10.5 on Form
      8-K
      on September 27, 2004).





10.8  Registration
      Rights Agreement, dated September 22, 2004, among Registrant, Sands Brothers
      Venture Capital LLC, Sands Brothers Venture Capital III LLC and Sands Brothers
      Venture Capital IV LLC (filed as Exhibit 4.4 on Form 8-K on September 27,
      2004).





10.9  Bill
      of
      Sale, Assignment And Assumption Agreement dated July 18, 2005 by and among
      Evoke
      Software Corporation and Similarity Vector Technologies (Sivtech) Limited (filed
      as Exhibit 2.2 on Form 8-K on July 22, 2005).





10.10  Bill
      of
      Sale, Assignment and Assumption Agreement dated July 18, 2005 by and among
      Evoke
      Software Corporation and Similarity Systems, Inc. (filed as Exhibit 2.3 on
      Form
      8-K on July 22, 2005).


60





10.11  Restricted
      Account Agreement by and among Registrant, North Fork Bank and Laurus Master
      Fund, Ltd. (filed as Exhibit 10.11 on Form 10-KSB/A on July 26,
      2005).





10.12  Employment
      Agreement dated July 22, 2005 by and between Registrant and William McKnight
      (filed as Exhibit 10.1 on Form 8-K on July 28, 2005).





10.13  Omnibus
      Amendment dated July 28, 2005 with Laurus Master Fund, Ltd. (filed as Exhibit
      10.3 on Form 8-K on August 3, 2005).





10.14  Joinder
      In Subsidiary Guaranty, Master Security Agreement, Stock Pledge Agreement and
      Security Agreement with Laurus Master Fund, Ltd., dated July 28, 2005 (filed
      as
      Exhibit 10.4 on Form 8-K on August 3, 2005).





10.15  Reaffirmation
      and Ratification Agreement with Laurus Master Fund, Ltd., dated July 28, 2005
      (filed as Exhibit 10.5 on Form 8-K on August 3, 2005).





10.16  Overadvance
      Letter with Laurus Master Fund, Ltd., dated July 28, 2005 (filed as Exhibit
      10.4
      on Form 8-K on August 3, 2005).





10.17  Omnibus
      Amendment with Laurus Master Fund, Ltd., dated November 30, 2005 (filed as
      Exhibit 10.4 on Form 8-K on December 6, 2005).





10.18  Reaffirmation
      and Ratification Agreement with Laurus Master Fund, Ltd., dated November 30,
      2005 (filed as Exhibit 10.5 on Form 8-K on December 6, 2005).





10.19  Security
      Agreement dated February 1, 2006 by and among Laurus Master Fund, Ltd.,
      Registrant, DeLeeuw Associates, LLC, CSI Sub Corp. (DE), Integrated Strategies,
      Inc., CSI Sub Corp. II (DE), and McKnight Associates, Inc. (filed as Exhibit
      10.3 on Form 8-K on February 7, 2006).





10.20  Stock
      Pledge Agreement with Laurus Master Fund, Ltd., dated February 1, 2006 (filed
      as
      Exhibit 10.4 on Form 8-K on February 7, 2006).





10.21  Overadvance
      Side Letter with Laurus Master Fund, Ltd., dated February 1, 2006 (filed as
      Exhibit 10.5 on Form 8-K on February 7, 2006).





10.22  Stock
      Purchase Agreement dated February 2, 2006 by and between Registrant and Taurus
      Advisory Group, LLC (filed as Exhibit 10.1 on Form 8-K on February 7,
      2006).





10.23  Registration
      Rights Agreement dated February 2, 2006 by and between Registrant and Taurus
      Advisory Group, LLC (filed as Exhibit 10.1 on Form 8-K on February 7,
      2006).





10.24  Stock
      Purchase Agreement dated August 11, 2006 by and between Registrant and Matthew
      J. Szulik (filed as Exhibit 10.1 on Form 8-K on August 16, 2006).




10.25  Registration
      Rights Agreement dated August 11, 2006 by and between Registrant, Matthew J.
      Szulik and the Feiner Family Trust (filed as Exhibit 10.2 on Form 8-K on August
      16, 2006).





10.26  Stock
      Purchase Agreement by and between Registrant and certain investors represented
      by Taurus Advisory Group, LLC, dated December 29, 2006 (filed as Exhibit 10.1
      on
      Form 8-K on January 5, 2007).


61





10.27  Registration
      Rights Agreement by and between Registrant and certain investors represented
      by
      Taurus Advisory Group, LLC, dated December 29, 2006 (filed as Exhibit 10.2
      on
      Form 8-K on January 5, 2007).





10.28  Registration
      Rights Agreement by and between Registrant and investor represented by TAG
      Virgin Islands, Inc., dated March 1, 2007 (filed as Exhibit 10.2 on Form 8-K
      on
      March 7, 2007).





10.29  Third
      Extension Agreement among Registrant and Sands Brothers Venture Capital LLC,
      Sands Brothers Venture Capital III LLC and Sands Brothers Venture Capital IV
      LLC, dated March 1, 2007 (filed as Exhibit 10.4 on Form 8-K on March 7,
      2007).





10.30  Omnibus
      Amendment and Waiver No. 2 among Registrant, CSI Sub Corp. (DE), DeLeeuw
      Associates, Inc. and Laurus Master Fund, Ltd. dated March 1, 2007 (filed as
      Exhibit 10.5 on Form 8-K on March 7, 2007).





10.31  Assumption,
      Adoption and Consent Agreement among Registrant, CSI Sub Corp. (DE), DeLeeuw
      Associates, Inc. and Laurus Master Fund, Ltd. dated March 1, 2007 (filed as
      Exhibit 10.7 on Form 8-K on March 7, 2007).





10.32  Amended
      and Restated Registration Rights Agreement among Registrant and Laurus dated
      March 1, 2007 (filed as Exhibit 10.8 on Form 8-K on March 7, 2007).





10.33  10%
      Convertible Unsecured Note issued
      to TAG Virgin Islands, Inc. Due
      on
      August 31, 2007 ( filed
      as
      Exhibit 10.1 on Form 8-K on May 3, 2007)





10.34  Amendment
      No. 1 to Employment Agreement among Registrant and Glenn Peipert, dated August
      6, 2007 (filed as Exhibit 10.5 on Form 10-Q filed on August 8, 2007).





10.35  Amendment
      No. 1 to Employment Agreement among Registrant and Scott Newman, dated August
      6,
      2007 (filed as Exhibit 10.6 on Form 10-Q filed on August 8, 2007).


10.36  Stock
        Purchase Agreement entered into between the Company and Investor, dated August
        24, 2007 (filed as Exhibit 10.1 on Form 10-Q filed on November 13, 2007.
 
 10.37  Registration
        Rights Agreement entered into between the Company and Investor, dated August
        24,
        2007 (filed as Exhibit 10.2 on Form 10-Q filed on November 13, 2007.
  10.38  Stock
        Purchase Agreement entered into between the Company and Investor, dated
        September 4, 2007 (filed as Exhibit 10.3 on Form 10-Q filed on November 13,
        2007.
 
 10.39  Registration
        Rights Agreement entered into between the Company and Investor, dated September
        4, 2007 (filed as Exhibit 10.4 on Form 10-Q filed on November 13,
        2007.
 
 10.40  Amendment
        1 to March 1, 2007 Registration Rights Agreement entered into between the
        Company and Investor, dated as of June 27, 2007 (filed as Exhibit 10.5 on
        Form
        10-Q filed on November 13, 2007. **
 
 10.41  Stock
        Purchase Agreement entered into between the Company and Investor, dated as
        of
        October 19, 2007 (filed as Exhibit 10.6 on Form 10-Q filed on November 13,
        2007.
 10.42
          Registration Rights Agreement entered into between the Company and Investor,
          dated as of October 19, 2007 (filed as Exhibit 10.7 on Form 10-Q filed
          on
          November 13, 2007.
 62
  10.42
          Omnibus Amendment and Waiver No. 3 dated December 11, 2007 to the Security
          Agreement (filed as Exhibit 10.1 on Form 8-K filed on December 13,
          2007).




10.43 Note
      Conversion Agreement by and between the Company and certain Noteholders, dated
      as of March 27, 2008.*





10.44
      Loan and Security Agreement by and between the Company and Access Capital,
      Inc.,
      dated as of March 31, 2008.*





10.45
      Stock Pledge Agreement by and between the Company and Access Capital, Inc.
      dated
      as of March 31, 2008*





21*   Subsidiaries of Registrant.




23.1*  Consent
      of Friedman LLP, Independent Registered Public Accounting Firm





31.1*  Certification
      of Registrant’s Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of
      the Securities Exchange Act of 1934.





31.2*  Certification
      of Registrant’s Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of
      the Securities Exchange Act of 1934.





32.1*  Certification
      of Registrant’s Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of
      the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.





32.2*  Certification
      of Registrant’s Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of
      the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.


____________________


*
      filed
      herewith


63





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





The
      Board
      of Directors and Stockholders


Conversion
      Services International, Inc.





We
      have
      audited the accompanying consolidated balance sheets of Conversion Services
      International, Inc. and Subsidiaries as of December 31, 2007 and 2006, and
      the
      related consolidated statements of operations, stockholders' equity (deficit),
      and cash flows for each of the two years in the period ended December 31, 2007.
      These consolidated financial statements are the responsibility of the Company's
      management. Our responsibility is to express an opinion on these financial
      statements based on our audits.





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





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






/s/
      Friedman LLP





East
      Hanover, New Jersey


March
      31,
      2008


64





**CONVERSION
      SERVICES INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**DECEMBER
      31,**





2007
            
            2006ASSETSCURRENT
                ASSETSCash
            
            $
            1,506,866
            
            $
            668,006Accounts
                receivable, net of allowance for doubtful accounts of $142,181 and
                $279,422 as of December 31, 2007 and 2006, respectively
            
            
            3,077,847
            
            
            3,912,000Accounts
                receivable from related parties, net of allowance for doubtful accounts
                of
                $16,244 and $8,972 as of December 31, 2007 and 2006, respectively;
                (Note
                22)
            
            
            315,503
            
            
            330,006Prepaid
                expenses
            
            
            199,635
            
            
            132,087TOTAL
                CURRENT ASSETS
            
            
            5,099,851
            
            
            5,042,099PROPERTY
                AND EQUIPMENT, at cost, net
            
            
            182,868
            
            
            265,084OTHER
                ASSETSGoodwill
            
            
            6,135,125
            
            
            6,826,705Intangible
                assets, net of accumulated amortization of $1,754,344 and $1,265,958
                as of
                December 31, 2007 and 2006, respectively; (Note 5)
            
            
            778,470
            
            
            1,266,856Deferred
                financing costs, net of accumulated amortization of $110,000 and
                $52,609
                as of December 31, 2007 and 2006, respectively; (Note 6)
            
            
            -
            
            
            57,391Discount
                on debt issued, net of accumulated amortization of $1,052,639 and
                $1,793,921 as of December 31, 2007 and 2006, respectively; (Note
                7)
            
            
            447,361
            
            
            786,079Equity
                investments
            
            
            82,253
            
            
            176,152Other
                assets
            
            
            85,445
            
            
            110,445Total
                Assets
            
            $
            12,811,373
            
            $
            14,530,811LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
                LIABILITIESLine
                of credit; (Note 8)
            
            $
            2,056,341
            
            $
            5,795,552Current
                portion of long-term debt
            
            
            10,819
            
            
            578,685Accounts
                payable and accrued expenses
            
            
            1,356,425
            
            
            1,957,501Short
                term notes payable; (Note 9)
            
            
            -
            
            
            2,745,000Deferred
                revenue
            
            
            59,350
            
            
            74,450Related
                party note payable; (Note 22)
            
            
            107,833
            
            
            110,831Financial
                instruments; (Note 10)
            
            
            -
            
            
            52,228TOTAL
                CURRENT LIABILITIES
            
            
            3,590,768
            
            
            11,314,247Long-term
                debt, net of current portion (Note 11)
            
            
            1,533,126
            
            
            1,769,154Deferred
                taxes
            
            
            363,400
            
            
            363,400Total
                Liabilities
            
            
            5,487,294
            
            
            13,446,801Convertible
                preferred stock, $0.001 par value, $100 stated value, 20,000,000
                shares
                authorized.Series
                A convertible preferred stock, 19,000 shares issued and outstanding
                at
                December 31, 2007 and 2006, respectively; (Note 14)
            
            
            728,333
            
            
            348,333Series
                B convertible preferred stock, 20,000 shares issued and outstanding
                at
                December 31, 2007 and 2006, respectively; (Note 14)
            
            
            -
            
            
            1,248,806COMMITMENTS
                AND CONTINGENCIES
            
            
            -
            
            
            -STOCKHOLDERS'
                EQUITY (DEFICIT)Common
                stock, $0.001 par value, 200,000,000 shares authorized;110,144,462
                and 57,625,535 issued and outstanding at December 31, 2007 and 2006,
                respectively
            
            
            111,290
            
            
            57,625Series
                B convertible preferred stock, 20,000 shares issued and outstanding
                at
                December 31, 2007 and 2006, respectively; (Note 14)
            
            
            1,352,883
            
            
            -Additional
                paid in capital
            
            
            66,742,898
            
            
            50,829,255Treasury
                stock, at cost, 1,145,382 shares in treasury as of December 31, 2007
                and
                2006; (Note 15)
            
            
            (423,869
            )
            
            (423,869
            )Accumulated
                deficit
            
            
            (61,187,456
            )
            
            (50,976,140
            )Total
                Stockholders' Equity (Deficit)
            
            
            6,595,746
            
            
            (513,129
            )Total
                Liabilities and Stockholders' Equity (Deficit)
            
            $
            12,811,373
            
            $
            14,530,811





See
      Notes
      to Consolidated Financial Statements


65




**CONVERSION
      SERVICES INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**FOR
      THE YEARS ENDED DECEMBER 31,**





2007
            
            2006REVENUE:Services
            
            $
            18,453,197
            
            $
            22,550,805Related
                party services
            
            
            1,881,803
            
            
            2,478,342Reimbursable
                expenses
            
            
            946,880
            
            
            570,121Other
            
            
            184,457
            
            
            74,78921,466,337
            
            
            25,674,057COST
                OF REVENUE:Services
                (inclusive of stock based compensation of $0.3 million and $0.4 million
                for the years ended December 31, 2007 and 2006,
                respectively.)
            
            
            13,507,340
            
            
            16,868,554Related
                party services
            
            
            1,698,040
            
            
            2,305,523Reimbursable
                expenses
            
            
            1,048,611
            
            
            756,85716,253,991
            
            
            19,930,934GROSS
                PROFIT
            
            
            5,212,346
            
            
            5,743,123OPERATING
                EXPENSESSelling
                and marketing (inclusive of stock based compensation of zero and
                $1.0
                million for the years ended December 31, 2007 and 2006,
                respectively.)
            
            
            3,248,410
            
            
            5,072,532General
                and administrative (inclusive of stock based compensation of $0.1
                million
                and $0.6 million for the years ended December 31, 2007 and 2006,
                respectively.
            
            
            4,155,357
            
            
            5,451,324Lease
                impairment
            
            
            210,765
            
            
            -Goodwill
                & intangibles impairment
            
            
            691,580
            
            
            349,000Depreciation
                and amortization
            
            
            646,236
            
            
            802,3868,952,348
            
            
            11,675,242LOSS
                FROM OPERATIONS
            
            
            (3,740,002
            )
            
            (5,932,119
            )OTHER
                INCOME (EXPENSE)Equity
                in earnings (losses) from investments
            
            
            (18,329
            )
            
            27,035Gain
                (loss) on financial instruments
            
            
            19,329
            
            
            (351,132
            )Loss
                on extinguishment of debt
            
            
            (2,461,515
            )
            
            (2,311,479
            )Interest
                expense, net
            
            
            (4,010,799
            )
            
            (3,094,083
            )(6,471,314
            )
            
            (5,729,659
            )LOSS
                BEFORE INCOME TAXES
            
            
            (10,211,316
            )
            
            (11,661,778
            )INCOME
                TAXES
            
            
            -
            
            
            -LOSS
                FROM CONTINUING OPERATIONS
            
            
            (10,211,316
            )
            
            (11,661,778
            )DISCONTINUED
                OPERATIONS:Gain
                on disposal of discontinued operations
            
            
            -
            
            
            2,050,000NET
                LOSS
            
            
            (10,211,316
            )
            
            (9,611,778
            )Accretion
                of issuance costs associated with convertible preferred
                stock
            
            
            (484,075
            )
            
            (429,747
            )Dividends
                on convertible preferred stock
            
            
            (263,212
            )
            
            (162,603
            )NET
                LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
            
            $
            (10,958,603
            )
            $
            (10,204,128
            )Basic
                and diluted loss per common share from continuing
                operations
            
            $
            (0.15
            )
            $
            (0.23
            )Basic
                and diluted income per common share from discontinued
                operations
            
            $
            -
            
            $
            0.04Basic
                and diluted loss per common share
            
            $
            (0.15
            )
            $
            (0.19
            )Basic
                and diluted loss per common share attributable to common stockholders
            
            $
            (0.16
            )
            $
            (0.20
            )Weighted
                average common shares used to compute income (loss) per common
                share:Basic
                and diluted
            
            
            67,541,607
            
            
            51,792,504





See
      Notes
      to Consolidated Financial Statements


66





**CONVERSION
      SERVICES INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)**





Common
                Shares
            
            CapitalStock
            
            Treasury
                Stock
            
            Series
                B Preferred
              Shares
            
            Series
                B Preferred
              Stock
            
            Additional
                Paid-in Capital
            
            Retained
                Earnings (Deficit)
            
            Accumulated
                Total Stockholders' Equity (Deficit)Balance,
                December 31, 2005
            
            
            54,093,916
            
            $
            54,094
            
            $
            -
            
            
            -
            
            $
            -
            
            $
            42,264,407
            
            $
            (40,689,362
            )
            $
            1,629,139Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (9,611,778
            )
            
            (9,611,778
            )Dividends
                payable on preferred stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (162,603
            )
            
            -
            
            
            (162,603
            )Shares
                issued due to exercise of stock options
            
            
            1,620,100
            
            
            1,620
            
            
            -
            
            
            -
            
            
            -
            
            
            33,043
            
            
            -
            
            
            34,663Treasury
                shares acquired
            
            
            (4,145,382
            )
            
            -
            
            
            (1,848,869
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,848,869
            )Compensation
                expense for stock and stock option grants.
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,022,223
            
            
            -
            
            
            2,022,223Relative
                fair value of warrants issued
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,500,121
            
            
            -
            
            
            2,500,121Convertible
                preferred stock beneficial conversion feature
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,012,190
            
            
            -
            
            
            1,012,190Issuance
                of stock options in conjunction with debt restructure
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,694,000
            
            
            -
            
            
            1,694,000Laurus
                warrant liability reclassified to equity
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            703,567
            
            
            -
            
            
            703,567Dividends
                on series A preferred stock paid in shares
            
            
            79,166
            
            
            79
            
            
            -
            
            
            -
            
            
            -
            
            
            39,504
            
            
            -
            
            
            39,583Shares
                issued due to conversion of debt to equity
            
            
            1,832,353
            
            
            1,832
            
            
            -
            
            
            -
            
            
            -
            
            
            1,152,550
            
            
            -
            
            
            1,154,382Issuance
                of Common Stock in connection with a stock purchase
                agreement
            
            
            3,000,000
            
            
            -
            
            
            1,425,000
            
            
            -
            
            
            -
            
            
            -
            
            
            (675,000
            )
            
            750,000Accretion
                of issuance costs associated with convertible preferred
                stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (429,747
            )
            
            -
            
            
            (429,747
            )Total
                comprehensive loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance,
                December 31, 2006
            
            
            56,480,153
            
            
            57,625
            
            
            (423,869
            )
            
            -
            
            
            -
            
            
            50,829,255
            
            
            (50,976,140
            )
            
            (513,129
            )Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (10,211,316
            )
            
            (10,211,316
            )Dividends
                payable on preferred stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (263,214
            )
            
            -
            
            
            (263,214
            )Shares
                issued due to exercise of stock options and warrants
            
            
            3,147,654
            
            
            3,148
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,148
            )
            
            -
            
            
            -Compensation
                expense for stock and stock option grants
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            422,633
            
            
            -
            
            
            422,633Relative
                fair value of warrants issued
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            7,050,200
            
            
            -
            
            
            7,050,200Issuance
                of common stock in conjunction with debt restructure
            
            
            16,088,169
            
            
            16,089
            
            
            -
            
            
            -
            
            
            -
            
            
            3,123,552
            
            
            -
            
            
            3,139,641Laurus
                warrant to purchase common stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            535,714
            
            
            -
            
            
            535,714Dividends
                on Series A preferred stock paid in common stock
            
            
            952,602
            
            
            952
            
            
            -
            
            
            -
            
            
            -
            
            
            141,938
            
            
            -
            
            
            142,890Dividends
                on Series B preferred stock paid in common stock
            
            
            486,684
            
            
            486
            
            
            -
            
            
            -
            
            
            -
            
            
            242,856
            
            
            -
            
            
            243,342Interest
                on convertible debt paid in Common Stock
            
            
            794,522
            
            
            795
            
            
            -
            
            
            -
            
            
            -
            
            
            134,274
            
            
            -
            
            
            135,069Shares
                issued in conjunction with services agreement
            
            
            25,000
            
            
            25
            
            
            -
            
            
            -
            
            
            -
            
            
            (25
            )
            
            -
            
            
            -Reclassification
                of Series B preferred stock to equity
            
            
            -
            
            
            -
            
            
            -
            
            
            20,000
            
            
            1,352,883
            
            
            -
            
            
            -
            
            
            1,352,883Issuance
                of Common Stock in connection with a stock purchase
                agreement
            
            
            15,263,810
            
            
            15,264
            
            
            -
            
            
            -
            
            
            -
            
            
            2,539,636
            
            
            -
            
            
            2,554,900Issuance
                of Common Stock for Director compensation
            
            
            72,534
            
            
            73
            
            
            -
            
            
            -
            
            
            -
            
            
            14,927
            
            
            -
            
            
            15,000Issuance
                of Common Stock in payment of Notes Payable
            
            
            16,833,334
            
            
            16,833
            
            
            -
            
            
            -
            
            
            -
            
            
            2,458,376
            
            
            -
            
            
            2,475,209Accretion
                of issuance costs associated with convertible preferred stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (484,076
            )
            
            -
            
            
            (484,076
            )Total
                comprehensive loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance,
                December 31, 2007
            
            
            110,144,462
            
            $
            111,290
            
            $
            (423,869
            )
            
            20,000
            
            $
            1,352,883
            
            $
            66,742,898
            
            $
            (61,187,456
            )
            $
            6,595,746




See
      Notes
      to Consolidated Financial Statements.


67





**CONVERSION
      SERVICES INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE YEARS ENDED DECEMBER 31,**





2007
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (10,211,316
            )
            $
            (9,611,778
            )Net
                income from discontinued operations
            
            
            -
            
            
            2,050,000**Net
                loss from continuing operations**
            
            $
            (10,211,316
            )
            $
            (11,661,778
            )Adjustments
                to reconcile net loss from continuing operations to net cash used
                in
                operating activities:Depreciation
                of property and equipment and amortization of leasehold
                improvements
            
            
            100,459
            
            
            152,386Amortizaton
                of intangible assets
            
            
            488,386
            
            
            576,108Amortization
                of debt discounts
            
            
            338,718
            
            
            1,307,022Amortization
                of relative fair value of warrants issued
            
            
            2,990,106
            
            
            710,072Amortization
                of deferred financing costs
            
            
            57,390
            
            
            73,894Impairment
                of goodwill and intangible assets
            
            
            691,580
            
            
            349,000Leasehold
                impairment
            
            
            210,765
            
            
            -Stock
                based compensation
            
            
            424,263
            
            
            2,022,223(Gain)
                loss on change in fair value of financial instruments
            
            
            (19,329
            )
            
            351,132Loss
                on extinguishment of debt
            
            
            2,461,515
            
            
            2,311,479Decrease
                in allowance for doubtful accounts
            
            
            (129,969
            )
            
            (200,675
            )Loss
                from sale of equity investment
            
            
            25,569
            
            
            -Loss
                (Income) from equity investments
            
            
            18,330
            
            
            (27,035
            )Changes
                in operating assets and liabilities:(Increase)
                decrease in accounts receivable
            
            
            971,395
            
            
            (507,978
            )Decrease
                in accounts receivable from related parties
            
            
            7,231
            
            
            230,930(Increase)
                decrease in prepaid expenses
            
            
            (67,548
            )
            
            10,344Decrease
                in goodwill
            
            
            -
            
            
            83,861Decrease
                in other assets
            
            
            25,000
            
            
            12,987Decrease
                in accounts payable and accrued expenses
            
            
            (367,133
            )
            
            (595,445
            )Increase
                (decrease) in deferred revenue
            
            
            (15,100
            )
            
            33,329**Net
                cash used in operating activities**
            
            
            (1,999,688
            )
            
            (4,768,144
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Acquisition
                of property and equipment
            
            
            (18,243
            )
            
            -Sale
                of equity investment in DeLeeuw Turkey
            
            
            50,000
            
            
            -**Net
                cash provided by investing activities of continuing
                operations**
            
            
            31,757
            
            
            -Net
                proceeds from the sale of discontinued operations
            
            
            -
            
            
            2,050,000**Net
                cash provided by investing activities**
            
            
            31,757
            
            
            2,050,000CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                (repayments) advances under line of credit
            
            
            (3,239,211
            )
            
            791,156Proceeds
                from issuance of short-term note payable
            
            
            650,000
            
            
            500,000Proceeds
                from issuance of long-term note payable
            
            
            -
            
            
            381,256Payments
                for financing costs
            
            
            -
            
            
            (110,000
            )Principal
                payments on long-term debt
            
            
            -
            
            
            (487,110
            )Principal
                payments on short-term notes
            
            
            (1,710,455
            )
            
            -Proceeds
                from sale of Company common stock and exercise of stock
                options
            
            
            7,165,658
            
            
            34,663Acquisition
                of treasury stock
            
            
            -
            
            
            (1,848,869
            )Reissuance
                of treasury stock
            
            
            -
            
            
            750,000Proceeds
                from sale of Series A Convertible Preferred Stock
            
            
            -
            
            
            1,900,000Proceeds
                from sale of Series B Convertible Preferred Stock
            
            
            -
            
            
            2,000,000Principal
                payments on capital lease obligations
            
            
            (33,231
            )
            
            (104,340
            )Principal
                payments on related party notes
            
            
            (25,970
            )
            
            (596,679
            )**Net
                cash provided by financing activities**
            
            
            2,806,791
            
            
            3,210,077NET
                INCREASE IN CASH
            
            
            838,860
            
            
            491,933CASH,
                beginning of period
            
            
            668,006
            
            
            176,073CASH,
                end of period
            
            $
            1,506,866
            
            $
            668,006





See
      Notes
      to Consolidated Financial Statements


68





**CONVERSION
      SERVICES INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE YEARS ENDED DECEMBER 31,**





2007
            
            2006SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:Cash
                paid for interest
            
            $
            471,824
            
            $
            866,189Cash
                paid for income taxes
            
            
            -
            
            
            -Series
                A convertible preferred stock dividend satisfied by issuing Company
                common
                stock
            
            
            -
            
            
            39,583Related
                party note payable repayment through issuance of Company common
                stock
            
            
            -
            
            
            1,154,382Common
                stock purchase warrants issued in settlement of debt
            
            
            698,714
            
            
            -Common
                stock issued in payment of preferred stock dividends
            
            
            386,232
            
            
            -Common
                stock issued in payment of Director's fees
            
            
            15,000
            
            
            -Common
                stock issued in payment of interest due on outstanding
                debt
            
            
            135,069
            
            
            -Extinguishment
                of debt via issuance of Common Stock
            
            
            2,500,000





SUPPLEMENTAL
                DISCLOSURE OF NON-CASH ACTIVITIES:The
                Company did not enter into any capital lease arrangements during
                the years
                ended December 31, 2007 or 2006.See
                Notes to Consolidated Financial
                Statements


69





**CONVERSION
      SERVICES INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**Note
      1 - Accounting Policies**




***Organization
      and Business***




Conversion
      Services International, Inc. (“CSI”) was incorporated in the State of Delaware
      and has been conducting business since 1990. CSI and its wholly owned
      subsidiaries (together the “Company”) are principally engaged in the information
      technology services industry in the following areas: strategic consulting,
      business intelligence, data warehousing and data management, on credit, to
      its
      customers principally located in the northeastern United States.




·
            On
                November 1, 2002, the Company acquired the operations of Scosys,
                Inc.
                (“Scosys”). Scosys is engaged in the information technology services
                industry.·
            On
                January 30, 2004, the Company became a public company through its
                merger
                with a wholly owned subsidiary of LCS Group, Inc. Although LCS Group,
                Inc.
                (now known as Conversion Services International, Inc.) was the legal
                survivor in the merger and remains the Registrant with the Securities
                and
                Exchange Commission, the merger was accounted for as a reverse
                acquisition, whereby the Company was considered the accounting “acquirer”
                of LCS Group, Inc. for financial reporting purposes, as the Company’s
                stockholders controlled approximately 76% of the post transaction
                combined
                company. Among other matters, reverse merger accounting requires
                LCS
                Group, Inc. to present in all financial statements and other public
                filings, prior historical and other information of the Company, and
                a
                retroactive restatement of the Company’s historical stockholders’ equity.
                The retroactive restatement took place subsequent to the merger on
                January
                30, 2004.





·
            On
                March 4, 2004, the Company acquired DeLeeuw Associates, Inc. and
                merged
                the company into DeLeeuw Associates, LLC (“DeLeeuw”), a subsidiary of CSI.
                On October 1, 2006, the corporate structure was changed and this
                subsidiary became DeLeeuw Associates, Inc. DeLeeuw is a management
                consulting firm specializing in integration, reengineering and project
                management.·
            On
                May 1, 2004, the Company acquired a 49% interest in Leading Edge
                Communications Corporation (“LEC”), a provider of enterprise software and
                services solutions for technology infrastructure
                management.





·
            On
                June 28, 2004, the Company acquired substantially all the assets
                of Evoke
                Software Corporation and the stock of Evoke’s foreign subsidiaries
                (“Evoke”), a provider of data discovery, profiling and quality management
                software. On July 18, 2005, the Company sold certain assets and
                liabilities of Evoke to Similarity Systems. See Note 4 of the Notes
                to the
                Consolidated Financial Statements for further
                discussion.·
            On
                July 22, 2005, the Company acquired McKnight Associates, Inc. and
                merged
                the company into McKnight Associates, Inc. (“McKnight”), a subsidiary of
                CSI. McKnight is a management consulting firm specializing in data
                warehousing projects for a variety of clients worldwide. As of December
                31, 2006, McKnight was merged with and into CSI Sub Corp.
                (DE).





·
            On
                July 29, 2005, the Company acquired Integrated Strategies, Inc. and
                merged
                the company into Integrated Strategies, Inc. (“ISI”), a subsidiary of CSI.
                ISI is a management consulting firm specializing in integration and
                project management. As of December 31, 2006, ISI was merged with
                and into
                DeLeeuw Associates, Inc.·
            Doorways,
                Inc. is a wholly owned subsidiary of the Company that is currently
                dormant. Doorways was dissolved on December 26,
                2006.





·
            LEC
                Corporation of NJ is a wholly owned subsidiary of the Company that
                incurs
                an insignificant amount of payroll expense and has no other operations.
                As
                of December 31, 2006, this corporation was merged with and into CSI
                Sub
                Corp. (DE).·
            CSI
                Sub Corp. (DE) is a wholly owned subsidiary of the Company and is
                the
                primary operating entity for the
                Company.


70





***Principles
      of Consolidation***





The
      accompanying consolidated financial statements include the accounts of the
      Company and its subsidiaries. All intercompany transactions and balances have
      been eliminated in the consolidation. Investments in business entities in which
      the Company does not have control, but has the ability to exercise significant
      influence (generally 20-50% ownership), are accounted for by the equity method.





***Revenue
      recognition***





Revenue
      from consulting and professional services is recognized at the time the services
      are performed on a project by project basis. For projects charged on a time
      and
      materials basis, revenue is recognized based on the number of hours worked
      by
      consultants at an agreed-upon rate per hour. For large services projects where
      costs to complete the contract could reasonably be estimated, the Company
      undertakes projects on a fixed-fee basis and recognizes revenues on the
      percentage of completion method of accounting based on the evaluation of actual
      costs incurred to date compared to total estimated costs. Revenues recognized
      in
      excess of billings are recorded as costs in excess of billings. Billings in
      excess of revenues recognized are recorded as deferred revenues until revenue
      recognition criteria are met. Reimbursements, including those relating to travel
      and other out-of-pocket expenses, are included in revenues, and an equivalent
      amount of reimbursable expenses are included in cost of services.





***Business
      Combinations***





Business
      combinations are accounted for in accordance with SFAS No. 141, “ *Business
      Combinations* ”
      (“SFAS 141”), which requires the purchase method of accounting for business
      combinations be followed and in accordance with EITF No. 99-12 “ *Determination
      of the Measurement Date for the Market Price of Acquirer Securities Issued
      in a
      Purchase Business Combination”* (“EITF
      99-12”) *.* In
      accordance with SFAS 141, the Company determines the recognition of
      intangible assets based on the following criteria: (i) the intangible asset
      arises from contractual or other rights; or (ii) the intangible is
      separable or divisible from the acquired entity and capable of being sold,
      transferred, licensed, returned or exchanged. In accordance with SFAS 141,
      the Company allocates the purchase price of its business combinations to the
      tangible assets, liabilities and intangible assets acquired based on their
      estimated fair values. The excess purchase price over those fair values is
      recorded as goodwill. Additionally, in accordance with EITF 99-12, the Company
      values an acquisition based upon the market price of its common stock for a
      reasonable period before and after the date the terms of the acquisition are
      agreed to and announced.





***Accounts
      receivable***





The
      Company carries its accounts receivable at cost less an allowance for doubtful
      accounts. On a periodic basis, the Company evaluates its accounts receivable
      and
      adjusts the allowance for doubtful accounts, when deemed necessary, based upon
      its history of past write-offs and collections, contractual terms and current
      credit conditions. During 2007 and 2006, $133,264 and $147,272 of uncollectible
      accounts receivable were written off against the allowance for doubtful
      accounts, respectively.





***Property
      and equipment***





Property
      and equipment are stated at cost and includes equipment held under capital
      lease
      arrangements. Depreciation is computed using the straight-line method and is
      based on the estimated useful lives of the various assets ranging from three
      to
      seven years. Leasehold improvements are amortized over the shorter of the asset
      life or the remaining lease term on a straight-line basis. When assets are
      sold
      or retired, the cost and accumulated depreciation are removed from the accounts
      and any gain or loss is included in operations.


71





Expenditures
      for maintenance and repairs have been charged to operations. Major renewals
      and
      betterments have been capitalized.





***Goodwill
      and intangible assets***





Goodwill
      and intangible assets are accounted for in accordance with
      SFAS No. 142 “ *Goodwill
      and Other Intangible Assets* ”
      (“SFAS 142”). Under SFAS 142, goodwill and indefinite lived intangible
      assets are not amortized but instead are reviewed annually for impairment,
      or
      more frequently if impairment indicators arise. Separable intangible assets
      that
      are not deemed to have an indefinite life will continue to be amortized over
      their estimated useful lives. The Company tests for impairment whenever events
      or changes in circumstances indicate that the carrying amount of goodwill or
      other intangible assets may not be recoverable, or at least annually at December
      31 of each year. These tests are performed at the reporting unit level using
      a
      two-step, fair-value based approach. The first step compares the fair value
      of
      the reporting unit with its carrying amount, including goodwill. If the fair
      value of the reporting unit is less than its carrying amount, a second step
      is
      performed to measure the amount of impairment loss. The second step allocates
      the fair value of the reporting unit to the Company’s tangible and intangible
      assets and liabilities. This derives an implied fair value for the reporting
      unit’s goodwill. If the carrying amount of the reporting unit’s goodwill exceeds
      the implied fair value of that goodwill, an impairment loss is recognized equal
      to that excess. In the event that the Company determines that the value of
      goodwill or other intangible assets have become impaired, the Company will
      incur
      a charge for the amount of the impairment during the fiscal quarter in which
      the
      determination is made.





Goodwill
      represents the amounts paid in connection with the acquisitions of Scosys,
      DeLeeuw, ISI and McKnight. Additionally, as part of the Scosys, DeLeeuw and
      McKnight acquisitions, the Company acquired identifiable intangible assets.
      During the June 2007 quarter, due to an unfavorable economic change in the
      ISI
      business, the Company performed an impairment review and recorded a $557,055
      impairment charge. As of December 31, 2007, the Company performed its annual
      impairment review and determined that as a result of a continued unfavorable
      change with respect to the ISI business, an additional $134,525 impairment
      charge was required for a total 2007 impairment related to ISI of $691,580.
      As
      of December 31, 2006, the Company performed its annual impairment review and
      determined as a result of an unfavorable change with respect to the economics
      of
      the ISI business, a $329,000 impairment charge was required. Additionally,
      the
      Company determined that, due to a change in the Company’s marketing and
      positioning of the Scosys business, the $20,000 intangible for the rights to
      use
      the Scosys name was impaired and recorded a charge as of that date.





Acquired
      contracts are amortized over a period that approximates the estimated life
      of
      the contracts, based upon the estimated annual cash flows obtained from those
      contracts, generally five years. The approved vendor status intangible asset
      was
      being amortized over an estimated life of forty months. The proprietary
      presentation format intangible asset is being amortized over an estimated life
      of three years. The customer relationship intangible asset is being amortized
      over an estimated life of thirty months. The order backlog intangible asset
      was
      being amortized over an estimated life of five months.





***Deferred
      financing costs***





The
      Company capitalizes costs associated with the issuance of debt instruments.
      These costs are amortized on a straight-line basis over the term of the related
      debt instruments, which are currently less than one year.





***Discount
      on debt***





The
      Company has allocated the proceeds received from conventionally convertible
      debt
      instruments between the underlying debt instrument and the freestanding
      warrants, and had recorded the conversion feature as a discount on the debt
      in
      accordance with Emerging Issues Task Force No. 00-27 "Application of Issue
      No.
      98-5 to Certain Convertible Instruments".  The Company is amortizing the
      discount on the debt using the effective interest rate method over the life
      of
      the debt instruments.


72





***Stock
      compensation***





SFAS
      No. 123 (Revised 2004) (“SFAS No. 123R”), “ *Share-Based
      Payment* ,”
issued in December 2004, is a revision of FASB Statement 123, “ *Accounting
      for Stock-Based Compensation* ”
and
      supersedes APB Opinion No. 25, “ *Accounting
      for Stock Issued to Employees* ,”
and
      its related implementation guidance. The Statement focuses primarily on
      accounting for transactions in which an entity obtains employee services in
      share-based payment transactions. SFAS No. 123R requires a public entity to
      measure the cost of employee services received in exchange for an award of
      equity instruments based on the grant-date fair value of the award (with limited
      exceptions). That cost will be recognized over the period during which an
      employee is required to provide service in exchange for the award. On
      March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB
      No. 107”), which provides the Staff’s views regarding interactions between
      SFAS No. 123R and certain SEC rules and regulations and provides
      interpretations of the valuation of share-based payments for public
      companies.





The
      Company was required to adopt this standard effective with the beginning of
      the
      first annual reporting period beginning after December 15, 2005, therefore,
      we
      adopted the standard in the first quarter of fiscal 2006 using the modified
      prospective method. We previously accounted for share-based payments to
      employees using the intrinsic value method prescribed in APB Opinion 25 and,
      as
      such, generally recognized no compensation cost for employee stock options.
      SFAS
      No. 123(R) also requires the benefits of tax deductions in excess of
      recognized compensation cost to be reported as a financing cash flow, rather
      than as an operating cash flow as required under current literature. This
      requirement will reduce net operating cash flows and increase net financing
      cash
      flows in future periods.





The
      Company follows EITF No. 96-18, “ *Accounting
      for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* ”
(“EITF
      96-18”) in accounting for stock options issued to non-employees. Under EITF
      96-18, the equity instruments should be measured at the fair value of the equity
      instrument issued. During the fiscal year ended December 31, 2005, the Company
      granted approximately 48,000 stock options, respectively, to non-employee
      recipients. In compliance with EITF 96-18, the fair value of these options
      was
      determined using the Black-Scholes option pricing model. The Company is
      recognizing the fair value of these options as expense over the three year
      vesting period of the options.




The
      per
      share weighted average fair value of stock options granted during 2006 was
      $0.34
      per share on the date of grant using the Black-Scholes option-pricing model
      with
      the following weighted average assumptions:





Expected
                dividend yield
            
            
            0.0
            %Risk-free
                interest rate
            
            
            4.97
            %Expected
                volatility
            
            
            177.5
            %Expected
                option life (years)
            
            
            3.0




The
      per
      share weighted average fair value of stock options granted during 2007 was
      $0.25
      per share on the date of grant using the Black-Scholes option-pricing model
      with
      the following weighted average assumptions:





Expected
                dividend yield
            
            
            0.0
            %Risk-free
                interest rate
            
            
            4.95
            %Expected
                volatility
            
            
            155.63
            %Expected
                option life (years)
            
            
            3.0





The
      Black-Scholes option pricing model used in this valuation was developed for
      use
      in estimating the fair value of traded options, which have no vesting
      restrictions and are fully transferable. Option valuation models require the
      input of highly subjective assumptions. The Company’s stock-based compensation
      has characteristics significantly different from those of traded options, and
      changes in the assumptions used can materially affect the fair value
      estimate.


73





***Concentrations
      of credit risk***





Financial
      instruments which potentially subject the Company to concentrations of credit
      risk are cash and accounts receivable arising from its normal business
      activities. The Company routinely assesses the financial strength of its
      customers, based upon factors surrounding their credit risk, establishes an
      allowance for doubtful accounts, and as a consequence believes that its accounts
      receivable credit risk exposure beyond such allowances is limited. At December
      31, 2007, ING accounted for approximately 17.8% of the Company’s accounts
      receivable balance and Bank of America accounted for approximately 14.2% of
      the
      Company’s accounts receivable balance.





The
      Company maintains its cash with a high credit quality financial institution.
      Each account is secured by the Federal Deposit Insurance Corporation up to
      $100,000.





***Advertising***





The
      Company expenses advertising costs as incurred. Advertising costs amounted
      to
      approximately $82,600 and $134,000 for the years ended December 31, 2007 and
      2006, respectively.





***Income
      taxes***





The
      Company accounts for income taxes, in accordance with SFAS No. 109, “Accounting
      for Income Taxes” (“SFAS 109”) and related interpretations, under an asset and
      liability approach that requires the recognition of deferred tax assets and
      liabilities for the expected future tax consequences of events that have been
      recognized in the Company’s financial statements or tax returns. In estimating
      future tax consequences, the Company generally considers all expected future
      events other than enactments of changes in the tax laws or rates.





The
      Company records a valuation allowance to reduce the deferred tax assets to
      the
      amount that is more likely than not to be realized. The Company’s current
      valuation allowance primarily relates to benefits from the Company’s
      NOL’s.




***Derivatives***





The
      Company accounts for derivatives in accordance with SFAS No. 133,
“ *Accounting
      for Derivative Instruments and Hedging Activities* ”
      (“SFAS 133”) and related interpretations. SFAS 133, as amended,
      requires companies to recognize all derivative instruments as either assets
      or
      liabilities in the balance sheet at fair value. The accounting for changes
      in
      the fair value of a derivative instrument depends on: (i) whether the
      derivative has been designated and qualifies as part of a hedging relationship,
      and (ii) the type of hedging relationship. For those derivative instruments
      that are designated and qualify as hedging instruments, a company must designate
      the hedging instrument based upon the exposure being hedged as either a fair
      value hedge, cash flow hedge or hedge of a net investment in a foreign
      operation. At December 31, 2007, the Company had not entered into any
      transactions which were considered hedges under SFAS 133.




***Financial
      Instruments***





The
      carrying value of the Company’s financial instruments, including cash and cash
      equivalents, accounts receivable, note receivable, accounts payable and accrued
      liabilities approximate fair value because of the short maturities of those
      instruments. Based on borrowing rates currently available to the Company for
      loans with similar terms, the carrying value of convertible notes and notes
      payable also approximate fair value.


74





We
      review
      the terms of convertible debt and equity instruments we issued to determine
      whether there are embedded derivative instruments, including the embedded
      conversion option, that are required to be bifurcated and accounted for
      separately as a derivative financial instrument. Generally, where the ability
      to
      physical or net-share settle the conversion option is deemed to be not within
      the control of the company, the embedded conversion option is required to be
      bifurcated and accounted for as a derivative financial instrument
      liability.





In
      connection with the sale of convertible debt and equity instruments, we may
      also
      issue freestanding options or warrants. Additionally, we may issue options
      or
      warrants to non-employees in connection with consulting or other services they
      provide. Although the terms of the options and warrants may not provide for
      net-cash settlement, in certain circumstances, physical or net-share settlement
      is deemed to not be within the control of the company and, accordingly, we
      are
      required to account for these freestanding options and warrants as derivative
      financial instrument liabilities, rather than as equity.





Derivative
      financial instruments are initially measured at their fair value. For derivative
      financial instruments that are accounted for as liabilities, the derivative
      instrument is initially recorded at its fair value and is then re-valued at
      each
      reporting date, with changes in the fair value reported as charges or credits
      to
      income. For option-based derivative financial instruments, we use the
      Black-Scholes option pricing model to value the derivative
      instruments.





In
      circumstances where the embedded conversion option in a convertible instrument
      is required to be bifurcated and there are also other embedded derivative
      instruments in the convertible instrument that are required to be bifurcated,
      the bifurcated derivative instruments are accounted for as a single, compound
      derivative instrument.





If
      freestanding options or warrants were issued and will be accounted for as
      derivative instrument liabilities (rather than as equity), the proceeds are
      first allocated to the fair value of those instruments. When the embedded
      derivative instrument is to be bifurcated and accounted for as a liability,
      the
      remaining proceeds received are then allocated to the fair value of the
      bifurcated derivative instrument. The remaining proceeds, if any, are then
      allocated to the convertible instrument itself, usually resulting in that
      instrument being recorded at a discount from its face amount. In circumstances
      where a freestanding derivative instrument is to be accounted for as an equity
      instrument, the proceeds are allocated between the convertible instrument and
      the derivative equity instrument, based on their relative fair
      values.





The
      discount from the face value of the convertible debt instrument resulting from
      the allocation of part of the proceeds to embedded derivative instruments and/or
      freestanding options or warrants is amortized over the life of the instrument
      through periodic charges to income, using the effective interest
      method.





The
      classification of derivative instruments, including whether such instruments
      should be recorded as liabilities or as equity, is re-assessed at the end of
      each reporting period. Derivative instrument liabilities are classified in
      the
      balance sheet as current or non-current based on whether or not net-cash
      settlement of the derivative instrument is expected within 12 months of the
      balance sheet date.





***Equity
      investments***





Prior
      to
      the Company’s acquisition of DeLeeuw in 2004, DeLeeuw had acquired a
      non-controlling interest in DeLeeuw International (a company formed under the
      laws of Turkey). The Company accounts for its share of the income (losses)
      of
      this investment under the equity method. The Company sold its equity investment
      in DeLeeuw International for a cash payment of $50,000 in February 2007 and
      recorded a loss of $25,569 on the transaction.


75




The
      Company acquired 49% of all issued and outstanding shares of common stock of
      LEC
      as of May 1, 2004. The acquisition was completed through a Stock Purchase
      Agreement between the Company and the sole stockholder of LEC. In connection
      with the acquisition, the Company (i) repaid a bank loan on behalf of the seller
      in the amount of $35,000; (ii) repaid an LEC bank loan in the amount of $38,000;
      and (iii) satisfied an LEC obligation for $10,000 of prior compensation to
      an
      employee. The Company accounts for its share of the income (losses) of this
      investment under the equity method.




***Reclassification***





Certain
      amounts in prior periods have been reclassified to conform to the 2007 financial
      statement presentation.





***Use
      of estimates***





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




**Note
      2 -**  **Recently
      Issued Accounting Pronouncements**




In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 141 (revised 2007), Business Combinations (“SFAS No. 141(R)”).
      SFAS No. 141(R) establishes principles and requirements for how an acquirer
      recognizes and measures in its financial statements the identifiable assets
      acquired, the liabilities assumed, any noncontrolling interest in the acquiree
      and the goodwill acquired. SFAS No. 141(R) also establishes disclosure
      requirements to enable the evaluation of the nature and financial effects of
      the
      business combination. SFAS No. 141(R) is effective for fiscal years
      beginning after December 15, 2008.




In
      February 2007, the Financial Accounting Standards Board (FASB) issued FASB
      Statement No. 159, “The Fair Value Option for Financial Assets and
      Financial Liabilities — Including an amendment of FASB Statement
      No. 115” (FAS 159). ** FAS 159, which becomes effective for the company on January 1, 2008,
      permits companies to choose to measure many financial instruments and certain
      other items at fair value and report unrealized gains and losses in earnings.
      Such accounting is optional and is generally to be applied instrument by
      instrument. The company does not anticipate that election, if any, of this
      fair-value option will have a material effect on its consolidated financial
      condition, results of operations, cash flows or disclosures.





In
      September 2006, the FASB issued FAS No. 157 (“FAS 157”), “Fair
      Value Measurements,” which establishes a framework for measuring fair value in
      accordance with GAAP and expands disclosures about fair value measurements.
      FAS
      157 does not require any new fair value measurements but rather eliminates
      inconsistencies in guidance found in various prior accounting pronouncements.
      FAS 157 is effective for fiscal years beginning after November 15, 2007. The
      adoption of this standard has not had a material affect on the Company’s
      financial condition, results of operations, cash flows or
      disclosures.


76




In
      December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
      Consolidated Financial Statements—an amendment of Accounting Research Bulletin
      No. 51 (“SFAS No. 160”). SFAS No. 160 establishes accounting and
      reporting standards for ownership interests in subsidiaries held by parties
      other than the parent, the amount of consolidated net income attributable to
      the
      parent and to the noncontrolling interest, changes in a parent’s ownership
      interest, and the valuation of retained noncontrolling equity investments when
      a
      subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure
      requirements that clearly identify and distinguish between the interests of
      the
      parent and the interests of the noncontrolling owners. SFAS No. 160 is
      effective for fiscal years beginning after December 15, 2008. We are
      currently evaluating the potential impact, if any, of the adoption of
      SFAS No. 160 on our consolidated results of operations and financial
      condition.




**Note
      3 - Discontinued Operations**





In
      July
      2005, the Board of Directors approved, and the Company completed, the sale
      of
      substantially all of the assets of Evoke Software Corporation and received
      aggregate consideration of $645,000 cash, the assumption by Similarity Systems
      and Similarity Vector Technologies, Ltd. of certain liabilities, 821,053 shares
      which are issuable by Similarity subject to the Company’s satisfactory
      completion of certain post-closing obligations, and an earnout in an amount
      equal to 13% of certain Similarity revenues. The maximum earnout consideration
      to which the Company is entitled under this agreement is $1,400,000 and would
      be
      received over a three year period. CSI changed the name of its “Evoke Software
      Corporation” subsidiary to “CSI Sub Corp II (DE)” in August 2005.





The
      821,053 shares and the earnout noted above as consideration to be received
      by
      the Company are both contingent upon certain post-closing events. However,
      as a
      result of Informatica Corporation’s acquisition of Similarity Systems in
      February 2006, the Company received $2,050,000 as a final payment on all future
      consideration related to our agreement with Similarity.





**Note
      4 - Property and equipment**




Property
      and equipment consisted of the following:





December 31,
              2007
            
            December 31,
              2006Computer
                equipment
            
            $
            1,016,582
            
            $
            998,339Furniture
                and fixtures
            
            
            161,543
            
            
            161,543Leasehold
                improvements
            
            
            92,459
            
            
            92,4591,270,584
            
            
            1,252,341Accumulated
                depreciation
            
            
            (1,087,716
            )
            
            (987,257
            )$
            182,868
            
            $
            265,084





Depreciation
      and amortization expense related to property and equipment totaled $0.1 million
      and $0.2 million for 2007 and 2006, respectively.


77





**Note
      5 - Intangible assets**




Intangibles
      acquired have been assigned as follows:





December
                31,
            
            December
                31,
            
            Amortization2007
            
            2006
            
            periodCustomer
                contracts
            
            $
            414,000
            
            $
            414,000
            
            
            5
                yearsApproved
                vendor status
            
            
            538,814
            
            
            538,814
            
            
            40
                monthsCustomer
                relationships
            
            
            685,000
            
            
            685,000
            
            
            2.5
                yearsTradename
            
            
            722,000
            
            
            722,000
            
            
            IndefiniteProprietary
                presentation format
            
            
            173,000
            
            
            173,000
            
            
            3
                years2,532,814
            
            
            2,532,814Accumulated
                amortization
            
            
            (1,754,344
            )
            
            (1,265,958
            )$
            778,470
            
            $
            1,266,856





The
      estimated amortization expense for the next five years related to other
      finite-lived intangible assets is estimated to be as follows:





Amortization of
              Intangible assets2008
            
            
            56,4702009
            
            
            -Thereafter
            
            
            -$
            56,470




**Note
      6 - Deferred financing costs**





The
      Company has incurred and capitalized financing costs in connection with
      financing transactions consummated between 2004 and 2007. These costs were
      deferred and are being amortized over the life of the related financing
      agreement. The following illustrates the components of the deferred financing
      costs:





December 31,
              2007
            
            December 31,
              2006Laurus
                Master Fund
            
            $
            110,000
            
            $
            110,000Sands
                Brothers
            
            
            -
            
            
            -$
            110,000
            
            $
            110,000Accumulated
                amortization
            
            
            (110,000
            )
            
            (52,609
            )$
            -
            
            $
            57,391





78




**Note
      7 - Discount on debt**





The
      Company has recorded the discounts on its debt instruments due to both warrant
      issuances and embedded derivatives contained in convertible notes as deferred
      charges. These deferred charges are being amortized to interest expense over
      the
      life of the related debt instruments, which currently range from one to five
      years. The following illustrates the components of the discount on debt and
      their applicable amortization period:





December
                31, 2007
            
            December
                31, 2006
            
            Amortization
                periodSands
                Brothers
            
            $
            -
            
            $
            1,080,000
            
            
            12-15 monthsTaurus
                Advisory Group
            
            
            1,500,000
            
            
            1,500,000
            
            
            5
                years1,500,000
            
            
            2,580,000Accumulated
                amortization
            
            
            (1,052,639
            )
            
            (1,793,921
            )$
            447,361
            
            $
            786,079





**Note
      8 - Line of credit**





In
      August
      2004, we replaced our $3.0 million line of credit with North Fork Bank with
      a
      revolving line of credit with Laurus Master Fund, Ltd. (“Laurus”), whereby we
      had access to borrow up to $6.0 million based upon eligible accounts receivable.
      This revolving line provided for advances at an advance rate of 90% against
      eligible accounts receivable, with an annual interest rate of prime rate (as
      reported in the Wall Street Journal) plus 1%, and matured in three years. This
      agreement contained no financial covenants. This line of credit is secured
      by
      substantially all the corporate assets. Laurus had the option to convert amounts
      outstanding into our common stock at a fixed conversion price of $2.10 per
      share.





Additionally,
      in exchange for a $5.0 million secured convertible term note bearing interest
      at
      prime rate (as reported in the Wall Street Journal) plus 1%, Laurus had
      established a $5.0 million account to be used only for acquisition targets
      identified by us that were approved by Laurus in Laurus’ sole discretion. We had
      no obligation to meet financial covenants under this note. This note was
      convertible into our common stock at a fixed conversion price of $2.10 per
      share. This note was to mature in three years. We issued Laurus a common stock
      purchase warrant that provided Laurus with the right to purchase 800,000 shares
      of our common stock. The exercise price for the first 400,000 shares acquired
      under the warrant is $4.35 per share, the exercise price for the next 200,000
      shares acquired under the warrant is $4.65 per share, and the exercise price
      for
      the final 200,000 shares acquired under the warrant is $5.25 per share. The
      common stock purchase warrant expires on August 15, 2011. We paid $0.75 million
      in brokerage and transaction closing related costs. These costs were deducted
      from the $5.0 million restricted cash balance being provided to us by
      Laurus.





The
      Company and Laurus amended these agreements during 2005 and, in February 2006,
      they were amended again, as follows. The Company entered into financing
      agreements with Laurus, pursuant to which it, among other things, (a) issued
      a
      secured non-convertible term note in the principal amount of $1.0 million to
      Laurus (the “Term Note”), (b) issued a secured non-convertible revolving note in
      the principal amount of $10.0 million to Laurus (the “Revolving Note”,
      collectively with the Term Note, the “Notes”), and (c) issued an option to
      purchase up to 3,080,000 shares of the Company's common stock to Laurus (the
      “Option”) at an exercise price of $.001 per share. The proceeds from the
      issuance of the Notes were used to refinance the Company’s outstanding
      obligations under the existing facility with Laurus (originally entered into
      in
      August 2004 and subsequently amended in July and November 2005) at a 5% premium.
      The Notes bear an annual interest rate of prime (as reported in the Wall Street
      Journal, which was 7.25% as of December 31, 2007) plus 1.0%, with a floor of
      5.0%. Payments of principal and interest were to be made in equal monthly
      amounts until maturity of both notes on December 31, 2007




79





In
      connection with the Notes, the Company and Laurus entered into an Overadvance
      Letter Agreement, pursuant to which Laurus exercised its discretion granted
      to
      it pursuant to the Security Agreement entered into in August 2004 to make a
      loan
      to the Company in excess of the “Formula Amount” (as defined therein) and
      advanced $3,101,084 to the Company. The Company also entered into a Stock Pledge
      Agreement and Security Agreement securing its obligations to Laurus, both prior
      to and including the Notes, as well as a Registration Rights Agreement pursuant
      to which the Company agreed to file a registration statement to register the
      shares of the Company’s common stock underlying the Option, as well as the
      shares of the Company’s common stock and the shares of the Company’s common
      stock underlying the warrants held by Laurus, within 90 days. The Company was
      to
      repay the Overadvance to Laurus beginning February 1, 2007 by making monthly
      payments of approximately $258,424, until the principal amount of $3,101,084
      was
      repaid in full. The Company made the first two payments in February 2007 and,
      in
      March 2007, the Company and Laurus agreed that the Company would pay to Laurus
      $2,084,237 and issue a warrant to purchase 1,785,714 shares of common stock
      at
      an exercise price of $0.01 as final payment to satisfy the Overadvance Letter
      in
      full. Also in March 2007, the Company satisfied the outstanding amount on the
      outstanding term note issued to Laurus on February 1, 2006, with a cash payment
      of $409,722.





Using
      the
      Black-Scholes option pricing model, the Company calculated the relative fair
      value of the warrant to purchase 1,785,714 shares of Company common stock to
      be
      $535,714. This relative fair value has been recorded as a component of the
      loss
      on the extinguishment of this debt. The assumptions used in the relative fair
      value calculation were as follows: Company stock price on March 7, 2007 of
      $0.30
      per share; exercise price of the warrants of $0.01 per share; five year term;
      volatility of 147.32%; annual rate of dividends of 0%; and a risk free interest
      rate of 4.90%.





In
      December 2007 ,
      t he
      Company and Laurus agreed to reduce the amount available under the line of
      credit from $10,000,000 to $3,000,000 and to extend the maturity date of the
      revolving line of credit from December 31, 2007 to March 31, 2008 in exchange
      for a $25,000 fee.





As
      of
      December 31, 2007, approximately $2.1 million was outstanding under the
      revolving line of credit. The interest rate on the revolving line was 8.25%
      as
      of December 31, 2007. As of the date of this filing, Laurus owns approximately
      5,393,415 shares of the Company’s common stock, an option to purchase up to
      36,596 shares of the Company's common stock at an exercise price of $.001 per
      share, a warrant to purchase 17,857 shares of the Company’s common stock at an
      exercise price of $0.01 per share, and warrants to purchase 400,000 shares
      of
      the Company’s common stock at $4.35 per share, 200,000 shares of the Company’s
      common stock at $4.65 per share and 200,000 shares of the Company’s common stock
      at $5.25 per share.





**Note
      9 - Short Term Notes Payable**





On
      September 22, 2005, upon maturity of the three subordinated secured convertible
      promissory notes equaling $1.0 million (the “Notes”) issued to Sands
      Brothers Venture Capital LLC, Sands Brothers Venture Capital III LLC and Sands
      Brothers Venture Capital IV LLC (collectively, “Sands”) in
      September 2004, the Company issued to Sands three new subordinated secured
      convertible promissory notes equaling $1.080 million, each with an annual
      interest rate of 12% expiring on January 1, 2007. The Company also issued Sands
      three common stock purchase warrants (the “Warrants”) providing Sands with the
      right to purchase 400,000 shares of the Company’s common stock. The exercise
      price of the shares of the Company’s common stock issuable upon exercise of the
      Warrants shall be equal to a price per share of common stock equal to $2.10
      per
      share. The latest that the Warrants may expire is December 15,
      2009.





In
      December 2006, in exchange for a $15,000 extension fee, Sands agreed to extend
      the Maturity Date of the Notes from January 1, 2007 to February 1, 2007 and
      then, upon maturity and in exchange for a $150,000 payment to be applied against
      the principal balance outstanding on the Notes, agreed to extend the maturity
      date to March 1, 2007. On March 1, 2007, the Company and Sands agreed that
      the
      Company would pay the Funds an additional $900,000 cash during 2007, as well
      as
      issue shares of Common Stock and warrants to purchase Common Stock as final
      payment to satisfy the Sands Notes in full. In total, the Company paid
      $1,050,000 cash, issued 1,088,169 shares of Common Stock to Sands and issued
      warrants to purchase a total of 1,082,758 shares of Company Common Stock in
      order to settle the debt in full. The warrants to purchase Company Common Stock
      were issued in three tranches as follows: 263,512 shares, 541,379 shares and
      277,867 shares with exercise prices of $0.34 per share, $0.50 per share and
      $0.22 per share, respectively. The warrants are exercisable for a period of
      three years.


80





In
      July
      2005, the Company obtained two $250,000 short term loans from certain investors
      represented by Taurus. Both notes bear interest at 8% per annum. The first
      note
      is dated July 6, 2005 and initially matured on September 5, 2005. The second
      note is dated July 22, 2005 and originally matured on September 22, 2005. Each
      of these notes was extinguished on December 21, 2007 in exchange for 1,666,667
      shares of Company Common Stock, a total of 3,333,334 shares were issued to
      exchange these two notes, and warrants to purchase an equal number of shares
      of
      Company Common Stock. The warrants have a $0.165 purchase price and are
      exercisable for five years.





Using
      the
      Black-Scholes option pricing model, the Company calculated the relative fair
      value of the warrants to purchase 3,333,334 shares of Company common stock
      to be
      $466,667. This relative fair value was charged to the loss on extinguishment
      during 2007. The assumptions used in the relative fair value calculation were
      as
      follows: Company stock price on December 21, 2007 of $0.15 per share; exercise
      price of the warrants of $0.165 per share; five year term; volatility of
      161.02%; annual rate of dividends of 0%; and a risk free interest rate of
      3.28%.




In
      July
      2005, in conjunction with the acquisition of ISI, the Company issued a short
      term note in the principal amount of $165,000 payable to Adam Hock and Larry
      Hock (the “Hock’s”), the former principle stockholders of ISI. This note bears
      interest at 5% per annum and matured on October 28, 2006. Repayment of this
      note
      had been disputed and the dispute between the Company and the Hock’s was settled
      in November 2007. The settlement requires payments totaling $115,000 to be
      made
      to the Hock’s beginning with an initial payment of $15,000 and then twelve equal
      monthly installments in the amount of $8,333, ending in November
      2008.





In
      December 2005, the Company obtained a $1,000,000 short term loan from certain
      investors represented by Taurus. This note bears interest at 8% per annum.
      The
      note is dated December 19, 2005 and initially matured on January 31, 2006.
      These
      short term note holders had agreed to extend their maturity date on a
      month-to-month basis until the Company raises sufficient funds to repay the
      notes.  In conjunction with this note, these investors received a warrant
      to purchase 277,777 shares of our common stock with an exercise price of $0.675
      per share in December 2005, a warrant to purchase 277,777 shares of our common
      stock with an exercise price of $0.75 per share in February 2006 and a
      warrant to purchase 554,000 shares of our common stock with an exercise price
      of
      $1.30 per share in March 2006. These warrants expire in December
      2008, January 2009 and February 2009, respectively. **** This
      note
      was extinguished on December 21, 2007 in exchange for 6,666,668 shares of
      Company Common Stock and warrants to purchase an equal number of shares of
      Company Common Stock. The warrants have a $0.165 purchase price and are
      exercisable for five years.





Using
      the
      Black-Scholes option pricing model, the Company calculated the relative fair
      value of the warrant to purchase 277,777 shares of Company common stock to
      be
      $111,111. This relative fair value was amortized to interest expense during
      2006. The assumptions used in the relative fair value calculation were as
      follows: Company stock price on December 19, 2005 of $0.54 per share; exercise
      price of the warrants of $0.675 per share; three year term; volatility of
      162.52%; annual rate of dividends of 0%; and a risk free interest rate of
      4.5%.





Using
      the
      Black-Scholes option pricing model, the Company calculated the relative fair
      value of the warrants to purchase 6,666,668 shares of Company common stock
      to be
      $933,334. This relative fair value was charged to the loss on extinguishment
      during 2007. The assumptions used in the relative fair value calculation were
      as
      follows: Company stock price on December 21, 2007 of $0.15 per share; exercise
      price of the warrants of $0.165 per share; five year term; volatility of
      161.02%; annual rate of dividends of 0%; and a risk free interest rate of
      3.28%.


81





On
      February 1, 2007, the Company issued a 10% Unsecured Promissory Note to an
      investor represented by TAG Virgin Islands, Inc. for $705,883, maturing on
      March
      1, 2007. This note was retired and included as part of the March 1, 2007 10%
      Unsecured Promissory Note in the principal amount of $4,000,000.





On
      March
      1, 2007, the Company issued a 10% Convertible Unsecured Note (the "TAG Note")
      to
      certain investors represented by TAG Virgin Islands, Inc. for $4.0 million.
      The
      TAG Note was to automatically convert into 13,333,333 shares of the Company's
      common stock upon the effectiveness of the Information Statement on Schedule
      14C, filed preliminarily by the Company with the Securities and Exchange
      Commission on March 8, 2007, amended on April 9, 2007 and filed definitively
      on
      May 1, 2007. The investor was also granted a warrant to purchase 13,333,333
      shares of the common stock, exercisable at a price of $0.33 per share (subject
      to adjustment) and exercisable for a period of five years. Pursuant to a
      Registration Rights Agreement, the Company agreed to file a registration
      statement covering the shares of common stock underlying the TAG Note and the
      warrant. Such registration rights are more fully set forth in the Registration
      Rights Agreement.   The TAG Note was subsequently amended in March 2007 to
      $4.25 million and the number of shares of common stock that the TAG Note will
      convert into was increased to 14,166,667 shares of common stock. Additionally,
      the warrant was also amended to entitle the investor to purchase 14,166,667
      shares of our common stock, exercisable at a price of $0.33 per share (subject
      to adjustment), and is exercisable for a period of five years. In June 2007,
      the
      note automatically converted to equity and the 14,166,667 shares were issued
      to
      the investor.





Using
      the
      Black-Scholes option pricing model, the Company calculated the relative fair
      value of the warrant to purchase 14,166,667 shares of Company common stock
      to be
      $3,825,000. This relative fair value is being accreted through interest expense
      over the six month life of the Note. The assumptions used in the relative fair
      value calculation were as follows: Company stock price on March 7, 2007 of
      $0.30
      per share; exercise price of the warrants of $0.33 per share; five year term;
      volatility of 147.32%; annual rate of dividends of 0%; and a risk free interest
      rate of 4.90%.




On
      April
      27, 2007, The Company issued a 10% Convertible Unsecured Note (the “Note”) to
      certain investors represented by TAG Virgin Islands, Inc. for $250,000. The
      Note
      will automatically convert into 833,333 shares of common stock upon the
      effectiveness of the Information Statement on Schedule 14C, filed preliminarily
      by the Company with the Securities and Exchange Commission on March 8, 2007,
      amended on April 9, 2007 and filed definitively on May 1, 2007. The investor
      was
      also granted a warrant to purchase 833,333 shares of common stock, exercisable
      at a price of $0.33 per share (subject to adjustment), and is exercisable for
      a
      period of five years. In June 2007, the note automatically converted to equity
      and the 833,333 shares were issued to the investor.





Using
      the
      Black-Scholes option pricing model, the Company calculated the relative fair
      value of the warrant to purchase 833,333 shares of Company common stock to
      be
      $118,421. The note is due on August 31, 2007 and the relative fair value of
      the
      warrants was being charged to interest expense over the four month term. The
      assumptions used in the relative fair value calculation were as follows: Company
      stock price on April 27, 2007 of $0.29 per share; exercise price of the warrants
      of $0.33 per share; five year term; volatility of 152.97%; annual rate of
      dividends of 0%; and a risk free interest rate of 4.95%.





On
      June
      6, 2007, the Company issued a 10% Convertible Unsecured Note (the "Note") to
      certain investors represented by TAG Virgin Islands, Inc. for $250,000. This
      note is due on demand and is convertible into 833,333 shares of common stock
      at
      the option of the holder. **** In
      the
      event that the Company obtains financing of at least $500,000, whether in the
      form of debt or equity, this Note is to be repaid to the investor immediately
      upon closing. **** The
      investor was also granted a warrant to purchase 833,333 shares of common stock,
      exercisable at a price of $0.33 per share (subject to adjustment), and is
      exercisable for a period of five years. This note was extinguished on December
      21, 2007 in exchange for 1,666,667 shares of Company Common Stock and a warrant
      to purchase an equal number of shares of Company Common Stock. The warrant
      has a
      $0.165 purchase price and is exercisable for five years.


82





Using
      the
      Black-Scholes option pricing model, the Company calculated the relative fair
      value of the warrant to purchase 833,333 shares of Company common stock to
      be
      $113,636. Since the note is due on demand, this relative fair value was
      immediately charged to interest expense. The assumptions used in the relative
      fair value calculation were as follows: Company stock price on June 6, 2007
      of
      $0.27 per share; exercise price of the warrants of $0.33 per share; five year
      term; volatility of 159.89%; annual rate of dividends of 0%; and a risk free
      interest rate of 4.95%.





Using
      the
      Black-Scholes option pricing model, the Company calculated the relative fair
      value of the warrants to purchase 1,666,667 shares of Company common stock
      to be
      $233,333. This relative fair value was charged to the loss on extinguishment
      during 2007. The assumptions used in the relative fair value calculation were
      as
      follows: Company stock price on December 21, 2007 of $0.15 per share; exercise
      price of the warrants of $0.165 per share; five year term; volatility of
      161.02%; annual rate of dividends of 0%; and a risk free interest rate of
      3.28%.





On
      June
      27, 2007, the Company issued 10% Convertible Unsecured Notes (the "Notes")
      to
      certain investors represented by TAG Virgin Islands, Inc. for $400,000. These
      notes are due on demand and are convertible into 1,333,333 shares of common
      stock at the option of the holders. In the event that the Company obtains
      financing of at least $500,000, whether in the form of debt or equity, these
      Notes are to be repaid to the investors immediately upon closing. **** The
      investors were also granted warrants to purchase 1,333,333 shares of common
      stock, exercisable at a price of $0.33 per share (subject to adjustment), and
      are exercisable for a period of five years. These notes were extinguished on
      December 21, 2007 in exchange for 2,666,668 shares of Company Common Stock
      and
      warrants to purchase an equal number of shares of Company Common Stock. The
      warrants have a $0.165 purchase price and are exercisable for five
      years.




Using
      the
      Black-Scholes option pricing model, the Company calculated the relative fair
      value of the warrant to purchase 1,333,333 shares of Company common stock to
      be
      $164,706. Since the note is due on demand, this relative fair value was
      immediately charged to interest expense. The assumptions used in the relative
      fair value calculation were as follows: Company stock price on June 27, 2007
      of
      $0.23 per share; exercise price of the warrants of $0.33 per share; five year
      term; volatility of 158.58%; annual rate of dividends of 0%; and a risk free
      interest rate of 4.95%.





Using
      the
      Black-Scholes option pricing model, the Company calculated the relative fair
      value of the warrants to purchase 2,666,668 shares of Company common stock
      to be
      $373,334. This relative fair value was charged to the loss on extinguishment
      during 2007. The assumptions used in the relative fair value calculation were
      as
      follows: Company stock price on December 21, 2007 of $0.15 per share; exercise
      price of the warrants of $0.165 per share; five year term; volatility of
      161.02%; annual rate of dividends of 0%; and a risk free interest rate of
      3.28%.





**Note
      10 - Financial Instruments**





Both
      the
      Laurus and Sands Notes were hybrid instruments which contained both freestanding
      derivative financial instruments and more than one embedded derivative feature
      which warranted separate accounting as a derivative instrument under SFAS No.
      133. The freestanding derivative financial instruments included the warrants
      and
      various embedded derivative features which had been bundled together as a
      single, compound embedded derivative instrument that had been bifurcated from
      the debt host contract, referred to as the “Compound Embedded Derivative
      Liability”. The single compound embedded derivative features included the
      conversion feature within the notes, the conversion reset feature, the early
      redemption option and the interest rate adjustments. The value of the single
      compound embedded derivative liability was bifurcated from the debt host
      contract and recorded as a derivative liability, which resulted in a reduction
      of the initial carrying amount (as unamortized discount) of the notes. The
      unamortized discount was amortized to interest expense using the effective
      interest method over the life of the notes, or 36 months.


83




The
      Sands
      Notes matured on January 1, 2007 and the Company and Sands agreed upon a payment
      schedule which began in March 2007 and matured in December 2007. On March 7,
      2007, the Company satisfied the outstanding amount on the Secured
      Non-Convertible Term Note, issued to Laurus on February 1, 2006, and the
      Overadvance Side Letter dated as of February 1, 2006. As a result of these
      repayments and settlement agreements the Company had no outstanding instruments
      which contained derivative instruments requiring liability accounting under
      SFAS
      No. 133.




84





**Note
      11 - Long Term Debt**





Long-term
                debt consisted of the following:December
                31,
              2007
            
            December
                31,
              2006Secured
                non-convertible term note with a maturity date of December 31, 2007.
                Interest accrues at a rate of prime plus one percent. As of December
                31,
                2006, the interest rate on this note was 9.25%. See note 8- Line of credit for further description of this
                transaction.
            
            
            -
            
            
            545,454Convertible
                line of credit note with a maturity date of June 6, 2009 unless converted
                into common stock at the Company or the note holder’s option. Interest
                accrues at 7% per annum. The original conversion price to shares
                of common
                stock is equal to 75% of the average trading price for the prior
                ten
                trading days. In September 2004, the price was reset to $1.58 per
                share. A
                warrant to purchase 277,778 shares of Company common stock was also
                issued. The exercise price of the warrant is $2.10 per share and
                the
                warrant expires on June 6, 2009. An allocation of the relative fair
                value
                of the warrant and the debt instrument was performed. The relative
                fair
                value of the warrant was determined to be $500,000 and is being amortized
                to interest expense over the life of the note. A discount on debt
                issued
                of $1,500,000 was recorded in September 2004 based on the reset conversion
                terms.
            
            
            1,650,000
            
            
            2,000,000Notes
                payable under capital lease obligations payable to various finance
                companies for equipment at varying rates of interest, ranging from
                18% to
                33% as of December 31, 2007, and have maturity dates through 2008.
            
            
            10,819
            
            
            44,0511,660,819
            
            
            2,589,505Relative
                fair values, at issuance, ascribed to warrants associated with the
                above
                debt agreements. This amount is being accreted to the debt instrument
                over
                the term of the related debt agreements, which range from three to
                five
                years.
            
            
            (116,874
            )
            
            (241,666
            )Subtotal
            
            
            1,543,945
            
            
            2,347,839Less:
                Current portion of long-term debt, including obligations under capital
                leases of $10,819 and current portion of long term debt of zero as
                of
                December 31, 2007 and current portion of capital leases of $33,231
                and
                current portion of long term debt of $545,454 as of December 31,
                2006.
            
            
            (10,819
            )
            
            (578,685
            )$
            1,533,126
            
            $
            1,769,154Future
                annual payments of long-term debt is as follows:Years
                Ending2007
            
            $
            -
            
            $
            578,6852008
            
            
            10,819
            
            
            10,8202009
            
            
            1,650,000
            
            
            2,000,000$
            1,660,819
            
            $
            2,589,505





Obligations
      under Capital Leases





The
      Company has entered into various capital leases that are collateralized by
      computer equipment and a trade show booth with an original cost of approximately
      $100,000.




85




The
      following schedule lists future minimum lease payments under the capital leases
      with their present value as of December 31, 2007:





December 31,2007
            
            December 31,20062007
            
            
            -
            
            
            37,4512008
            
            
            11,523
            
            
            11,52311,523
            
            
            48,974Less:
                Amount representing interest
            
            
            (704
            )
            
            (4,923
            )$
            10,819
            
            $
            44,051




During
      2007 and 2006, the Company recorded depreciation expense related to equipment
      under capital leases of approximately $0.1 million and $0.1 million,
      respectively.





In
      June
      2004, the Company issued a five-year $2,000,000 unsecured convertible line
      of
      credit note. The note accrues at an annual interest rate of 7%, and the
      conversion price of the shares of common stock issuable under the note is equal
      to $1.58 per share. In addition, such investors received a warrant to purchase
      277,778 shares of our common stock at an exercise price of $1.58 per share.
      This
      warrant expires in June 2009. This note also contains beneficial conversion
      features, and as a result, we recorded a beneficial conversion charge of $1.5
      million which is being amortized into income over the life of the debt
      instrument. Additionally, using the Black-Scholes option pricing model, we
      determined the fair value of the warrant to be $0.5 million. The Company valued
      the warrant in accordance with EITF 00-27 using the Black-Scholes option pricing
      model and the following assumptions: contractual term of five years, an average
      risk free interest rate of 1.33%, a dividend yield of 0%, and volatility of
      138.62%. The relative fair value attributed to the warrant issued is amortized
      over the note’s maturity period (60 months) as interest expense. On December 28,
      2007, $350,000 of this note was extinguished in return for Company Common Stock
      and warrants. The investors received 2,499,997 shares of Company Common Stock
      and warrants to purchase 2,499,997 shares of Common Stock at a purchase price
      of
      $0.154 per share.





Using
      the
      Black-Scholes option pricing model, the Company calculated the relative fair
      value of the warrants to purchase 2,499,997 shares of Company common stock
      to be
      $325,000. This relative fair value was charged to the loss on extinguishment
      during 2007. The assumptions used in the relative fair value calculation were
      as
      follows: Company stock price on December 28, 2007 of $0.14 per share; exercise
      price of the warrants of $0.154 per share; five year term; volatility of
      158.27%; annual rate of dividends of 0%; and a risk free interest rate of
      3.28%.




**Note
      12 - Income Taxes**





The
      Company provides for federal and state income taxes in accordance with current
      rates applied to accounting income before taxes. The provision for income taxes
      is as follows:





Years
                ended December 31,2007
            
            2006Current
                - Federal
            
            $
            -
            
            $
            -Current
                - State
            
            
            -
            
            
            -Deferred
                - Federal
            
            
            -
            
            
            -Deferred
                - State
            
            
            -
            
            
            -$
            -
            
            $
            -




86




The
      Company’s provision for income taxes is based on estimated effective annual
      income tax rates. The provision may differ from income taxes currently payable
      because certain items of income and expense are recognized in different periods
      for financial statement purposes than for tax return purposes.





The
      Company has $12.2 million of net operating loss carry-forwards for both federal
      and state purposes expiring between 2023 and 2027.




87





December
                31,2007
            
            2006Net
                operating losses
            
            $
            12,205,000
            
            $
            10,321,000Accounts
                receivable
            
            
            63,000
            
            
            82,000Property
                and equipment
            
            
            (1,000
            )
            
            38,000Accounts
                payable and accrued expenses
            
            
            23,000
            
            
            15,000Debt
            
            
            (140,000
            )
            
            (56,000
            )Goodwill
            
            
            166,000
            
            
            199,000Intangible
                assets
            
            
            (294,000
            )
            
            (392,000
            )Stock
                based compensation
            
            
            2,281,000
            
            
            1,821,00014,303,000
            
            
            12,028,000Valuation
                allowance
            
            
            (14,666,400
            )
            
            (12,391,400
            )$
            (363,400
            )
            $
            (363,400
            )




The
      Company evaluates the amount of deferred tax assets that are recorded against
      expected taxable income over its forecasting cycle which is currently two years.
      As a result of this evaluation, the Company has recorded a valuation allowance
      of $14,666,400 and $12,391,400 for the years ended December 31, 2007 and 2006,
      respectively, representing a current year change in the valuation allowance
      of
      $2,275,000. This allowance was recorded because, based on the weight of
      available evidence, it is more likely than not that some, or all, of the
      deferred tax asset may not be realized.


At
      December 31, 2007, the Company had net operating loss carryfowards for Federal
      and State income tax purposes of approximately $12.2 million, which begin to
      expire in 2023. The Tax Reform Act of 1986 contains provisions that limit the
      utilization of net operating loss and tax credit carryforwards if there has
      been
      an ownership change, as defined by the tax law. An ownership change as described
      in Section 382 of the Internal Revenue Code, may limit the Company’s ability to
      utilize its net operating loss and tax credit carryforwards on a yearly basis.
      The Company has issued a substantial number of shares of common stock during
      2007, which may place limitations on the current net loss carryforwards.





Income
      taxes computed at the federal statutory rate differ from the amounts provided
      as
      follows:





For the year endedDecember 31,2007
            
            2006Provision
                for Federal taxes at statutory rate (34%)
            
            
            (34.0
            )%
            
            (34.0
            )%State
                taxes, net of Federal benefit
            
            
            (3.3
            )%
            
            (4.6
            )%Permanent
                difference due to non-deductible items
            
            
            0.2
            %
            
            1.6
            %Stock
                based compensation
            
            
            2.9
            %
            
            4.9
            %Goodwill
                impairment
            
            
            2.3
            %
            
            1.2
            %Extinguishment
              of
              debt
            
            
            9.6
            %
            
            -
            %Valuation
                allowance applied against income tax benefit
            
            
            22.3
            %
            
            30.9
            %Income
                tax provision
            
            
            0.0
            %
            
            0.0
            %




**Note
      13 - Common Stock**




In
      July
      2005, the Company obtained two $250,000 short term loans from certain investors
      represented by Taurus. Both notes bear interest at 8% per annum. The first
      note
      is dated July 6, 2005 and initially matured on September 5, 2005. The second
      note is dated July 22, 2005 and originally matured on September 22, 2005. Each
      of these notes was extinguished on December 21, 2007 in exchange for 1,666,667
      shares of Company Common Stock, a total of 3,333,334 shares were issued to
      exchange these two notes, and warrants to purchase an equal number of shares
      of
      Company Common Stock. The warrants have a $0.165 purchase price and are
      exercisable for five years.


88





On
      December 29, 2006, the Company entered into a Stock Purchase Agreement with
      certain investors, pursuant to which the Company issued 3,000,000 shares of
      the
      Company's common stock, $0.001 par value, and the Company received proceeds
      of
      $750,000. Pursuant to the Stock Purchase Agreement, the Investors were also
      granted a warrant to purchase 1,500,000 shares of the Company's common stock,
      exercisable at a price of $0.30 per share (subject to adjustment). The warrant
      is exercisable for a period of five years.





On
      March
      1, 2007, the Company issued a 10% Convertible Unsecured Note (the "TAG Note")
      to
      certain investors represented by TAG Virgin Islands, Inc. for $4.0 million.
      The
      TAG Note was to automatically convert into 13,333,333 shares of the Company's
      common stock upon the effectiveness of the Information Statement on Schedule
      14C, filed preliminarily by the Company with the Securities and Exchange
      Commission on March 8, 2007, amended on April 9, 2007 and filed definitively
      on
      May 1, 2007. The investor was also granted a warrant to purchase 13,333,333
      shares of the common stock, exercisable at a price of $0.33 per share (subject
      to adjustment) and exercisable for a period of five years. Pursuant to a
      Registration Rights Agreement, the Company agreed to file a registration
      statement covering the shares of common stock underlying the TAG Note and the
      warrant. Such registration rights are more fully set forth in the Registration
      Rights Agreement.   The TAG Note was subsequently amended in March 2007 to
      $4.25 million and the number of shares of common stock that the TAG Note will
      convert into was increased to 14,166,667 shares of common stock. Additionally,
      the warrant was also amended to entitle the investor to purchase 14,166,667
      shares of our common stock, exercisable at a price of $0.33 per share (subject
      to adjustment), and is exercisable for a period of five years. In June 2007,
      the
      note automatically converted to equity and the 14,166,667 shares were issued
      to
      the investor.





On
      April
      27, 2007, The Company issued a 10% Convertible Unsecured Note (the “Note”) to
      certain investors represented by TAG Virgin Islands, Inc. for $250,000. The
      Note
      will automatically convert into 833,333 shares of common stock upon the
      effectiveness of the Information Statement on Schedule 14C, filed preliminarily
      by the Company with the Securities and Exchange Commission on March 8, 2007,
      amended on April 9, 2007 and filed definitively on May 1, 2007. The investor
      was
      also granted a warrant to purchase 833,333 shares of common stock, exercisable
      at a price of $0.33 per share (subject to adjustment), and is exercisable for
      a
      period of five years. In June 2007, the note automatically converted to equity
      and the 833,333 shares were issued to the investor.





On
      June
      6, 2007, the Company issued a 10% Convertible Unsecured Note (the "Note") to
      certain investors represented by TAG Virgin Islands, Inc. for $250,000. This
      note is due on demand and is convertible into 833,333 shares of common stock
      at
      the option of the holder. **** In
      the
      event that the Company obtains financing of at least $500,000, whether in the
      form of debt or equity, this Note is to be repaid to the investor immediately
      upon closing. **** The
      investor was also granted a warrant to purchase 833,333 shares of common stock,
      exercisable at a price of $0.33 per share (subject to adjustment), and is
      exercisable for a period of five years. This note was extinguished on December
      21, 2007 in exchange for 1,666,667 shares of Company Common Stock and a warrant
      to purchase an equal number of shares of Company Common Stock. The warrant
      has a
      $0.165 purchase price and is exercisable for five years.





On
      June
      27, 2007, the Company issued 10% Convertible Unsecured Notes (the "Notes")
      to
      certain investors represented by TAG Virgin Islands, Inc. for $400,000. These
      notes are due on demand and are convertible into 1,333,333 shares of common
      stock at the option of the holders. In the event that the Company obtains
      financing of at least $500,000, whether in the form of debt or equity, these
      Notes are to be repaid to the investors immediately upon closing. **** The
      investors were also granted warrants to purchase 1,333,333 shares of common
      stock, exercisable at a price of $0.33 per share (subject to adjustment), and
      are exercisable for a period of five years. These notes were extinguished on
      December 21, 2007 in exchange for 2,666,668 shares of Company Common Stock
      and
      warrants to purchase an equal number of shares of Company Common Stock. The
      warrants have a $0.165 purchase price and are exercisable for five
      years.





On
      August
      24, 2007, the Company entered into a Stock Purchase Agreement with an investor,
      pursuant to which the Company issued 550,000 shares of the Company's common
      stock, $0.001 par value, and the Company received proceeds of $115,500. Pursuant
      to the Stock Purchase Agreement, the Investor was also granted a warrant to
      purchase 550,000 shares of the Company's common stock, exercisable at a price
      of
      $0.22 per share (subject to adjustment). The warrant is exercisable for a period
      of five years. This transaction is also subject to a Registration Rights
      Agreement dated August 24, 2007.


89





On
      September 4, 2007, the Company entered into a Stock Purchase Agreement with
      certain investors, pursuant to which the Company issued 1,140,000 shares of
      the
      Company's common stock, $0.001 par value, and the Company received proceeds
      of
      $239,400. Pursuant to the Stock Purchase Agreement, the Investors were also
      granted a warrant to purchase 1,140,000 shares of the Company's common stock,
      exercisable at a price of $0.22 per share (subject to adjustment). The warrant
      is exercisable for a period of five years. This transaction is also subject
      to a
      Registration Rights Agreement dated September 4, 2007.





As
      of
      October 19, 2007, the Company and TAG Virgin Islands, Inc., as agent for the
      purchasers (the “Purchasers”), executed a Stock Purchase Agreement (the
“Agreement”). Pursuant to this Agreement, the Purchasers purchased from the
      Company $4.7 million in Company common stock, par value $0.001, in multiple
      closings prior to December 28, 2007. The purchase price of each share of common
      stock purchased was the higher of $0.10 per share or the per share closing
      price
      on the day that each purchase was effected. The Purchasers were also issued
      warrants to purchase Company common stock, the number of which was equal to
      the
      number of shares of common stock purchased. The warrants are exercisable at
      a
      price equal to 10% above the purchase price of the shares purchased and are
      exercisable for five years. Pursuant to a Registration Rights Agreement, the
      Company agreed to file a registration statement covering the shares of common
      stock underlying the Agreement and the warrant. Between October 19, 2007 and
      December 31, 2007, the Company received $2.2 million cash and exchanged $2.5
      million of outstanding debt for Company common stock. A total of 30,407,144
      common shares were issued and 30,407,144 warrants to purchase common stock
      were
      issued. 1,875,000 of these warrants are exercisable at a price of $0.22 per
      share (subject to adjustment), 18,300,004 of these warrants are exercisable
      at a
      price of $0.165 per share (subject to adjustment), 7,375,000 of these warrants
      are exercisable at a price of $0.175 per share (subject to adjustment) and
      2,857,140 of these warrants are exercisable at a price of $0.154 per share.
      The
      warrants are exercisable for a period of five years.





Between
      February and December 2007, pursuant to a settlement agreement executed between
      the Company and Sands Brothers Venture Capital LLC, Sands Brothers Venture
      Capital III LLC and Sands Brothers Venture Capital IV LLC (collectively,
“Sands”), the Company made cash payments to Sands of $1,050,000, issued
      1,088,169 shares of Common Stock to Sands and issued warrants to purchase a
      total of 1,082,758 shares of Company Common Stock in order to settle the debt
      in
      full. The warrants to purchase Company Common Stock were issued in three
      tranches as follows: 263,512 shares, 541,379 shares and 277,867 shares with
      exercise prices of $0.34 per share, $0.50 per share and $0.22 per share,
      respectively. The warrants are exercisable for a period of three
      years.





**Note
      14 - Preferred Stocks**





In
      February 2006, we entered into a Securities Purchase Agreement with investors
      represented by Taurus, pursuant to which we issued 19,000 shares of our
      newly created Series A Convertible Preferred Stock, $.001 par value (the “Series
      A Preferred”). Each share of Series A Preferred has a stated value of $100.00.
      We received proceeds of $1,900,000. The Series A Preferred has a cumulative
      annual dividend equal to five percent (5%), which is payable semi-annually 
in cash or common stock, at our election, and is convertible into shares of
      the
      Company’s common stock at any time at a price equal to $0.50 per share (subject
      to adjustment). In addition, the Series A Preferred has no voting rights, but
      has liquidation preferences and certain other privileges. All shares of Series
      A
      Preferred not previously converted shall be redeemed by the Company, in cash
      or
      common stock, at the election of the Taurus investors, on February 1, 2011.
      Pursuant to the Securities Purchase Agreement, the Taurus investors were also
      granted a warrant to purchase 1,900,000 shares of our common stock exercisable
      at a price of $0.60 per share (subject to adjustment), exercisable for a period
      of five years.




90





Using
      the
      Black-Scholes option pricing model, the Company calculated the relative fair
      value of the warrant to purchase 1,900,000 shares of Company common stock to
      be
      approximately $1,128,000. This relative fair value has been recorded as a
      reduction of the $1,900,000 mezzanine equity balance for the preferred stock
      and
      an addition to additional paid-in capital. The assumptions used in the relative
      fair value calculation are as follows: Company stock price on February 2, 2006
      of $1.49 per share; exercise price of the warrants of $0.60 per share; five
      year
      term; volatility of 187.13%; annual rate of dividends of 0%; and a risk free
      interest rate of 4.82%. Additionally, the Company calculated a beneficial
      conversion feature charge related to the conversion price for the preferred
      stock to common stock of approximately $772,000.





In
      August
      2006, we entered into a Stock Purchase Agreement with an investor represented
      by
      Taurus, pursuant to which we issued 20,000 shares of our newly created
      Series B Convertible Preferred Stock, $.001 par value (the “Series B
      Preferred”). Each share of Series B Preferred has a stated value of $100.00. We
      received proceeds of $2,000,000. The Series B Preferred has a cumulative annual
      dividend equal to the Prime Rate plus one percent (1%), which is payable
      monthly in cash or common stock, at our election, and is convertible into
      shares of our common stock at any time at a price equal to the lower of (1)
      $0.85 or (2) the average daily volume weighted market price for the five
      consecutive trading days immediately prior to the date for which such price
      is
      determined, with a minimum price of $0.50. In addition, the Series B Preferred
      has no voting rights, but has liquidation preferences and certain other
      privileges. Pursuant to the Stock Purchase Agreement, warrants to purchase
      1,276,471 shares of our common stock were issued, exercisable at a price of
      $0.94 per share (subject to adjustment), and exercisable for a period of five
      years.





Using
      the
      Black-Scholes option pricing model, the Company calculated the relative fair
      value of the warrants to purchase 1,276,471 shares of Company common stock
      to be
      approximately $593,000. This relative fair value has been recorded as a
      reduction of the $2,000,000 mezzanine equity balance for the preferred stock
      and
      an addition to additional paid-in capital. The assumptions used in the relative
      fair value calculation are as follows: Company stock price on August 11, 2006
      of
      $0.70 per share; exercise price of the warrants of $0.94 per share; five year
      term; volatility of 175.44%; annual rate of dividends of 0%; and a risk free
      interest rate of 4.97%. Additionally, the Company calculated a beneficial
      conversion feature charge related to the conversion price for the preferred
      stock to common stock of approximately $240,000.





**Note
      15 - Treasury Stock**





In
      February 2006, the Company repurchased 3,892,355 shares of its common stock
      from
      the Company’s largest non-affiliated stockholder, WHRT I Corp. for
      $1,848,868.80, and such shares were placed back into the Company’s treasury. An
      additional 253,027 shares of our common stock relating to the escrowed shares
      were also placed back into treasury. The Company utilized the proceeds from
      its
      issuance of its Series A Convertible Preferred Stock in order to finance this
      common stock repurchase.





In
      December 2006, the Company sold 3,000,000 shares of its common stock to an
      investor for $750,000. Treasury shares were re-issued during this transaction
      and a charge to retained earnings was recorded for the difference between the
      $0.475 per share acquisition cost and the $0.25 per share price at which the
      shares were re-issued.





**Note
      16 - Common Stock Warrants**





On
      February 2, 2006, the Company granted a warrant to purchase an aggregate of
      1,900,000 shares of the Company’s common stock to Taurus Advisory Group, LLC in
      connection with the sale of 19,000 shares of the Company’s Series A preferred
      stock. The warrant has an exercise price of $0.60 per share and expires on
      January 30, 2011. See Note 16 for further discussion of this
      transaction.





In
      August
      2006, in connection with the sale of Series B preferred stock, warrants to
      purchase 1,276,471 shares of our common stock were issued  exercisable at a
      price of $0.94 per share (subject to adjustment), and expiring on August 10,
      2011. See Note 14 for further discussion of this transaction.


91





In
      December 2006, the Company issued a warrant to purchase 1,500,000 shares of
      the
      Company’s common stock to TAG Virgin Islands, Inc. investors. The warrant is
      exercisable at a price of $0.30 per share and expires on December 28, 2011.
      See
      Note 15 for further discussion of this transaction.





On
      March
      1, 2007, the Company issued a warrant to purchase 13,333,333 shares of the
      common stock to certain investors represented by TAG Virgin Islands, Inc. The
      warrant is exercisable at a price of $0.33 per share (subject to adjustment)
      and
      exercisable for a period of five years. Pursuant to a Registration Rights
      Agreement, the Company agreed to file a registration statement covering the
      shares of common stock underlying the TAG Note and the warrant. Such
      registration rights are more fully set forth in the Registration Rights
      Agreement.   The TAG Note was subsequently amended in March 2007 to $4.25
      million and the number of shares of common stock that the TAG Note will convert
      into was increased to 14,166,667 shares of common stock. Additionally, the
      warrant was also amended to entitle the investor to purchase 14,166,667 shares
      of our common stock, exercisable at a price of $0.33 per share (subject to
      adjustment), and is exercisable for a period of five years.





On
      April
      27, 2007, The Company issued a warrant to purchase 833,333 shares of common
      stock to certain investors represented by TAG Virgin Islands, Inc. The warrant
      is exercisable at a price of $0.33 per share (subject to adjustment), and is
      exercisable for a period of five years.





On
      June
      6, 2007, the Company issued a warrant to purchase 833,333 shares of common
      stock
      to certain investors represented by TAG Virgin Islands, Inc. The warrant is
      exercisable at a price of $0.33 per share (subject to adjustment), and is
      exercisable for a period of five years.





On
      June
      27, 2007, the Company issued warrants to purchase 1,333,333 shares of common
      stock to certain investors represented by TAG Virgin Islands, Inc. The warrants
      are exercisable at a price of $0.33 per share (subject to adjustment), and
      are
      exercisable for a period of five years.





On
      August
      24, 2007, the Company granted a warrant to purchase 550,000 shares of the
      Company's common stock to an investor represented by TAG Virgin Islands, Inc.
      The warrant is exercisable at a price of $0.22 per share (subject to
      adjustment). The warrant is exercisable for a period of five years.





On
      September 4, 2007, the Company granted warrants to purchase 1,140,000 shares
      of
      the Company's common stock to certain investors represented by TAG Virgin
      Islands, Inc. The warrants are exercisable at a price of $0.22 per share
      (subject to adjustment) and are exercisable for a period of five years.





Between
      October 19, 2007 and December 31, 2007, the Company issued 30,407,144 warrants
      to certain investors represented by TAG Virgin Islands, Inc., as agent for
      the
      purchasers (the “Purchasers”), in connection with a financing
      transaction. **** 1,875,000
      of these warrants are exercisable at a price of $0.22 per share (subject to
      adjustment), 18,300,004 of these warrants are exercisable at a price of $0.165
      per share (subject to adjustment), 7,375,000 of these warrants are exercisable
      at a price of $0.175 per share (subject to adjustment) and 2,857,140 of these
      warrants are exercisable at a price of $0.154 per share. The warrants are
      exercisable for a period of five years.





On
      December 17, 2007, the Company granted a warrant to purchase 198,630 shares
      of
      the Company’s common stock to an investor represented by TAG Virgin Islands,
      Inc. the warrant is exercisable at a price of $0.20 per share (subject to
      adjustment). The warrant is exercisable for a period of five years.





Between
      March and December 2007, pursuant to a settlement agreement executed between
      the
      Company and Sands Brothers Venture Capital LLC, Sands Brothers Venture Capital
      III LLC and Sands Brothers Venture Capital IV LLC (collectively, “Sands”), the
      Company issued warrants to purchase a total of 1,082,758 shares of Company
      Common Stock. The warrants to purchase Company Common Stock were issued in
      three
      tranches as follows: 263,512 shares, 541,379 shares and 277,867 shares with
      exercise prices of $0.34 per share, $0.50 per share and $0.22 per share,
      respectively. The warrants are exercisable for a period of three
      years.


92





**Note
      17 - Stock Based Compensation**





The
      2003
      Incentive Plan (“2003 Plan”) authorizes the issuance of up to 20,000,000 shares
      of common stock for issuance upon exercise of options. It also authorizes the
      issuance of stock appreciation rights. The options granted may be a combination
      of both incentive and nonstatutory options, generally vest over a three year
      period from the date of grant, and expire ten years from the date of
      grant.





To
      the
      extent that CSI derives a tax benefit from options exercised by employees,
      such
      benefit will be credited to additional paid-in capital when realized on the
      Company’s income tax return. There were no tax benefits realized by the Company
      during 2006 or 2007.





The
      following summarizes the stock option transactions under the 2003 Plan during
      2007:





Shares
            
            Weighted average
              exercise priceOptions
                outstanding at December 31, 2006
            
            
            6,836,115
            
            $
            0.82Options
                granted
            
            
            500,000
            
            
            0.30Options
                exercised
            
            
            -
            
            
            -Options
                canceled
            
            
            (1,447,287
            )
            
            0.91Options
                outstanding at December 31, 2007
            
            
            5,888,828
            
            $
            0.75




The
      following table summarizes information concerning outstanding and exercisable
      Company common stock options at December 31, 2007:





Range
                of exercise prices
            
            Options
                outstanding
            
            Weighted
              average
              exercise price
            
            Weighted
                average remaining contractual life
            
            Options
                exercisable
            
            Weighted
              average
              exercise price$0.250
            
            
            2,033,332
            
            $
            0.250
            
            
            8.8
            
            
            693,314
            
            $
            0.250$0.30-0.70
            
            
            1,755,000
            
            $
            0.438
            
            
            8.5
            
            
            1,153,333
            
            $
            0.474$0.825-0.830
            
            
            1,394,499
            
            
            0.830
            
            
            7.0
            
            
            1,020,650
            
            
            0.830$2.475-3.45
            
            
            705,997
            
            
            2.786
            
            
            6.3
            
            
            705,997
            
            
            2.7865,888,828
            
            
            
            
            
            
            
            
            3,573,294




**Note
      18 - Loss Per Share**




Basic
      loss per share is computed on the basis of the weighted average number of common
      shares outstanding. Diluted loss per share is computed on the basis of the
      weighted average number of common shares outstanding plus the effect of
      outstanding stock options using the “treasury stock” method.





93




Basic
      and
      diluted loss per share were determined as follows:




For
                the years ended December 31,2007
            
            2006Loss
                from continuing operations (A)
            
            $
            (10,211,316
            )
            $
            (11,661,778
            )Income
                from discontinued operations (B)
            
            $
            -
            
            $
            2,050,000Net
                loss (C)
            
            $
            (10,211,316
            )
            $
            (9,611,778
            )Net
                loss attributable to common stockholders
            
            $
            (10,958,603
            )
            $
            (10,204,128
            )Weighted
                average common shares used to compute income (loss) per common share
                (D)
            
            
            67,541,607
            
            
            51,792,504Basic
                and diluted income (loss) per common share:From
                continuing operations (A/D)
            
            $
            (0.15
            )
            $
            (0.23
            )From
                discontinued operations (B/D)
            
            $
            -
            
            $
            0.04Net
                loss per common share (C/D)
            
            $
            (0.15
            )
            $
            (0.19
            )Net
                loss attributable to common stockholders
            
            $
            (0.16
            )
            $
            (0.20
            )




For
      the
      years ended December 31, 2007 and 2006, 5,888,828 shares and 6,836,115 shares,
      respectively, attributable to outstanding stock options were excluded from
      the
      calculation of diluted loss per share because the effect was antidilutive.
      Additionally, the effect of 5,508,248 warrants which were issued in 2006 and
      50,563,053 warrants which were issued in 2007 were excluded from the calculation
      of diluted loss per share for the years ended December 31, 2007 and 2006, as
      appropriate, because the effect was antidilutive. Also excluded from the
      calculation of loss per share because their effect was antidilutive were
      1,047,619 shares of common stock underlying the $1,650,000 convertible line
      of
      credit note to Taurus, 7,800,000 shares underlying the Series A and Series
      B
      convertible preferred stock, and an option to purchase 36,596 shares of common
      stock which was issued to Laurus in 2006.




**Note
      19 - Major Customers**





During
      2007, the Company had sales to two major customers, Bank of America (17.4%)
      and
      ING (10.5%), which totaled approximately $5,747,000. Amounts due from these
      customers included in accounts receivable were approximately $1,087,000 at
      December 31, 2007. Bank of America and ING accounted for approximately 14.2%
      and
      17.8% of the Company’s accounts receivable balance, respectively.





During
      2006, the Company had sales to three major customers, Bank of America (25.2%)
      Comsys (9.7%), and LEC, a related party (9.7%), which totaled approximately
      $11,442,000. Amounts due from these customers included in accounts receivable
      were approximately $1,790,000 at December 31, 2006. Bank of America, Comsys,
      and
      LEC accounted for approximately 30.0%, 4.2%, and 7.5% of the Company’s accounts
      receivable balance, respectively.





**Note
      20 - Employee Benefit Plan**





The
      Company has a defined contribution profit sharing plan under Section 401(k)
      of
      the Internal Revenue Code that covers substantially all employees. Eligible
      employees may contribute on a tax deferred basis a percentage of compensation
      up
      to the maximum allowable amount. Although the plan does not require a matching
      contribution by the Company, the Company may make a contribution. The Company’s
      contributions to the plan for the years ended December 31, 2007 and 2006 were
      approximately $72,000 and $97,000, respectively.





**Note
      21 - Commitments and Contingencies**





***Legal
      Proceedings***





In
      July
      2005, in conjunction with the acquisition of ISI, the Company issued a
      subordinated promissory note in the principal amount of $165,000 payable to
      Adam
      Hock and Larry Hock (the “Hocks”), the former principal stockholders of ISI.
      This note, along with $35,000 cash, was to be held in escrow for 15 months.
      This
      note matured on October 28, 2006. Pursuant to the indemnification provisions
      of
      the merger agreement among the Company and the Hocks, the $200,000 was to be
      held in escrow to cover any liabilities by any failure of any representation
      or
      warranty of ISI or the Hocks to be true and correct at or before the closing,
      and any act, omission or conduct of ISI and the Hocks prior to the closing,
      whether asserted or claimed prior to, or at or after, the closing. After the
      note matured, the Hocks requested the entire $200,000 from the Company, while
      the Company, after offsetting certain undisclosed liabilities, responded that
      the entire amount owed is significantly less. The Hocks then filed a lawsuit
      in
      the State of Florida on December 22, 2006 for recovery of the entire $200,000.
      On March 1, 2007, a circuit court in Hillsborough County, Florida denied the
      Company’s motion to dismiss the lawsuit for lack of jurisdiction without
      explanation to its ruling. A settlement of this dispute was reached in November
      2007 which requires the Company to pay to the Hock’s a total of $115,000 to be
      made to the Hock’s beginning with an initial payment of $15,000 and then twelve
      equal monthly installments in the amount of $8,333, ending in November
      2008.


94




In
      March
      2007, CSI commenced an action in the Superior Court of New Jersey, Morris County
      Chancery Division, for breach of contract, unfair competition, misappropriation
      of trade secrets and related claims against two former CSI employees and their
      start-up business.  In the spring of 2007, the court granted CSI’s request
      for a temporary restraining order based upon violation of a restrictive
      covenant.  The lawsuit is presently in the discovery phase, and CSI intends
      to litigate its claims aggressively in order to preserve its business from
      unfair competition and its confidential information from misappropriation.
      The
      defendants to the lawsuit have filed in response a counterclaim against CSI
      alleging tortious interference with economic advantage, abuse of process and
      breach of contract.  Although CSI is unable to predict the outcome of this
      litigation matter, management has been advised that based upon the discovery
      exchanged to date, the likelihood of a materially adverse outcome on the
      counterclaim against the Company is remote.





***Employment
      Agreements***  ****





Scott
      Newman, our President and Chief Executive Officer, agreed to a five-year
      employment agreement dated as of March 26, 2004. The agreement provides for
      an
      annual salary to Mr. Newman of $500,000 and an annual bonus to be awarded by
      the
      Compensation Committee. The agreement also provides for health, life and
      disability insurance, as well as a monthly car allowance. In the event that
      Mr.
      Newman’s employment is terminated other than with good cause, he will receive a
      lump sum payment of 2.99 times his base salary. Effective August 6, 2007, the
      Company and Scott Newman, the Company’s Chairman, President, and Chief Executive
      Officer, executed an amendment to Mr. Newman’s employment agreement dated March
      26, 2004. Under the original employment agreement, Mr. Newman was entitled
      to
      receive an annual salary of $500,000. This amendment reduces Mr. Newman’s annual
      salary to $375,000 per year. All other provisions in the employment agreement
      remain in full force and effect.





Glenn
      Peipert, Executive Vice President and Chief Operating Officer, agreed to a
      five-year employment agreement dated as of March 26, 2004. The agreement
      provides for an annual salary to Mr. Peipert of $375,000 and an annual bonus
      to
      be awarded by the Compensation Committee. The agreement also provides for
      health, life and disability insurance, as well as a monthly car allowance.
      In
      the event that Mr. Peipert’s employment is terminated other than with good
      cause, he will receive a lump sum payment of 2.99 times his base salary.
      Effective August 6, 2007, the Company and Glenn Peipert, the Company’s Executive
      Vice President and Chief Operating Officer, executed an amendment to Mr.
      Peipert’s employment agreement dated March 26, 2004. Under the original
      employment agreement, Mr. Peipert was entitled to receive an annual salary
      of
      $375,000. This amendment reduces Mr. Peipert’s annual salary to $315,000 per
      year. All other provisions in the employment agreement remain in full force
      and
      effect.





William
      McKnight, Senior Vice President - Information Management, agreed to a three-year
      employment agreement dated as of July 22, 2005. The agreement provides for
      an
      annual salary to Mr. McKnight of $250,000 and an annual bonus to be awarded
      by
      the Compensation Committee. The agreement also provides for health, life and
      disability insurance. In the event that Mr. McKnight’s employment is terminated
      other than with good cause, he will receive a lump sum payment of the longer
      of
      (1) one year's base salary or (2) the period from the date of termination
      through the expiration date.


95





William
      Hendry, Vice President and Chief Financial Officer, agreed to a three-year
      employment agreement dated as of October 15, 2007. The agreement provides for
      an
      annual salary to Mr. Hendry of $200,000 per year and an annual bonus, to be
      determined by the Company’s Board of Directors. The agreement also provides for
      health, life and disability insurance. In the event that Mr. Hendry’s employment
      is terminated other than with good cause, he will receive severance equal to
      his
      salary and the cost of any company sponsored insurance policy for twelve months.
      If Mr. Hendry is terminated without Good Cause as a result of a change in
      control of the Company, as defined in the Agreement, then in addition to the
      Severance Pay and the cost of any company sponsored insurance policy for twelve
      months, all unvested stock options and/or restricted shares owned by Mr. Hendry
      shall vest immediately. In the event Mr. Hendry is terminated for Good Cause,
      as
      defined in the Agreement, Mr. Hendry shall be paid salary earned and expenses
      reimbursable through the termination date, and receive health benefits for
      twelve months thereafter.




*Lease
      Commitments*





The
      Company's corporate headquarters are located at 100 Eagle Rock Avenue, East
      Hanover, New Jersey 07936, where it operates under an amended lease agreement
      expiring December 31, 2010.  Monthly rent with respect to our East Hanover,
      New Jersey facility is $26,290. In addition to minimum rentals, the Company
      is liable for its proportionate share of real estate taxes and operating
      expenses, as defined.  DeLeeuw Associates, Inc. has an office at Suite
      1460, Charlotte Plaza, 201 South College Street, Charlotte, North Carolina
      28244.  DeLeeuw leases this space which had an original expiration date of
      December 31, 2005, but has been extended until December 31, 2010.  Monthly
      rent with respect to our Charlotte, North Carolina facility is
      $2,382.





Rent
      expense, including automobile rentals, totaled approximately $307,000 and
      $489,000 in 2007 and 2006, respectively.





Future
      minimum lease payments due under all operating lease agreements as of December
      31, 2007 are as follows:





Years
                Ending December 31
            
            Office
            
            Subleases
            
            Net2008
            
            $
            366,534
            
            $
            107,310
            
            $
            259,2242009
            
            
            355,931
            
            
            107,310
            
            
            248,6212010
            
            
            373,821
            
            
            143,080
            
            
            230,7412011
            
            
            -
            
            
            -
            
            
            -Thereafter
            
            
            -
            
            
            -
            
            
            -$
            1,096,286
            
            $
            357,700
            
            $
            738,586




**Note
      22 – Related
      Party Transactions**





In
      November 2003, the Company executed an Independent Contractor Agreement with
      LEC, whereby the Company agreed to be a subcontractor for LEC, and to provide
      consultants as required to LEC. In return for these services, the Company
      receives a fee from LEC based on the hourly rates established for consultants
      subcontracted to LEC. In May 2004, the Company acquired 49% of all issued and
      outstanding shares of common stock of LEC. For the years ended December 31,
      2007
      and 2006, the Company invoiced LEC $1,881,803 and $2,478,342, respectively,
      for
      the services of consultants subcontracted to LEC by the Company. As of December
      31, 2007 and 2006, the Company had accounts receivable due from LEC of
      approximately $316,000 and $330,000, respectively. There are no known collection
      problems with respect to LEC. The majority of their billing is derived from
      Fortune 1000 clients. The collection process is slow as these clients require
      separate approval on their own internal systems, which extends the payment
      cycle.


96





As
      of
      December 31, 2007 and 2006, Mr. Newman’s outstanding loan balance to the Company
      was zero, and Mr. Peipert’s outstanding loan balance to the Company was $107,000
      and $111,000, respectively. The unsecured loans by Mr. Newman and Mr. Peipert
      each accrue interest at a simple rate of 8% per annum, and each had a term
      expiring on April 30, 2007, and are currently due on demand.




**Note
      23 –
      Regulatory Agency Communications**





On
      June
      29, 2006, we received a letter from the American Stock Exchange (the “AMEX”)
      indicating that we are below certain of the AMEX’s continued listing standards
      as set forth in Sections 1003(a)(i), 1003(a)(ii) and 1003(a)(iv) of the AMEX
      Company Guide. We were afforded the opportunity to submit a plan of compliance
      to the AMEX by July 31, 2006 that demonstrates our ability to regain compliance
      with Section 1003 of the AMEX Company Guide within 18 months. We submitted
      our
      plan to the AMEX on July 31, 2006, and the AMEX accepted our plan on September
      26, 2006. We were granted an extension until December 28, 2007 to regain
      compliance with the continued listing standards. We are subject to periodic
      review by the AMEX Staff during the extension period. Failure to make progress
      consistent with the plan or to regain compliance with the continued listing
      standards by the end of the extension period could result in the Company being
      delisted from the AMEX.





On
      January 29, 2007, the Company announced that it received notice from the Staff
      of the American Stock Exchange indicating that the Company no longer complied
      with the Exchange's continued listing standards due to the Company's inability
      to maintain compliance with certain AMEX continued listing requirements, as
      set
      forth in Sections 1003(a)(i), 1003(a)(ii) and 1003(a)(iv) of the AMEX Company
      Guide and its plan of compliance submitted in July 2006, and that its securities
      are subject to be delisted from the Exchange.




In
      April
      2007, the Company announced that it had been notified by the Hearings Department
      of the AMEX that the Company’s hearing had been cancelled. The Hearings
      Department indicated that the AMEX Listing Qualifications Staff recommended
      cancellation of the Company’s hearing after a review of the Company’s submission
      dated April 11, 2007, and other publicly available information. As a result,
      the
      Company will continue to be monitored by AMEX on a quarterly basis, however,
      is
      not currently subject to delisting proceedings.





**Note
      24 – Quarterly Information (unaudited)**





The
      following tables contain selected quarterly financial data for the fiscal years
      2007 and 2006. Our Evoke Software Corporation subsidiary (“Evoke”) was sold in
      July 2005 and, subsequent to that date, we accounted for Evoke as a discontinued
      operation. As a result, the operating results of this business have been
      segregated from continuing operations in our financial statements and in these
      tables.




For
                the three months ended:March
                31,
            
            June
                30,
            
            September
                30,
            
            December
                31,2007
            
            2007
            
            2007
            
            2007Revenue
            
            $
            5,647,938
            
            $
            5,412,932
            
            $
            5,457,475
            
            $
            4,947,992Gross
                profit
            
            
            1,174,241
            
            
            1,301,320
            
            
            1,454,781
            
            
            1,282,004Loss
                from operations
            
            
            (1,388,292
            )
            
            (1,368,626
            )
            
            (595,083
            )
            
            (388,001
            )Loss
                from continuing operations
            
            
            (2,650,303
            )
            
            (3,974,529
            )
            
            (793,046
            )
            
            (2,793,438
            )Income
                from discontinued operations
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                loss
            
            
            (2,650,303
            )
            
            (3,974,529
            )
            
            (793,046
            )
            
            (2,793,438
            )Net
                loss attributable to common stockholders
            
            $
            (2,865,187
            )
            $
            (4,191,440
            )
            $
            (958,426
            )
            $
            (2,943,550
            )Basic
                and diluted loss per common share from continuing
                operations
            
            $
            (0.05
            )
            $
            (0.07
            )
            $
            (0.01
            )
            $
            (0.03
            )Basic
                and diluted income per common share from discontinued
                operations
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Basic
                and diluted loss per common share
            
            $
            (0.05
            )
            $
            (0.07
            )
            $
            (0.01
            )
            $
            (0.03
            )Basic
                and diluted loss per common share attributable to common
                stockholders
            
            $
            (0.05
            )
            $
            (0.07
            )
            $
            (0.01
            )
            $
            (0.04
            )Weighted
                average common shares used to compute income (loss) per common
                share:Basic
                and diluted
            
            
            56,600,982
            
            
            58,567,995
            
            
            73,796,475
            
            
            80,702,551




97




For
                the three months ended:March
                  31,
            
            
            June
                30,
            
            
            September 30,
            
            
            December 31,2006
            
            
            2006
            
            
            2006
            
            
            2006Revenue
            
            $
            6,839,882
            
            $
            6,635,443
            
            $
            6,067,143
            
            $
            6,131,589Gross
                profit
            
            
            1,443,928
            
            
            1,596,269
            
            
            1,146,863
            
            
            1,556,063Loss
                from operations
            
            
            (1,437,073
            )
            
            (1,205,023
            )
            
            (2,020,690
            )
            
            (1,269,333
            )Income
                (loss) from continuing operations
            
            
            (6,876,198
            )
            
            (1,403,592
            )
            
            (1,902,487
            )
            
            (1,479,501
            )Income
                (loss) from discontinued operations
            
            
            2,050,000
            
            
            -
            
            
            -
            
            
            -Net
                income (loss)
            
            
            (4,826,198
            )
            
            (1,403,592
            )
            
            (1,902,487
            )
            
            (1,479,501
            )Net
                income (loss) attributable to common stockholders
            
            $
            (4,905,364
            )
            $
            (1,522,342
            )
            $
            (2,079,502
            )
            
            (1,696,920
            )Basic
                and diluted loss per common share from continuing
                operations
            
            $
            (0.13
            )
            $
            (0.03
            )
            $
            (0.04
            )
            $
            (0.03
            )Basic
                and diluted income per common share from discontinued
                operations
            
            $
            0.04
            
            $
            -
            
            $
            -
            
            $
            -Basic
                and diluted loss per common share
            
            $
            (0.09
            )
            $
            (0.03
            )
            $
            (0.04
            )
            $
            (0.03
            )Basic
                and diluted loss per common share attributable to common
                stockholders
            
            $
            (0.09
            )
            $
            (0.03
            )
            $
            (0.04
            )
            $
            (0.04
            )Weighted
                average common shares used to compute income (loss) per common
                share:Basic
                and diluted
            
            
            51,658,897
            
            
            49,988,634
            
            
            51,921,996
            
            
            53,577,979




**Note
      25 - Subsequent Events**





The
      Company’s line of credit with Laurus Master Fund, Ltd. expired on December 31,
      2007 and, in exchange for a $25,000 fee, the maturity date was extended until
      March 31, 2008.





The
      Company executed a replacement revolving line of credit agreement in March
      2008
      with Access Capital, Inc. The Access Capital line of credit provides for
      borrowing up to a maximum of $3,500,000, based upon collateral availability,
      a
      90% advance rate against eligible accounts receivable, has a three year term,
      and an interest rate of prime (which was 5.25% as of March 26, 2008) plus 2.75%.
      The Company must comply with a minimum working capital covenant which requires
      the Company to maintain minimum monthly working capital of $400,000.
      Additionally, during the first year of the three year term the Company must
      maintain an average minimum monthly borrowing of $2,000,000 which increases
      the
      $2,250,000 in the second year and to $2,500,000 in the third year. The Company
      must also pay an annual facility fee equal to 1% of the maximum available under
      the facility and a $1,250 per month collateral management fee. Further debt
      incurred by the Company may need to be subordinated to Access Capital,
      Inc.





In
      March
      2008, the Company’s Board of Directors approved a 10,000,000 share reduction in
      the number of shares reserved under the 2003 Incentive Plan. Previously,
      20,000,000 of the Company’s authorized shares were reserved for issuance under
      the 2003 Incentive Plan. This has been revised to 10,000,000 shares. The
      10,000,000 shares have been reallocated to the general pool of authorized but
      unissued shares.





In
      March
      2008, Company’s Board of Directors approved a 100,000,000 share increase in the
      number of authorized shares from the current 200,000,000 up to 300,000,000.
      The
      increase in authorized shares will not be effective until such time as
      shareholder approval is obtained.





In
      March
      2008, the Company and TAG Virgin Islands, Inc. executed a Note Conversion
      Agreement whereby certain investors represented by TAG Virgin Islands, Inc.
      converted $600,000 of debt due to them under an Unsecured Convertible Line
      of
      Credit Note dated June 7, 2004 in Company Common Stock. The Company issued
      4,615,385 shares of Common Stock to the investors. The number of shares of
      common stock acquired was based on the $0.13 closing price of the Company’s
      stock on the American Stock Exchange on the date of conversion. Warrants to
      purchase 4,615,385 shares of Company Common Stock were provided to the investors
      as an inducement to convert. The warrants are exercisable at a price of $0.143
      per share, and are exercisable for five years.





Using
      the
      Black-Scholes option pricing model, the Company calculated the relative fair
      value of the warrants to purchase 4,615,385 shares of Company common stock
      to be
      approximately $553,846. This relative fair value will be recorded as a charge
      to
      the loss on extinguishment of debt and an addition to additional paid-in
      capital. The assumptions used in the relative fair value calculation are as
      follows: Company closing stock price on March 26, 2008 of $0.13 per share;
      exercise price of the warrants of $0.143 per share; five year term; volatility
      of 158.6%; annual rate of dividends of 0%; and a risk free interest rate of
      1.35%.


98




**SIGNATURES**





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





Dated:
      March 31, 2008


/s/
                Scott NewmanScott
                NewmanPresident,
                Chief Executive Officer and Chairman




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




Signature
            
            Title
            
            Date/s/
                Scott Newman
              Scott
                Newman
            
            President,
                Chief Executive Officer and Chairman
            
            March
                31, 2008/s/
                William Hendry
              William
                Hendry
            
            Vice
                President, Chief Financial Officer, Secretary and
                Treasurer
            
            March
                31, 2008/s/
                Glenn Peipert
              Glenn
                Peipert
            
            Executive
                Vice President, Chief Operating Officer and Director
            
            March
                31, 2008/s/
                Lawrence K. Reisman
              Lawrence
                K. Reisman
            
            Director
            
            March
                31, 2008/s/
                Thomas Pear
              Thomas
                Pear
            
            Director
            
            March
                31, 2008/s/
                Frederick Lester
              Frederick
                Lester
            
            Director
            
            March
                31, 2008




99