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, 2008




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:





None





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





Title
of Each Class


Common
Stock, $.001 par value




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
Act. 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  xNO  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 filer o
            Accelerated filer o
            Non-accelerated filer o
            Smaller reporting
              company ý




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 $6,113,328 as of June
30, 2008 (based on the closing price for such stock as of June 30,
2008).





As of
March 25, 2009, there were 119,827,573 shares of common stock, par value $0.001
per share, of the registrant outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





None





TABLE OF
CONTENTS





PART
      IItem
      1.
                Business
                
                3Item
      1A.
                Risk
      Factors
                
                14Item
      1B.
                Unresolved
      Staff Comments
                
                27Item
      2.
                Properties
                
                27Item
      3.
                Legal
      Proceedings
                
                27Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                
                27PART
      IIItem
      5.
                Market
      For Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                
                27Item
      6.
                Selected
      Financial Data
                
                28Item
      7.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                28Item 7A.
                Quantitative
      and Qualitative Disclosures About Market Risk
                
                42Item
      8.
                Financial
      Statements and Supplementary Data
                
                42Item
      9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                
                42Item 9A.
                Controls
      and Procedures
                
                42Item 9B.
                Other
      Information
                
                44PART
      IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance
                
                45Item
      11.
                Executive
      Compensation
                
                49Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                
                52Item
      13.
                Certain
      Relationships and Related Transactions
                
                53Item
      14.
                Principal
      Accounting Fees and Services
                
                54PART
      IVItem
      15.
                Exhibits
      and Financial Statement Schedules
                
                55


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; and





·
            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;





·
            continue growth both organically
      and via acquisition;




3




·
            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.”  We voluntarily withdrew trading of
our common stock from AMEX effective September 8, 2008, and begun trading on the
Over-the-Counter Bulletin Board on that day under the symbol
“CVNS.”





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.


4





Business
      and Process Consulting





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




·
            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.





Strategic
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.





·
            Information Management Strategy
      & Roadmap – Helping clients develop a roadmap to leverage and
      integrate enterprise information. The solution can support a business
      intelligence/data warehouse solution, rationalization of a complex
      environment, sunsetting of old applications and migration to new
      applications.





·
            Information Management 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.





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.


5





·
            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.





·
            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.


6





·
            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.





·
            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.





·
            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.





·
            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,
2008:





TAG Virgin Islands,
Inc.





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 into 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.


7


As of
June 30, 2008, the Company and TAG Virgin Islands, Inc. executed a Stock
Purchase Agreement whereby an investor represented by TAG Virgin Islands, Inc.
purchased 2,500,000 shares of Company common stock at a purchase price of $0.08
per share, for a total investment of $200,000. The Company also issued a warrant
to purchase 2,500,000 shares of Company common stock to the investor. The
warrant is exercisable at a price of $0.09 per share, and is exercisable for
five years.





On July
28, 2008, the Company issued 10% Convertible Unsecured Notes (the “Notes”) to
certain investors represented by TAG Virgin Islands, Inc. for $200,000. These
notes were due on December 27, 2008 and are convertible into 2,500,000 shares of
common stock at the option of the holders. The investors were also granted
warrants to purchase 2,500,000 shares of Company common stock, exercisable at a
price of $0.088 per share (subject to adjustment), and are exercisable for a
period of five years. The maturity dates of the Notes have been extended to
April 30, 2009.





On
September 2, 2008, the Company issued a 10% Convertible Unsecured Note (the
“Note”) to certain investors represented by TAG Virgin Islands, Inc. for
$200,000. This note was due on March 1, 2009 and is convertible into 2,500,000
shares of common stock at the option of the holders. The investors were also
granted warrants to purchase 2,500,000 shares of Company common stock,
exercisable at a price of $0.088 per share (subject to adjustment), and are
exercisable for a period of five years. In March 2009, the maturity date of this
Note was extended to September 1, 2009.





On
October 2, 2008, the Company issued a 10% Convertible Unsecured Note (the
“Note”) to certain investors represented by TAG Virgin Islands, Inc. for
$50,000. This note is due on April 1, 2009 and is convertible into 1,000,000
shares of common stock at the option of the holders. The investors were also
granted warrants to purchase 1,000,000 shares of Company common stock,
exercisable at a price of $0.055 per share (subject to adjustment), and are
exercisable for a period of five years.





The
securities discussed above were offered and sold in reliance upon exemptions
from the registration requirements of Section 5 of the Securities Act of 1933,
as amended (the “Act”), pursuant to Section 4(2) of the Act and Rule 506
promulgated thereunder. Such securities were sold exclusively to accredited
investors as defined by Rule 501(a) under the Act.





Access Capital,
Inc.





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 3.25% as of December 31, 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 $1,750 per month collateral management fee. As of December
31, 2008, the Company was in default of the Loan and Security Agreement. As a
result of the default, Access has increased the interest rate payable on
borrowings under the line of credit to 18% per annum, has notified the Company’s
clients of their security interest in the amounts due to the Company, and has
provided instruction that payments are to be made directly to Access Capital.
See Note 6 of the Notes to Consolidated Financial Statements for remedies
available upon a default.


8


Clients





For 19
years, we have helped our clients develop strategies and implement technology
solutions to help them leverage corporate information.





Our
clients are primarily in the financial services, pharmaceutical, healthcare and
telecommunications industries and are primarily located in the northeastern
United States. During the year ended December 31, 2008, two of our clients, Bank
of America (20.3%) and LEC, a related party (11.9%), accounted collectively for
approximately 32.2% of total revenues.  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. 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 17 employees as of December 31, 2008. 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 2009 we plan to be speaking at, or attending,
      the following tradeshows and conferences: 2009 SAP Premier Event, Business
      Objects User Group, Business Objects Partner 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 2009, in addition to
      participating as guest presenters at partner and vendor sponsored web
      seminars.


9





·
            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 the iSix Sigma financial
      services channel. We intend to continue all our publishing activities,
      including blogs, by-line articles and expert web channels where our
      experts respond to end-user
questions.





·
            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,
      Business Objects and SAP 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 19 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:





Business
      Solutions Vendor:SAP
                          
                          We
      are now an SAP partner that will focus on SAP Business Warehouse, Business
      Planning and Consolidation, and other Business Modules within
      SAP.





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.


10





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.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 and business process optimization
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:


11





·
            Accenture





·
            Cap Gemini Ernst &
      Young





·
            IBM Global
      Services





·
            Fujitsu





·
            Bearing
    Point





·
            Answerthink





·
            Hitachi
      Consulting





·
            Hewlett
      Packard





Employees





As of
December 31, 2008, we had 48 outside consultants, 59 consultants on the payroll
and 31 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.


12





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 of Financial Condition and Results of
Operations.”  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.




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;


13





·
            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.





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, 2008, services provided to two of our clients, Bank
of America (20.3%) and LEC, a related party, (11.9 %) accounted for an aggregate
of approximately (32.2%) of total revenues. 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.
Further, the majority of our current assets consist of accounts receivable, and
as of December 31, 2008, receivables relating to Bank of America and LEC
accounted for 18.9% and 7.6% of our accounts receivable balance, respectively.
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.






The
Company has received a qualified audit opinion on its ability to continue as a
going concern.
 
 The audit
report our independent registered public accounting firm issued on our audited
financial statements for the fiscal year ended December 31, 2008 contains a
qualification regarding our ability to continue as a going concern. This
qualification indicates that the Company’s
recent losses, negative cash flows for operations, its net working capital
deficiency and its ability to pay its outstanding debt as they become due raises
substantial doubt on the part of our independent registered public accounting
firm that we can continue as a going concern. Such a qualified opinion from our
independent registered public accounting firm may limit our ability to access
certain types of financing, or may prevent us from obtaining financing on
acceptable terms.


14





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.





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.





Our
disclosure controls and procedures and internal controls over financial
reporting have been materially deficient.




Our
management, under the supervision and with the participation of our CEO and CFO,
has evaluated the effectiveness of our disclosure controls and procedures and
internal control over financial reporting as defined in Exchange Act Rules
13a-15(e) and (f) and15d-15(e) and (f) 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
disclosure controls and procedures and  internal control over
financial reporting is not effective as of December 31, 2008.





We
did not maintain effective financial reporting processes due to lack of
segregation of duties and deficiencies in general controls over information
security and user access.





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.





At
present, the Company’s ability to rectify the internal control weaknesses
relating to the segregation of duties and the general controls over information
technology security and user access is limited due to budgetary constraints. 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 reviewing possible improvements to
internal controls, and compensating controls, 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 result of these efforts. We cannot be certain that
any 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.


15





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, 2007 and 2008, we sustained operating losses and
cannot be sure that we will operate profitably in the future. During the fiscal
year ended December 31, 2008, we reported a net loss in the approximate amount
of $10.5 million. During the year ended December 31, 2007, we recorded a net
loss in the approximate amount of $10.2 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, 2008 was approximately $7.5 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;





·
            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 Access
Capital Inc. on many corporate actions including, but not limited to, mergers
and acquisitions—which is part of our ongoing business strategy.





Our failure to
maintain adequate working capital triggered an event of default under our line
of credit with Access Capital.





As of
April 2008, we failed to maintain $400,000 of working capital that is required
by the Loan and Security Agreement with Access Capital, which constitutes an
event of default.  In connection with the default, the Company and
Access entered into a Limited Waiver Agreement whereby Access Capital waived the
default, on the condition that (i) all debts owed to Access Capital bear an
interest rate of 18% per annum from May 1, 2008 until such time as we maintain
working capital of at least $400,000 and (ii) that we pay to Access a waiver fee
in the amount of $5,000.  Although Access Capital waived certain
rights and remedies in connection with this event of default, Access Capital may
not waive these rights in the future. As of December 31, 2008, the Company
remained in default with respect to the Access Capital Loan and Security
Agreement.


16





The
promissory note and related agreements delivered to Access Capital in connection
with the line of credit contain several events of default which
include:





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





·
            failure to maintain a minimum of
      $400,000 of working capital;





·
            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;





·
            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.




17





If we
default on the note again and Access Capital demands all amounts 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





·
            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.


18





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





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 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.




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.


19





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.





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.


20





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. Both Mr. Newman and
Mr. Peipert’s employment agreements terminated as of the close of business on
March 25, 2009. As of the date of this filing, while negotiations are ongoing,
the Company has not executed new employment agreements with either Mr. Newman or
Mr. Peipert. 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;





·
            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. 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.


21





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.




Our
management group and one major shareholder own, or control, 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, 2008, Scott Newman and Glenn Peipert, our executive officers and
two of our directors, beneficially own approximately 16.6% and 8.8%,
respectively, of our outstanding common stock. In addition, our largest
stockholder, TAG Virgin Islands, hold approximately 75.2% of our common stock.
Such percentages include options, warrants and convertible securities that are
exercisable into common stock within sixty (60) days. 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.


22





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.





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 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 plan 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.


23





A key
element of our 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


·
              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.





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.




Risks
Relating To Our Common Stock




Penny
stock regulations may impose certain restrictions on marketability of our common
stock.





The SEC
has adopted regulations which generally define a “penny stock” to be any equity
security that has amarket price of less
than $5.00 per share or anexercise price of less
than $5.00 per share, subject to certain exceptions. As a result, our common
stock is subject to rules that impose additional requirements on broker-dealers
who sell such securities to persons other than established customers and
accredited investors (generally those with net worth in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser’s written consent to the transaction prior to the
purchase.





Additionally,
for any transaction involving a penny stock, unless exempt, the rules require
the delivery, prior to the transaction, of a risk disclosure document relating
to the penny stock market. The broker-dealer must also disclose the commission
payable to both the broker-dealer and the registered representative, current
quotations for the securities and, if the broker-dealer is the sole market
maker, the broker-dealer must disclose this fact and the broker-dealer’s
presumed control over the market.


24





Finally,
monthly statements must be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks. Consequently, the “penny stock” rules may restrict the ability of
broker-dealers to sell our common stock and may affect the ability of investors
to sell our common stock  in the secondary market and the price at
which such purchasers can sell any such securities.




Stockholders
should be aware that, according to the Commission, the market for penny stocks
has suffered in recent years from patterns of fraud and abuse. Such patterns
include:




·
            Control of the market for the
      security by one or a few broker-dealers that are often related to the
      promoter or issuer;





·
            Manipulation of prices through
      prearranged matching of purchases and sales and false and misleading press
      releases;





·
            "Boiler room" practices involving
      high pressure sales tactics and unrealistic price projections by
      inexperienced sales persons;





·
            Excessive and undisclosed bid-ask
      differentials and markups by selling broker-dealers;
      and





·
            The wholesale dumping of the same
      securities by promoters and broker-dealers after prices have been
      manipulated to a desired level, along with the inevitable collapse of
      those prices with consequent investor
  losses.




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 Loan and Security Agreement
with Access Capital requires that we obtain their consent prior to paying any
dividends on our common stock.





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 has experienced extreme price and
volume downturns 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:




·
              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;
   25





·
            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 300,000,000 shares of our common stock.  As of March
25, 2009, there were 119,827,573 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 25, 2009, we had 6,666,667
shares of common stock underlying convertible notes.  As of March 25, 2009,
we had outstanding stock options and warrants to purchase approximately
79,469,283 shares of our common stock, the exercise prices of which range
between $0.001 and $5.25per 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 TAG Virgin
Islands, Inc. (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.





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.


26





ITEM
1B. UNRESOLVED STAFF COMMENTS





None.





ITEM 2. PROPERTIES




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.  Effective December 31, 2008, Deleeuw Associates merged with and
into CSI Sub Corp. (DE), a wholly owned subsidiary of the
Company.  The business owned by Deleeuw Associates is currently
operated by CSI Sub Corp (DE).





ITEM 3. LEGAL PROCEEDINGS




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. This lawsuit was settled amicably between the parties in January
2009.





On April
28, 2008, Milbank Roy & Co., LLC (“Milbank”) submitted a Demand for
Arbitration and Statement of Claim with the American Arbitration Association.
Through an agreement with Milbank, Milbank had a limited exclusive right to
obtain certain bridge financing and equity financing on behalf of the Company
during 2007 from certain potential investors that were identified on certain
schedules. Milbank alleged that it was owed a fee of $105,000 relating to the
Company’s completion of a revolving line of credit transaction with Access
Capital, Inc. in March 2008. In August 2008, this case was settled requiring the
Company to make a $10,000 payment to Milbank, Roy & Co., LLC.





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, 2008.





PART
II





ITEM
5.  MARKET FOR REGISTRANT’S 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, 2007 through December 31, 2008. Because we
voluntarily delisted from AMEX on September 8, 2008, all information after that
date reflect high and low bid prices on the OTCBB.


27





High
                
                
                Low2008
      by QuarterJanuary
      1 - March 31
                
                $
                0.22
                
                
                
                0.08April
      1 - June 30
                
                $
                0.15
                
                
                
                0.07July
      1 - September 30
                
                $
                0.12
                
                
                
                0.02October
      1 - December 31
                
                $
                0.07
                
                
                
                0.012007
      by QuarterJanuary
      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





On March
24, 2009, the closing price for shares of our common stock, as reported by the
Over-the-Counter Bulletin Board, was $0.02.





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.





(b) Record
Holders. As of March 24, 2009, there were 509 registered holders of our
common stock. As of March 25, 2009, there were 119,827,573 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 Loan and Security Agreement with Access Capital requires that we
obtain their consent prior to paying any dividends.




(d) Sales of
Unregistered Securities




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 OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





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.


28





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.





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. It is anticipated that this will result
in organic growth through the addition of new customers. In addition, this
foundation could be leveraged as the Company may pursue 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 may 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.





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


29





Years
Ended December 31, 2008 and 2007





The
Company’s revenues are primarily comprised of billing to clients for consulting
hours worked on client projects. Revenues of $19.7 million for the year ended
December 31, 2008 decreased by $1.8 million, or 8.0%, compared to revenues of
$21.5 million for the year ended December 31, 2007.





Revenues
for the Company are categorized by strategic consulting, business intelligence
and data warehousing, data management, reimbursable expenses and other. The
chart below reflects revenue by line of business for the years ended December
31, 2008 and 2007.





For the year ended December 31,2008
                
                
                2007$
                
                
                % of total
                  revenues
                
                
                $ (1)
                
                
                % of total
                  revenuesStrategic
      consulting
                
                $
                5,332,784
                
                
                
                27.0
                %
                
                $
                8,650,869
                
                
                
                40.3
                %Business
      intelligence and data warehousing
                
                
                11,076,398
                
                
                
                56.1
                %
                
                
                9,718,328
                
                
                
                45.3
                %Data
      management
                
                
                2,340,657
                
                
                
                11.9
                %
                
                
                1,881,803
                
                
                
                8.8
                %Reimbursable
      expenses
                
                
                719,956
                
                
                
                3.6
                %
                
                
                946,880
                
                
                
                4.4
                %Other
                
                
                273,791
                
                
                
                1.4
                %
                
                
                268,457
                
                
                
                1.2
                %$
                19,743,586
                
                
                
                100.0
                %
                
                $
                21,466,337
                
                
                
                100.0
                %





(1)
Certain amounts have been reclassified to conform to 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).





Strategic
consulting revenues of $5.3 million, or 27.0% of total revenues, for the year
ended December 31, 2008, decreased by $3.4 million, or 13.3% points of total
revenue, as compared to revenues of $8.7 million, or 40.3% of total revenues,
for the comparable prior year period. The $3.4 million decrease is primarily due
to a $2.1 million decline in revenues from ING due to the completion of the
project at the end of 2007 and a $1.7 million reduction in revenues derived from
our Integrated Strategies division 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 $0.4 million of revenues
derived from a new process re-engineering project and increased Bank of America
revenue during the current year.





Strategic
consulting revenues have been heavily concentrated in the financial services
sector, with the major customer being Bank of America. Given the deepening
recession and the downturn in the financial services sector during the fourth
quarter of 2008, strategic consulting revenues have been negatively affected
and, may continue to be negatively affected in the event this situation
continues.





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.


30





Business
intelligence and data warehousing (“BI/DW”) revenues of $11.1 million, or 56.1%
of total revenues, for the year ended December 31, 2008, increased by $1.4
million, or 10.8% points of total revenues, as compared to BI/DW revenues of
$9.7 million, or 45.3% of total revenues, for the comparable prior year period.
The increase in BI/DW revenues for the year ended December 31, 2008 is primarily
due to new 2008 projects which provided approximately $4.2 million of current
year revenue, partially offset by $2.5 million of 2007 projects which were
completed in the prior year. Overall, the Company experienced a 9.4% increase in
billable hours and a 6.6% increase in utilization in this line of business
during 2008 as compared to the prior year, while average headcount remained
unchanged. The remaining $0.3 million reduction in revenues relates to a
reduction in the volume of business transacted with ongoing clients in 2008 as
compared to 2007.





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, Leading Edge Communications (“LEC”).





Data
management revenues of $2.3 million, or 11.9% of total revenues, for the year
ended December 31, 2008, increased by $0.4 million, or 3.1% points, as compared
to data management revenues of $1.9 million, or 8.8% of total revenues, for the
comparable prior year period. This increase in current year revenue is primarily
due to $0.9 million of revenues related to a new client obtained in 2008,
partially offset by a $0.5 million reduction related to current clients as
compared to the prior year. Average headcount for consultants required by LEC
increased by 23.1% and average bill rates increased 30.1% in 2008 as compared to
2007.





Cost
of revenue





Cost of
revenue includes payroll and benefit and other direct costs for the Company’s
consultants. Cost of revenue was $14.8 million or 75.2% of total revenues for
the year ended December 31, 2008, decreased by $1.5 million, and also decreased
as a percent of total revenue by 0.7% points as compared to cost of revenue of
$16.3 million, or 75.7% of total revenues, for the comparable prior year
period.





Services





Cost of
services was $11.8 million, or 72.1% of services revenue, for the year ended
December 31, 2008, which decreased by $1.7 million, or 1.2% points, as compared
to cost of services of $13.5 million, or 73.3% of services revenue, for the year
ended December 31, 2007.This decline in cost of services is primarily due to a 10.7% reduction in
services revenue as compared to the prior year. The average number of
consultants on billing declined 15.7% in the current year as compared to the
prior year. The Company’s average billable consultant headcount in this services
category was 86 and 102 for the years ended December 31, 2008 and 2007,
respectively.





Related
Party Services





Cost of
related party services was $2.2 million, or 91.9% of related party services
revenue, for the year ended December 31, 2008, representing an increase of $0.5
million, but decreased by 1.1% points of related party services revenue, as
compared to $1.7 million, or 93.0%, of related party services revenue for the
year ended December 31, 2007.Cost of related party
services increased by $0.5 million in the current year primarily due to $0.8
million of costs associated with servicing a new client in 2008 that generated
$0.9 million of revenue for the Company. This increase was partially offset by a
reduction of approximately $0.3 million of costs relating to ongoing customers
that had a decline in current year business. Overall, the average number of
billable consultants utilized by LEC was 16 and 13 for the periods ended
December 31, 2008 and 2007, respectively, representing a 23.1% average increase
in consultants billable to LEC as compared to the prior year
period.


31





Gross
profit




Gross
profit of $4.9 million or 24.8% of total revenue for the year ended December 31,
2008, decreased by $0.3 million, but increased as a percentage of revenue by
0.5% points as compared to gross profit of $5.2 million or 24.3% of total
revenues for the comparable prior year period.





Services





Gross profit from services was $4.6
million, or 27.9% of services revenue, for the year ended December 31, 2008,
decreased by $0.3 million, but increased as a percentage of services revenue by
1.2% points, as compared to $4.9 million, or 26.7% of services revenue, for the
year ended December 31, 2007. 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 8.1% of related party
services revenue, for the year ended December 31, 2008, increased by $0.1
million, or 1.1% points, as compared to gross profit from related party services
of $0.1 million, or 7.0% of related party services revenue, for the year ended
December 31, 2007. 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 $3.3 million, or 16.5% of revenue for the year ended
December 31, 2008, increased by $0.1 million, or 1.4% points of total revenue,
as compared to $3.2 million, or 15.1% of total revenue, for the year ended
December 31, 2007. The $0.1 million increase in selling and marketing expense is
primarily due to a $0.1 million increase in stock compensation charges, and
various immaterial offsetting expense increases and reductions in multiple
expense categories.





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
$3.6 million or 18.2% of revenue for the year ended December 31, 2008, decreased
by $0.6 million or 1.2% points of total revenues as compared to $4.2 million, or
19.4% of total revenues for the year ended December 31, 2007. The $0.6 million
decrease in general and administrative expense is primarily due to a $0.5
million reduction in payroll expense due to a three person reduction in
headcount and salary reductions taken by two corporate officers during the
current period, a $0.2 million reduction in business licenses and taxes and a
$0.2 million reduction in investor relations, stock exchange listing fees, SEC
filing expenses, and rent expense. These expense reductions were partially
offset by a $0.2 million increase in bad debt expense and a $0.1 million
increase in legal and bank fees.


32





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. There was no lease impairment recorded
during the year ended December 31, 2008.




Goodwill
and intangibles impairment





During
the year ended December 31, 2008, the Company learned that the remaining
Integrated Strategies (“ISI”) consultants were to be ending their projects.
Additionally, the strategic consulting revenues related to the DeLeeuw
Associates business declined dramatically in 2008 due to the completion of the
ING project in December 2007, fewer new projects in 2008, and a reduced forecast
due to the general economic decline in the financial services sector. The Scosys
business was restructured during 2008 in an effort to reduce Company expenses.
William McKnight’s employment with the Company was terminated during 2008.
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. As a result of the above, the remaining $0.1
million of ISI goodwill was determined to be impaired, the entire $0.4 million
of Scosys goodwill was determined to be impaired, the $1.4 million of McKnight
goodwill was determined to be impaired, and the $5.0 million of DeLeeuw
Associates goodwill and intangible assets was determined to be impaired during
2008. In total, $6.9 million of goodwill and intangible assets were impaired
during 2008 and therefore written off.





During
the year 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. Due to the change in this
business, the Company recorded a goodwill impairment of $0.7 million during the
year ended December 31, 2007.




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 was 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
$0.3 million for the year ended December 31, 2008, decreasing by $0.3 million as
compared to $0.6 million for the year ended December 31, 2007. The $0.3 million
decrease in depreciation and amortization expense for the year ended December
31, 2008 is primarily due to the customer relationship intangible asset becoming
fully amortized in January 2008 and both the approved vendor status intangible
asset and the acquired contract intangible becoming fully amortized during 2007
and, therefore, requiring no amortization expense in 2008.


33





Other
income (expense)





The
Company reported a gain on financial instruments of $19,329 during 2007 as
compared to zero in 2008. All contracts that required the Company to account for
the financial instruments were extinguished in March 2007.





The loss
on extinguishment of debt of ($0.7 million) in 2008 related to accounting for
the conversion of notes payable to TAG Virgin Islands investors into Company
common stock. A loss on extinguishment of debt of ($2.5 million) in 2007 related
to accounting for the extinguishments of notes payable to Laurus, Sands, TAG
Virgin Islands investors and Adam and Larry Hock.




Interest
expense, net of $1.1 million for the year ended December 31, 2008 decreased by
$2.9 million, or 72.5%, from interest expense, net of $4.0 million for the year
ended December 31, 2007. The $2.9 million decrease in interest expense is
primarily due to a reduction of $2.4 million of 2007 charges related to the
relative fair value of warrants issued, a reduction of $0.3 million of interest
on notes payable due to the conversion of notes payable to common stock, a
reduction of $0.1 million related to 2007 charges for beneficial conversion
features included in convertible notes payable, a $0.1 million reduction in
amortization of debt discounts, and a reduction of $0.1 million of 2007 interest
paid to Sands Brothers due to the payoff of the notes. These interest expense
reductions were partially offset by $0.1 million of increased interest expense
related to the Access Capital line of credit as compared to the Laurus line of
credit outstanding in the prior year.





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 $15.9
million and $14.7 million during the years ended December 31, 2008 and 2007,
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, 2008, the Company had net operating loss carryfowards for Federal
and State income tax purposes of approximately $13.2 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 and 2008, which may place limitations on the current net loss
carryforwards.





LIQUIDITY
AND CAPITAL RESOURCES





The
Company has incurred net losses for the years ended December 31, 2004 through
2008, negative cash flows from operating activities for the years ended December
31, 2004 through 2008, and had an accumulated deficit of $71.7 million at
December 31, 2008. The Company has relied upon cash from its financing
activities to fund its ongoing operations as it has not been able to generate
sufficient cash from its operating activities in the past, and there is no
assurance that it will be able to do so in the future. Due to this history of
losses and operating cash consumption, we cannot predict how long we will
continue to incur further losses or whether we will become profitable again, or
if the Company’s business will improve. These factors raise substantial doubt as
to our ability to continue as a going concern. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.





As
of December 31, 2008, the Company had a cash balance of approximately $0.3
million, compared to $1.5 million at December 31, 2007, and a working capital
deficiency of $1.3 million. The
Company’s cash balance is primarily derived from customer remittances and bank
borrowings and is used for general working capital needs.


34


The
liquidity issues that have resulted from the Company’s history of losses have
been addressed in the past through the sale of Company common stock, preferred
stock and by entering into various debt instruments. During 2008, the Company
issued 10% Convertible Unsecured Notes and warrants to purchase Company common
stock in exchange for $450,000 cash. Additionally, the Company and TAG Virgin
Islands, Inc. executed a Stock Purchase Agreement whereby an investor
represented by TAG Virgin Islands, Inc. purchased 2,500,000 shares of Company
common stock for a total investment of $200,000. Refer to footnotes 7 and
11 of the Notes to Consolidated Financial Statements for further discussion on
the issuance of the 10% Convertible Unsecured Notes and the Common
Stock.
 
 The
Company executed a revolving line of credit agreement in March 2008 with Access
Capital, Inc. (“Access Capital” or “Access”). As of December 31, 2008, the
Company was in default of the Loan and Security Agreement. As a result of the
default, Access has increased the interest rate payable on borrowings under the
line of credit to 18% per annum, has notified the Company’s clients of their
security interest in the amounts due to the Company, and has provided
instruction that payments are to be made directly to Access Capital. Refer to
footnote 6 of the Notes to Consolidated Financial Statements for further
discussion on the Line of Credit.
 
 On June
7, 2004, the Company issued a five-year $2,000,000 Unsecured Convertible Line of
Credit Note. $950,000 of the original principal balance has previously been
converted to Company common stock and the remaining $1,050,000 balance which is
outstanding at December 31, 2008, matures on June 6, 2009. As of December 31,
2008, the Company does not have the ability to repay this note upon maturity.
Refer to footnote 7 of the Notes to Consolidated Financial Statements for
further discussion on the Short Term Note Payable.
 
 In August
2008, the Company notified the American Stock Exchange (“AMEX”) of its intent to
voluntarily delist trading of its common stock, par value $0.001 per share, from
AMEX. The Company’s last day of trading on AMEX was September 5, 2008. On
September 8, 2008, the Company’s common stock began trading on the Over the
Counter Bulletin Board under the symbol CVNS.OB.
 
 The
Company needs additional capital in order to survive. Additional capital will be
needed to fund current working capital requirements, ongoing debt service and to
repay the obligations that are maturing over the upcoming 12 month period. 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 control operating
expenses in order to reduce, or eliminate, the operating losses. Additionally,
we will continue to seek equity and/or debt financing in order to enable us to
continue to meet our financial obligations until we achieve profitability. There
can be no assurance that any such funding will be available to us on favorable
terms, or at all. Failure to obtain sufficient financing would have substantial
negative ramifications to the Company.
  The
Company’s working capital deficit of ($1.3 million) as of December 31, 2008
decreased by $2.8 million as compared to working capital of $1.5 millionas of December 31, 2007.
The Company’s working capital position has eroded during the current year
primarily due to a $1.4 million increase in short term notes payable of which
$1.0 million relates to a liability that was classified as long term in the
prior period but is currently short term and $0.4 million relates to short term
notes issued in 2008. Additionally, the liability under the Company’s line of
credit increased by $0.3 million, deferred revenue increased by $0.1 million and
accounts payable and accrued liabilities increased by $0.1 million. The
Company’s cash balance declined by $1.2 million during the period as a result of
the losses incurred by the Company. Partially offsetting these declines in
working capital was a $0.3 million increase in accounts receivable resulting
primarily from increased fourth quarter 2008 revenues.
  35
 
 Cash used
in operating activities during the year ended December 31, 2008 was $1.9
million, a reduction of $0.1 million from the cash used in operating activities
of $2.0 million for the year ended December 31, 2007. Cash used in operating
activities during the year ended December 31, 2008 primarily relates to a $1.8
million “cash-based” loss from operating activities, as determined by adding the
non-cash charges incurred of $8.7 million to the reported loss from continuing
operations of $10.5 million for the year ended December 31, 2008 and a $0.4
million increase in accounts receivable due primarily to increased revenues in
the fourth quarter of 2008, partially offset by a $0.1 million decrease in
prepaid expenses, a $0.1 million increase in accounts payable and accrued
expenses during the year and a $0.1 million increase in deferred revenues as
compared to the prior year.
 
 Cash used
in investing activities during 2008 of $32,194 relates to the purchase of
computer equipment for the Company’s employees. Cash provided by investing
activities of $31,757 during 2007 relates to a $50,000 payment received from the
sale of the Company’s equity investment in DeLeeuw International during 2007,
partially offset by $18,243 of costs to purchase computer
equipment.
 
 Cash
provided by financing activities was $0.8 million during the year ended December
31, 2008. During 2008, $0.2 million was raised from the sale of Company common
stock and $0.45 million from the issuance of short term notes payable.
Additionally, borrowings outstanding on the Company’s line of credit increased
by $0.3 million during the period. These increases were partially offset by $0.1
million of payments made for financing costs, principal payments on capital
lease obligations and principal payments on related party notes.
 
 The
Company has experienced continued losses that exceeded expectations from 2004
through 2008. 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 2008 and, as of December 31, 2008 had
approximately $5.5 million of liabilities outstanding in addition to an
aggregate of $3.9 million of Series A and Series B Convertible Preferred Stock
which was issued in 2006.
  Financing
transactions effectuated in 2008, and through March 30, 2009, are as
follows:
 
 Taurus Advisory Group / TAG
Virgin Islands, Inc.
 
 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.
 
 As of
June 30, 2008, the Company and TAG Virgin Islands, Inc. executed a Stock
Purchase Agreement whereby an investor represented by TAG Virgin Islands, Inc.
purchased 2,500,000 shares of Company common stock at a purchase price of $0.08
per share, for a total investment of $200,000. The Company also issued a warrant
to purchase 2,500,000 shares of Company common stock to the investor. The
warrant is exercisable at a price of $0.09 per share, and is exercisable for
five years.
 
 On July
28, 2008, the Company issued 10% Convertible Unsecured Notes (the “Notes”) to
certain investors represented by TAG Virgin Islands, Inc. for $200,000. These
notes are due on December 27, 2008 and are convertible into 2,500,000 shares of
common stock at the option of the holders. The investors were also granted
warrants to purchase 2,500,000 shares of Company common stock, exercisable at a
price of $0.088 per share (subject to adjustment), and are exercisable for a
period of five years. The maturity dates of the Notes have been extended to
April 30, 2009.
  36
 
 On
September 2, 2008, the Company issued a 10% Convertible Unsecured Note (the
“Note”) to certain investors represented by TAG Virgin Islands, Inc. for
$200,000. This note is due on March 1, 2009 and is convertible into 2,500,000
shares of common stock at the option of the holders. The investors were also
granted warrants to purchase 2,500,000 shares of Company common stock,
exercisable at a price of $0.088 per share (subject to adjustment), and are
exercisable for a period of five years. In March 2009, the maturity date of this
Note was extended to September 1, 2009.
 
 On
October 2, 2008, the Company issued a 10% Convertible Unsecured Note (the
“Note”) to certain investors represented by TAG Virgin Islands, Inc. for
$50,000. This note is due on April 1, 2009 and is convertible into 1,000,000
shares of common stock at the option of the holders. The investors were also
granted warrants to purchase 1,000,000 shares of Company common stock,
exercisable at a price of $0.055 per share (subject to adjustment), and are
exercisable for a period of five years.
 
 Laurus and Access Capital,
Inc.
 
 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, the 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.
 
 On March
31, 2008, the Company executed a replacement revolving line of credit agreement
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 3.25% as of December 31, 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 $1,750 per month collateral management fee. As of December
31, 2008 and as of March 30, 2009, the Company was in default of the Loan and
Security Agreement. As a result of the default, Access has increased the
interest rate payable on borrowings under the line of credit to 18% per annum,
has notified the Company’s clients of their security interest in the amounts due
to the Company, and has provided instruction that payments are to be made
directly to Access Capital.
  37
 
 As of
December 31, 2008, approximately $2.35 million was outstanding under the
revolving line of credit. The interest rate on the revolving line was 18.0% as
of December 31, 2008 and March 30, 2009.
 
 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 “Hocks”), 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 Hocks was settled
in November 2007. The settlement required 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. This
obligation was repaid in full in November 2008.
 
 There are
currently no material commitments for capital expenditures.
 
 As of
December 31, 2008 and 2007, 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, 2008 and 2007, we invoiced LEC $2.3 million and $1.9
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.
  As of
December 31, 2008, 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 the loan matured on April 30,
2007.
 
 The
following is a summary of the debt instruments outstanding as of March 27,
2009:
  Lender
                                
                                Type of facility
                                
                                Outstanding as of
                                  March 27, 2009 (not
                                  including interest) (all
                                  numbers approximate)
                                
                                
                                Remaining
                                  Availability (if
                                  applicable)Access
      Capital, Inc.
                                
                                Line
      of Credit
                                
                                $
                                2,880,300
                                
                                
                                $
                                0Taurus
      Advisory Group, LLC investors
                                
                                Short
      term debt
                                
                                $
                                1,500,000
                                
                                
                                $
                                0Taurus
      Advisory Group, LLC investors
                                
                                Series
      A and B Convertible Preferred Stock
                                
                                $
                                3,900,000
                                
                                
                                $
                                0Glenn
      Peipert
                                
                                Related
      party note payable
                                
                                $
                                104,000
                                
                                
                                $
                                0TOTAL
                                
                                
                                
                                $
                                8,384,300
                                
                                
                                $
                                0
 
 The
Company needs additional capital in order to survive. Additional capital will be
needed to fund current working capital requirements, ongoing debt service and to
repay the obligations that are maturing over the upcoming 12 month period. 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 control operating
expenses in order to reduce, or eliminate, the operating losses. Additionally,
we will continue to seek equity and/or debt financing in order to enable us to
continue to meet our financial obligations until we achieve profitability. There
can be no assurance that any such funding will be available to us on favorable
terms, or at all. Failure to obtain sufficient financing would have substantial
negative ramifications to the Company.
  38
  Off-balance
sheet arrangements
 
 The
Company does not have any transactions, agreements or other contractual
arrangements that constitute off-balance sheet arrangements.
  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 upon 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.
  39
 
 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.
 
 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.
  40
 
 Recent
Pronouncements
  In
December 2007, the Financial Accounting Standards Board (“FASB”) issued FASB No.
141(R), “Business
Combinations”. FASB 141(R) was issued to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects. This Statement applies to a transaction or other event that
meets the definition of a business combination. It does not apply to the
formation of a joint venture, the acquisition of an asset or a group of assets
that do not constitute a business, a combination between entities or businesses
under common control, or a combination between not-for-profit organizations or
the acquisition of a for-profit business by a not-for-profit organization. This
Statement shall be applied prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Earlier application is
prohibited. The Company does not anticipate that adoption of this Issue will
have a material affect on the Company’s financial condition, results of
operations, cash flows or disclosures.
 
 In June
2008, the Emerging Issues Task Force (“EITF”) issued EITF 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock”. EITF 07-5
clarifies how to determine whether certain instruments or features were indexed
to an entity’s own stock under EITF 01-6, “The Meaning of “Indexed to a
Company’s Own Stock”. It also resolves issues related to proposed
Statement 133 Implementation Issue No. C21, Scope Exceptions: “Whether Options (Including Embedded
Conversion Options) Are Indexed to both an Entity’s Own Stock and Currency
Exchange Rates”.  EITF 07-5 will become effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The consensus must be applied to all
instruments outstanding on the date of adoption and the cumulative effect of
applying the consensus must be recognized as an adjustment to the opening
balance of retained earnings at transition. The Company does not anticipate that
adoption of this Issue will have a material affect on the Company’s financial
condition, results of operations, cash flows or disclosures.
 
 In
November 2008, the Emerging Issues Task Force (“EITF”) issued EITF 08-6, “Equity Method Investment Accounting
Considerations”.EITF 08-6 clarifies the accounting for certain
transactions and impairment consideration involving equity method investments.
This Issue applies to all investments accounted for under the equity method and
is effective for fiscal years beginning on or after December 15, 2008, and
interim periods within those fiscal years. This Issue shall only be applied
prospectively. The Company does not anticipate that adoption of this Issue will
have a material affect on the Company’s financial condition, results of
operations, cash flows or disclosures.
 
 In
November 2008, the Emerging Issues Task Force (“EITF”) issued EITF 08-7, “Accounting for Defensive Intangible
Assets”.EITF 08-7 clarifies the accounting for defensive intangible
assets subsequent to initial measurement. This Issue is effective for intangible
assets acquired on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008 and shall be applied
prospectively.
 
 In November 2008, the Emerging Issues
Task Force (“EITF”) issued EITF 08-8, “Accounting for an Instrument (or an
Embedded Feature) with a Settlement Amount That is Based on the Stock of an
Entity’s Consolidated Subsidiary”.EITF 08-8 applies to freestanding
financial instruments (and embedded features) for which the payoff to the
counterparty is based, in whole or in part, on the stock of a consolidated
subsidiary. This Issue applies to those instruments (and embedded features) in
the consolidated financial statements of the parent, whether the instrument was
entered into by the parent or the subsidiary. Written options that do not
qualify for equity classification should be reported at fair value and
subsequently marked to fair value through earnings. This Issue is effective for
fiscal years beginning on or after December 15, 2008, and interim periods within
those fiscal years. Early adoption is not permitted. The consensus shall be
applied to outstanding instruments as of the beginning of the fiscal year in
which this Issue is initially applied. The fair value of an outstanding
instrument that was previously classified as an asset or liability shall become
its net carrying amount at that date (that is, the current fair value). The net
carrying amount shall be reclassified to noncontrolling interest. Gains or
losses recorded during the period that the instrument was classified as an asset
or liability shall not be reversed. The Company does not anticipate that
adoption of this Issue will have a material affect on the Company’s financial
condition, results of operations, cash flows or disclosures.
  41
 
 In January 2009, the Financial
Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FSP EITF
99-20-1, “Amendments to the
Impairment Guidance of EITF Issue No. 99-20”.This FSP amends the
impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets,”to
achieve more consistent determination of whether an other-than-temporary
impairment has occurred. The FSP also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in FASB Statement No. 115, ”Accounting for Certain Investments
in Debt and Equity Securities”, and other related guidance. This FSP
shall be effective for interim and annual reporting periods ending after
December 15, 2008, and shall be applied prospectively. Retrospective application
to a prior interim or annual reporting period is not permitted. The Company does
not anticipate that adoption of this Issue will have a material affect on the
Company’s financial condition, results of operations, cash flows or
disclosures.
  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 62  through 95 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 controls and procedures.
  As of the end of the period covered by
this Annual Report, the Company’s management, with the participation of the
Company’s Chief Executive Officer and Chief Financial Officer (“the Certifying
Officers”), conducted evaluations of the Company’s disclosure controls and
procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure
controls and procedures” means controls and other procedures of an issuer that
are designed to ensure that information required to be disclosed by the issuer
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Commission’s rules and forms. Disclosure controls and procedures include without
limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer’s management,
including the Certifying Officers, to allow timely decisions regarding required
disclosures. Based on this evaluation, the Certifying Officers have concluded
that the Company’s disclosure controls and procedures were not effective to
ensure that material information is recorded, processed, summarized and reported
by management of the Company on a timely basis in order to comply with the
Company’s disclosure obligations under the Exchange Act and the rules and
regulations promulgated thereunder.The Chief Executive Officer’s and Chief
Financial Officer’s conclusion regarding the Company’s disclosure controls and
procedures is based solely on management’s conclusion that the Company’s
internal control over financial reporting continues to be
ineffective.
  42
 
 Manaagement’s
Report on Internal Controls Over Financial Reporting..
  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:
 
 ·
              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 and
internal controls over financial reporting as defined in Exchange Act Rules
13a-15(e) and (f) and 15d-15(e) and (f) 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,
2008.
  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.
  43
 
 Changes
in internal control over financial reporting.
  No
significant changes were made in our internal control over financial reporting
during the Company’s fourth quarter of 2008 that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
  ITEM 9B. OTHER INFORMATION
 
 Not
applicable.
  44
  PART
III
 
 ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
 
 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.
  Our
directors and executive officers are as follows:
 
 Name
                              
                              Year
                                First Elected
                                as Director
                                or Officer
                              
                              Age
                              
                              Positions HeldScott
      Newman
                              
                              2004
                              
                              49
                              
                              President,
      Chief Executive Officer and ChairmanGlenn
      Peipert
                              
                              2004
                              
                              48
                              
                              Executive
      Vice President, Chief Operating Officer and DirectorWilliam
      Hendry
                              
                              2006
                              
                              48
                              
                              Vice
      President, Chief Financial Officer, Secretary and
  TreasurerBryan
      Carey
                              
                              2007
                              
                              51
                              
                              Senior
      Vice President - Strategic Consulting and Managing Director, DeLeeuw
      Associates, Inc.Lawrence
      K. Reisman*
                              
                              2004
                              
                              47
                              
                              DirectorFrederick
      Lester**
                              
                              2006
                              
                              51
                              
                              DirectorThomas
      Pear***
                              
                              2006
                              
                              56
                              
                              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.
  45
 
 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, and has belonged to 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.
  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.
 
 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 LESTERhas 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 a Technology
Manager with Hewlett Packard Corporation in the business intelligence solutions
division.  From 2006-2008, Mr. Lester was the Regional Consulting Partner,
Banking & Capital Markets, Teradata Corporation. From 2005-2006, Mr. Lester
was a National 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.
  46
 
 THOMAS PEARhas 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
of 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 2008. Each member of the Audit Committee was present, either in person or
telephonically at each meeting. 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 regarding 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.
  47
 
 Compensation
and Stock Option Committee
 
 The
Compensation Committee and the Stock Option Committee merged in March 2007, met
1 time in fiscal year 2008 and each member of the Compensation and Stock Option
Committee was present, either in person or telephonically, at the meeting. 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 2008. 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 2008, all Forms 3, 4 and 5 were timely
filed with the SEC by such reporting persons.
  48
 
 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
                                                                                  
                                                                                  
                                                                                  2008
                                                                                  
                                                                                  375,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  46,765
                                                                                  (1)
                                                                                  421,765President,
      Chief Executive
                                                                                  
                                                                                  
                                                                                  2007
                                                                                  
                                                                                  440,489
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  50,427
                                                                                  (1)
                                                                                  490,916Officer
      and ChairmanGlenn
      Peipert
                                                                                  
                                                                                  
                                                                                  2008
                                                                                  
                                                                                  315,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  37,544
                                                                                  (1)
                                                                                  352,544Executive
      Vice President, Chief
                                                                                  
                                                                                  
                                                                                  2007
                                                                                  
                                                                                  338,983
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  40,987
                                                                                  (1)
                                                                                  379,970Operating
      Officer and DirectorBryan
      Carey
                                                                                    Senior
      Vice
                                                                                  
                                                                                  
                                                                                  2008
                                                                                  
                                                                                  271,072
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  14,762
                                                                                  (2)
                                                                                  285,834President,
      Managing Director DeLeeuw Associates
                                                                                  
                                                                                  
                                                                                  2007
                                                                                  
                                                                                  313,476
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  62,500
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  16,612
                                                                                  (2)
                                                                                  392,588
 
 (1)
              Amounts
      shown reflect payments related to medical, dental and life insurance, car
      payments, 401(k) contributions and country club dues paid by the
      Company.
  49
 
 (2)
              Amounts
      shown reflect payments related to medical, dental and life insurance, car
      payments and 401(k) contributions by the
  Company.
 
 The
following table shows outstanding equity awards at December 31,
2008:
  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
                    
                    
                    250,000
                    
                    —
                    
                    
                    —
                    
                    0.83
                    
                    
                    11/16/2010
                    
                    —
                    
                    
                    —
                    
                    —
                    
                    
                    —Bryan
      Carey
                    
                    
                    33,333
                    
                    —
                    
                    
                    —
                    
                    3.00
                    
                    
                    5/28/2014
                    
                    —
                    
                    
                    —
                    
                    —
                    
                    
                    —125,000
                    
                    —
                    
                    
                    —
                    
                    0.83
                    
                    
                    11/16/2015
                    
                    —
                    
                    
                    —
                    
                    —
                    
                    
                    —100,000
                    
                    50,000
                    
                    
                    —
                    
                    0.25
                    
                    
                    10/10/2016
                    
                    —
                    
                    
                    —
                    
                    —
                    
                    
                    —83,333
                    
                    166,667
                    
                    
                    —
                    
                    0.30
                    
                    
                    5/10/2017
                    
                    —
                    
                    
                    —
                    
                    —
                    
                    
                    —
 
 The
following table shows the details of compensation paid to outside directors of
the Company during 2008:
  Director
Compensation for 2008
 
 Name
                                    
                                    Fees
                                      Earned or
                                      Paid
      in
                                      Cash
                                      ($)
                                    
                                    Stock
                                      Awards
                                      ($)
                                    
                                    Option
                                      Awards
                                      ($)
                                    
                                    Non-Equity
                                      Incentive Plan
                                      Compensation
                                      ($)
                                    
                                    Change in
                                      Pension
                                      Value and
                                      Nonqualified
                                      Deferred
                                      Compensation
                                      Earnings
                                    
                                    All Other
                                      Compensation
                                      ($)
                                    
                                    Total
                                      ($)(a)
                                    
                                    (b)
                                    
                                    (c)
                                    
                                    (d)
                                    
                                    (e)
                                    
                                    (f)
                                    
                                    (g)
                                    
                                    (h)Frederick
      Lester
                                    
                                    
                                    2,750
                                    
                                    10,000
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    12,750Thomas
      Pear
                                    
                                    
                                    2,720
                                    
                                    10,000
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    12,720Lawrence
      K. Reisman
                                    
                                    
                                    3,000
                                    
                                    10,000
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    13,000
  50
  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. Mr. Newman’s
employment agreement terminated as of the close of business on March 25, 2009.
As of the date of this filing, while negotiations are ongoing, the Company and
Mr. Newman have not executed a new employment agreement.
 
 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.
Mr. Peipert’s employment agreement terminated as of the close of business on
March 25, 2009. As of the date of this filing, while negotiations are ongoing,
the Company and Mr. Peipert have not executed a new employment
agreement.
 
 Severance
Arrangements
 
 The
following named executive officers have arrangements pursuant
to their employment agreementsthat 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.
 Messrs.
Newman and Peipert’s employment agreements terminated as of the close of
business on March 25, 2009. As of the date of this filing, while negotiations
are ongoing , the Company has not executed new employment agreements with either
Mr. Newman or Mr. Peipert.
  Change-in-Control
Arrangements
 
 Messrs.
Newman and Peipert were entitled to the above severance arrangements on a change
of control.
  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
                  
                  
                  —
                  
                  —Bryan
      Carey
                  
                  
                  —
                  
                  —
 
 Stock
Ownership Requirement for Management
  51
 
 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 an amount of restricted common stock equal in value to
$10,000 as compensation for serving as directors. 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 25, 2009, based on 119,827,573 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 OwnedScott
      Newman(3)
                    
                    
                    19,655,413
                    
                    16.4
                    %Glenn
      Peipert(4)
                    
                    
                    10,450,394
                    
                    8.7
                    %William
      Hendry(5)
                    
                    
                    160,000
                    
                    
                    *Bryan
      Carey (6)
                    
                    
                    424,999
                    
                    
                    *Lawrence
      K. Reisman (7)
                    
                    
                    233,701
                    
                    
                    *Frederick
      Lester (8)
                    
                    
                    183,701
                    
                    
                    *Thomas
      Pear (9)
                    
                    
                    183,901
                    
                    
                    *Laurus
      Master Fund, Ltd.
                    
                    
                    6,008,016
                    
                    5.0
                    %Matthew
      J. Szulik
                    
                    
                    62,169,057
                    
                    41.6
                    %All
      directors and officers as a group (7 persons)
                    
                    
                    31,292,109
                    
                    25.9
                    %
  
 *
              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.
  (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. Includes an option to purchase 250,000 shares of
      Common Stock granted on November 16, 2005, and expiring on November 16,
      2010, at an exercise price of $0.83 per
share.
  52
 
 (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 30,000 shares of Common Stock granted on November 16,
      2005, and expiring on November 16, 2015, at an exercise price of $0.83 per
      share. Consists of an option to purchase 100,000 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 50,000 shares of Common Stock which vests on October 10,
      2009.
  (6)
              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 125,000 shares of Common Stock granted on November 16,
      2005, and expiring on November 16, 2015, at an exercise price of $0.83 per
      share. Consists of an option to purchase 100,000 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 50,000 shares of Common Stock which vests on October 10, 2009.
      Consists of an option to purchase 166,666 shares of Common Stock granted
      on May 10, 2007, and expiring on May 10, 2017, at an exercise price of
      $0.30 per share and does not include an option to purchase 83,334 shares
      of Common Stock which vest  on May 10,
  2010.
 
 (7)
              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 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. Consists of an option to purchase 16,666 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 8,334 shares of Common Stock which vest on October 10, 2009.
      Includes 24,178 shares granted in October 2007 and 142,857 shares granted
      in October 2008 in connection with the annual director
      compensation.
 
 (8)
              Mr.
      Lester is a Director.  Consists of an option to purchase 16,666
      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 8,334 shares of Common Stock which vest on October 10,
      2009. Includes 24,178 shares granted in October 2007 and 142,857 shares
      granted in October 2008 in connection with the annual director
      compensation.
 
 (9)
              Mr.
      Pear is a Director. Consists of an option to purchase 16,666 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 8,334 shares of Common Stock which vest on October 10, 2009.
      Includes 24,178 shares granted in October 2007 and 142,857 shares granted
      in October 2008 in connection with the annual director
      compensation.
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
 
 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, or an
executive officer or any family of such parties. One greater than 5%
stockholder, Matthew Szulik, acquired 2,500,000 shares of Company common stock
and warrants to purchase common stock in exchange for an aggregate purchase
price of $200,000 during the last fiscal year.
  53
 
 ITEM
14. PRINCIPAL ACCOUNTING 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, 2008 and
December 31, 2007 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, 2008
                  
                  
                  December
                    31, 2007Audit
      Fees
                  
                  $
                  141,200
                  
                  
                  $
                  144,003Audit
      Related Fees
                  
                  
                  -
                  
                  
                  
                  2,000Tax
      Fees
                  
                  
                  45,500
                  
                  
                  
                  39,563All
      Other Fees
                  
                  
                  17,500
                  
                  
                  
                  13,198$
                  204,200
                  
                  
                  $
                  198,764
 
 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.
  54
  Part
IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
  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).
 
 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).
  55
 
 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).
 
 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).
  56
 
 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).
 
 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).
  57
 
 4.29 
Form of Common Stock Purchase Warrant issued to investors, dated March 26,
2008.  (filed as Exhibit 4.29 on Form 10-K filed on March 30,
2008)
  4.30 Form
of Common Stock Purchase Warrant issued to investors, dated March 26, 2008.
(filed as Exhibit 4.1 on Form 10-Q filed on August 12, 2008)
 
 4.31 Form
of Common Stock Purchase Warrant issued to investor, dated June 30, 2008. (filed
as Exhibit 4.2 on Form 10-Q filed on August 12, 2008)
 
 4.32 Form
of Common Stock Purchase Warrant issued to investors, dated July 28, 2008.
(filed as Exhibit 4.3 on Form 10-Q filed on August 12, 2008)
 
 4.33 Form
of 10% Convertible Unsecured Note issued to investors, dated July 28,
2008.  (filed as Exhibit 4.4 on Form 10-Q filed on August 12,
2008)
 
 4.34 Form
of Common Stock Purchase Warrant issued to investor, dated September 2, 2008
(filed as Exhibit 4.1 on Form 10-Q filed on November 12, 2008).
 
 4.35 Form
of Common Stock Purchase Warrant issued to investor, dated October 2,
2008.  (filed as Exhibit 4.2 on Form 10-Q filed on November 12,
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).
  58
 
 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).
 
 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).
  59
 
 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).
 
 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.
  60
 
 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.
  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. (filed as Exhibit 10.43 on Form 10-K filed on March 31,
2008)
 
 10.44
Loan and Security Agreement by and between the Company and Access Capital, Inc.,
dated as of March 31, 2008. (filed as Exhibit 10.44 on Form 10-K filed on March
31, 2008)
 
 10.45
Stock Pledge Agreement by and between the Company and Access Capital, Inc. dated
as of March 31, 2008 (filed as Exhibit 10.43 on Form 10-K filed on March 31,
2008)
 
 10.46  Note
Conversion Agreement by and between the Registrant and investors represented by
TAG Virgin Islands, Inc. dated as of March 26, 2008.  (filed as
Exhibit 10.1 on Form 10-Q filed on August 12, 2008)
 
 10.47  Stock
Purchase Agreement dated June 30, 2008 by and between Registrant and Matthew J.
Szulik.  (filed as Exhibit 10.2 on Form 10-Q filed on August 12,
2008)
 
 10.48 10%
Convertible Unsecured Note by and between the Registrant and investor
represented by TAG Virgin Islands, Inc. dated as of September 2,
2008.  (filed as Exhibit 10.1 on Form 10-Q filed on November 12,
2008)
 
 10.49 10%
Convertible Unsecured Note by and between the Registrant and investor
represented by TAG Virgin Islands, Inc. dated as of October 2,
2008.  (filed as Exhibit 10.2 on Form 10-Q filed on November 12,
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
  61
 
 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, 2008 and 2007, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the two years in the period ended December
31, 2008.  These consolidated financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the 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 the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audits provide
a reasonable basis for our opinion.
 
 In
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Conversion Services
International,  Inc. as of December 31, 2008 and December 31, 2007,
and the consolidated results of its operations and its cash flows for each of
the two years in the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.
 
 The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As more fully described in Note 2, the
Company has incurred recurring operating losses, negative cash flows, is not in
compliance with a covenant associated with its Line of Credit and has
significant future cash flow commitments. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
 
 /s/
Friedman LLP
 
 East
Hanover, New Jersey
 March 30,
2009
  62
 
 CONVERSION
SERVICES INTERNATIONAL, INC.
 AND
SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 DECEMBER
31,
 
 2008
                      
                      
                      2007ASSETSCURRENT
      ASSETSCash
                      
                      $
                      338,240
                      
                      
                      $
                      1,506,866Accounts
      receivable, net of allowance for doubtful accounts of $260,205 and
      $142,181 as of December 31, 2008 and 2007, respectively
                      
                      
                      3,440,810
                      
                      
                      
                      3,077,847Accounts
      receivable from related parties; (Note 20)
                      
                      
                      284,028
                      
                      
                      
                      315,503Prepaid
      expenses
                      
                      
                      140,493
                      
                      
                      
                      199,635TOTAL
      CURRENT ASSETS
                      
                      
                      4,203,571
                      
                      
                      
                      5,099,851PROPERTY
      AND EQUIPMENT, at cost, net
                      
                      
                      68,536
                      
                      
                      
                      182,868OTHER
      ASSETSGoodwill;
      (Note 5)
                      
                      
                      -
                      
                      
                      
                      6,135,125Intangible
      assets, net of accumulated amortization of $1,754,344 as of December 31
      2007; (Note 5)
                      
                      
                      -
                      
                      
                      
                      778,470Other
      assets
                      
                      
                      306,778
                      
                      
                      
                      615,059Total
      Assets
                      
                      $
                      4,578,885
                      
                      
                      $
                      12,811,373LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESLine
      of credit; (Note 6)
                      
                      $
                      2,349,920
                      
                      
                      $
                      2,056,341Current
      portion of long-term debt
                      
                      
                      -
                      
                      
                      
                      10,819Accounts
      payable and accrued expenses
                      
                      
                      1,503,145
                      
                      
                      
                      1,356,425Short
      term notes payable; (Note 7)
                      
                      
                      1,384,811
                      
                      
                      
                      -Deferred
      revenue
                      
                      
                      159,177
                      
                      
                      
                      59,350Related
      party note payable; (Note 20)
                      
                      
                      102,796
                      
                      
                      
                      107,833TOTAL
      CURRENT LIABILITIES
                      
                      
                      5,499,849
                      
                      
                      
                      3,590,768Long-term
      debt, net of current portion (Note 9)
                      
                      
                      -
                      
                      
                      
                      1,533,126Deferred
      taxes
                      
                      
                      -
                      
                      
                      
                      363,400Total
      Liabilities
                      
                      
                      5,499,849
                      
                      
                      
                      5,487,294Convertible
      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, 2008 and 2007, respectively; (Note 12)
                      
                      
                      1,108,332
                      
                      
                      
                      728,333COMMITMENTS
      AND CONTINGENCIES
                      
                      
                      -
                      
                      
                      
                      -STOCKHOLDERS'
      EQUITY (DEFICIT)Common
      stock, $0.001 par value, 300,000,000 shares authorized;119,594,463
      and 111,289,844 issued and outstanding at December 31, 2008 and 2007,
      respectively
                      
                      
                      119,594
                      
                      
                      
                      111,290Series
      B convertible preferred stock, 20,000 shares issued and outstanding at
      December 31, 2008 and 2007, respectively; (Note 12)
                      
                      
                      1,352,883
                      
                      
                      
                      1,352,883Additional
      paid in capital
                      
                      
                      68,575,918
                      
                      
                      
                      66,742,898Treasury
      stock, at cost, 1,145,382 shares in treasury as of December 31, 2008 and
      2007; (Note 13)
                      
                      
                      (423,869
                      )
                      
                      
                      (423,869
                      )Accumulated
      deficit
                      
                      
                      (71,653,822
                      )
                      
                      
                      (61,187,456
                      )Total
      Stockholders' Equity (Deficit)
                      
                      
                      (2,029,296
                      )
                      
                      
                      6,595,746Total
      Liabilities and Stockholders' Equity (Deficit)
                      
                      $
                      4,578,885
                      
                      
                      $
                      12,811,373
 
 See Notes
to Consolidated Financial Statements
  63
  CONVERSION
SERVICES INTERNATIONAL, INC.
 AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 FOR
THE YEARS ENDED DECEMBER 31,
 
 2008
                        
                        
                        2007REVENUE:Services
                        
                        $
                        16,409,181
                        
                        
                        $
                        18,369,197Related
      party services
                        
                        
                        2,340,658
                        
                        
                        
                        1,881,803Reimbursable
      expenses
                        
                        
                        719,956
                        
                        
                        
                        946,880Other
                        
                        
                        273,791
                        
                        
                        
                        268,45719,743,586
                        
                        
                        
                        21,466,337COST
      OF REVENUE:Services
                        
                        
                        11,832,715
                        
                        
                        
                        13,455,789Related
      party services
                        
                        
                        2,151,157
                        
                        
                        
                        1,749,591Reimbursable
      expenses
                        
                        
                        864,250
                        
                        
                        
                        1,048,61114,848,122
                        
                        
                        
                        16,253,991GROSS
      PROFIT
                        
                        
                        4,895,464
                        
                        
                        
                        5,212,346OPERATING
      EXPENSESSelling
      and marketing
                        
                        
                        3,262,546
                        
                        
                        
                        3,248,410General
      and administrative
                        
                        
                        3,592,309
                        
                        
                        
                        4,155,357Lease
      impairment
                        
                        
                        -
                        
                        
                        
                        210,765Goodwill
      & intangibles impairment
                        
                        
                        6,857,125
                        
                        
                        
                        691,580Depreciation
      and amortization
                        
                        
                        264,996
                        
                        
                        
                        646,23613,976,976
                        
                        
                        
                        8,952,348LOSS
      FROM OPERATIONS
                        
                        
                        (9,081,512
                        )
                        
                        
                        (3,740,002
                        )OTHER
      INCOME (EXPENSE)Equity
      in earnings (losses) from investments
                        
                        
                        21,045
                        
                        
                        
                        (18,329
                        )Gain
      on financial instruments
                        
                        
                        -
                        
                        
                        
                        19,329Loss
      on extinguishment of debt
                        
                        
                        (664,372
                        )
                        
                        
                        (2,461,515
                        )Interest
      expense, net
                        
                        
                        (1,104,927
                        )
                        
                        
                        (4,010,799
                        )(1,748,254
                        )
                        
                        
                        (6,471,314
                        )LOSS
      BEFORE INCOME TAX BENEFIT
                        
                        
                        (10,829,766
                        )
                        
                        
                        (10,211,316
                        )INCOME
      TAX BENEFIT
                        
                        
                        363,400
                        
                        
                        
                        -NET
      LOSS
                        
                        
                        (10,466,366
                        )
                        
                        
                        (10,211,316
                        )Accretion
      of issuance costs associated with convertible preferred
    stock
                        
                        
                        (380,000
                        )
                        
                        
                        (484,075
                        )Dividends
      on convertible preferred stock
                        
                        
                        (217,081
                        )
                        
                        
                        (263,212
                        )NET
      LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
                        
                        $
                        (11,063,447
                        )
                        
                        $
                        (10,958,603
                        )Basic
      and diluted loss per common share
                        
                        $
                        (0.09
                        )
                        
                        $
                        (0.15
                        )Basic
      and diluted loss per common share attributable to common
      stockholders
                        
                        $
                        (0.10
                        )
                        
                        $
                        (0.16
                        )Weighted
      average common shares used to compute loss per common
    share:Basic
      and diluted
                        
                        
                        115,358,271
                        
                        
                        
                        67,541,607
 See Notes
to Consolidated Financial Statements
  64
 
 CONVERSION
SERVICES INTERNATIONAL, INC.
 AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
 
 AccumulatedAdditional
                            
                            
                            Retained
                            
                            
                            TotalCommon
                            
                            
                            Capital
                            
                            
                            Treasury
                            
                            
                            Series
      B
                            
                            
                            Series
      B
                            
                            
                            Paid-in
                            
                            
                            Earnings
                            
                            
                            Stockholders'Shares
                            
                            
                            Stock
                            
                            
                            Stock
                            
                            
                            Preferred
      Shares
                            
                            
                            Preferred
      Stock
                            
                            
                            Capital
                            
                            
                            (Deficit)
                            
                            
                            Equity
      (Deficit)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
                            )Balance,
      December 31, 2007
                            
                            
                            110,144,462
                            
                            
                            
                            111,290
                            
                            
                            
                            (423,869
                            )
                            
                            
                            20,000
                            
                            
                            
                            1,352,883
                            
                            
                            
                            66,742,898
                            
                            
                            
                            (61,187,456
                            )
                            
                            
                            6,595,746Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (10,466,366
                            )
                            
                            
                            (10,466,366
                            )Dividends
      payable on preferred stock
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (217,081
                            )
                            
                            
                            -
                            
                            
                            
                            (217,081
                            )Compensation
      expense for stock and stock option grants
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            469,978
                            
                            
                            
                            -
                            
                            
                            
                            469,978Relative
      fair value of warrants issued
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            968,846
                            
                            
                            
                            -
                            
                            
                            
                            968,846Dividends
      on Series A preferred stock paid in common stock
                            
                            
                            527,778
                            
                            
                            
                            528
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            46,972
                            
                            
                            
                            -
                            
                            
                            
                            47,500Dividends
      on Series B preferred stock paid in common stock
                            
                            
                            227,885
                            
                            
                            
                            227
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            121,854
                            
                            
                            
                            -
                            
                            
                            
                            122,081Shares
      issued in conjunction with services agreement
                            
                            
                            5,000
                            
                            
                            
                            5
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (5
                            )
                            
                            
                            -
                            
                            
                            
                            -Issuance
      of Common Stock in connection with a stock purchase
    agreement
                            
                            
                            2,500,000
                            
                            
                            
                            2,500
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            197,500
                            
                            
                            
                            -
                            
                            
                            
                            200,000Issuance
      of Common Stock for Director compensation
                            
                            
                            428,571
                            
                            
                            
                            429
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            29,571
                            
                            
                            
                            -
                            
                            
                            
                            30,000Issuance
      of Common Stock in payment of Notes Payable
                            
                            
                            4,615,385
                            
                            
                            
                            4,615
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            595,385
                            
                            
                            
                            -
                            
                            
                            
                            600,000Accretion
      of issuance costs associated with convertible preferred
    stock
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (380,000
                            )
                            
                            
                            -
                            
                            
                            
                            (380,000
                            )Balance,
      December 31, 2008
                            
                            
                            118,449,081
                            
                            
                            $
                            119,594
                            
                            
                            $
                            (423,869
                            )
                            
                            
                            20,000
                            
                            
                            $
                            1,352,883
                            
                            
                            $
                            68,575,918
                            
                            
                            $
                            (71,653,822
                            )
                            
                            $
                            (2,029,296
                            )
 
 See Notes
to Consolidated Financial Statements.
  65
 
 CONVERSION
SERVICES INTERNATIONAL, INC.
 AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED DECEMBER 31,
 
 2008
                      
                      
                      2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                      
                      $
                      (10,466,366
                      )
                      
                      $
                      (10,211,316
                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      of property and equipment and amortization of leasehold
      improvements
                      
                      
                      146,526
                      
                      
                      
                      100,459Amortizaton
      of intangible assets
                      
                      
                      56,470
                      
                      
                      
                      488,386Amortization
      of debt discounts
                      
                      
                      267,766
                      
                      
                      
                      338,718Amortization
      of relative fair value of warrants issued
                      
                      
                      416,685
                      
                      
                      
                      2,990,106Amortization
      of deferred financing costs
                      
                      
                      62,000
                      
                      
                      
                      57,390Impairment
      of goodwill and intangible assets
                      
                      
                      6,857,125
                      
                      
                      
                      691,580Leasehold
      impairment
                      
                      
                      -
                      
                      
                      
                      210,765Stock
      based compensation
                      
                      
                      499,978
                      
                      
                      
                      424,263Gain
      on change in fair value of financial instruments
                      
                      
                      -
                      
                      
                      
                      (19,329
                      )Loss
      on extinguishment of debt
                      
                      
                      664,372
                      
                      
                      
                      2,461,515Deferred
      tax benefit
                      
                      
                      (363,400
                      )
                      
                      
                      -Increase
      (decrease) in allowance for doubtful accounts
                      
                      
                      108,804
                      
                      
                      
                      (129,969
                      )Loss
      from sale of equity investment
                      
                      
                      -
                      
                      
                      
                      25,569(Income)
      loss from equity investments
                      
                      
                      (21,045
                      )
                      
                      
                      18,330Changes
      in operating assets and liabilities:(Increase)
      decrease in accounts receivable
                      
                      
                      (480,987
                      )
                      
                      
                      971,395Decrease
      in accounts receivable from related parties
                      
                      
                      40,695
                      
                      
                      
                      7,231(Increase)
      decrease in prepaid expenses
                      
                      
                      59,142
                      
                      
                      
                      (67,548
                      )Decrease
      in other assets
                      
                      
                      2,070
                      
                      
                      
                      25,000Increase
      (decrease) in accounts payable and accrued expenses
                      
                      
                      107,414
                      
                      
                      
                      (367,133
                      )Increase
      (decrease) in deferred revenue
                      
                      
                      99,828
                      
                      
                      
                      (15,100
                      )Net
      cash used in operating activities
                      
                      
                      (1,942,923
                      )
                      
                      
                      (1,999,688
                      )CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
                      
                      
                      (32,194
                      )
                      
                      
                      (18,243
                      )Sale
      of equity investment in DeLeeuw Turkey
                      
                      
                      -
                      
                      
                      
                      50,000Net
      cash (used in) provided by investing activities
                      
                      
                      (32,194
                      )
                      
                      
                      31,757CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      advances (repayments) under line of credit
                      
                      
                      293,579
                      
                      
                      
                      (3,239,211
                      )Proceeds
      from issuance of short-term note payable
                      
                      
                      450,000
                      
                      
                      
                      650,000Increase
      in financing costs
                      
                      
                      (113,036
                      )
                      
                      
                      -Principal
      payments on short-term notes
                      
                      
                      -
                      
                      
                      
                      (1,710,455
                      )Proceeds
      from sale of Company common stock and exercise of stock
      options
                      
                      
                      200,000
                      
                      
                      
                      7,165,658Principal
      payments on capital lease obligations
                      
                      
                      (10,822
                      )
                      
                      
                      (33,231
                      )Principal
      payments on related party notes
                      
                      
                      (13,230
                      )
                      
                      
                      (25,970
                      )Net
      cash provided by financing activities
                      
                      
                      806,491
                      
                      
                      
                      2,806,791NET
      (DECREASE) INCREASE IN CASH
                      
                      
                      (1,168,626
                      )
                      
                      
                      838,860CASH,
      beginning of period
                      
                      
                      1,506,866
                      
                      
                      
                      668,006CASH,
      end of period
                      
                      $
                      338,240
                      
                      
                      $
                      1,506,866
 
 See Notes
to Consolidated Financial Statements
  66


CONVERSION
SERVICES INTERNATIONAL, INC.
 AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED DECEMBER 31,
 
 2008
                    
                    
                    2007SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest
                    
                    $
                    364,658
                    
                    
                    $
                    471,824Cash
      paid for income taxes
                    
                    
                    -
                    
                    
                    
                    -Common
      stock issued in settlement of debt
                    
                    
                    600,000
                    
                    
                    
                    -Common
      stock purchase warrants issued in settlement of debt
                    
                    
                    -
                    
                    
                    
                    698,714Common
      stock issued in payment of preferred stock dividends
                    
                    
                    169,581
                    
                    
                    
                    386,232Common
      stock issued in payment of Director's fees
                    
                    
                    30,000
                    
                    
                    
                    15,000Common
      stock issued in payment of interest due on outstanding
debt
                    
                    
                    -
                    
                    
                    
                    135,069Extinguishment
      of debt via issuance of Common Stock
                    
                    
                    -
                    
                    
                    
                    2,500,000
 
 See Notes
to Consolidated Financial Statements
  67
  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
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.
  68
 
 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.
  Fair
Value of Financial Instruments
 
 Effective January 1, 2008, the Company
adopted Financial Accounting Standards Board (“FASB”) Statement of Financial
Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”. This
standard defines fair value, provides guidance for measuring fair value and
requires certain disclosures. The standard utilizes a fair value hierarchy which
is categorized into three levels based on the inputs to the valuation techniques
used to measure fair value. The standard does not require any new fair value
measurements, but discusses valuation techniques, such as the market approach
(comparable market prices), the income approach (present value of future income
or cash flows) and the cost approach (cost to replace the service capacity of an
asset or replacement cost).
 
 The Company estimates that the carrying
value of its financial instruments which includes cash, line of credit and notes
payable approximates fair value, as all financial instruments are short term in
nature or bear interest at variable rates.
 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 2008 and 2007, $121,116 and $133,264 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.
 
 Expenditures
for maintenance and repairs have been charged to operations. Major renewals and
betterments have been capitalized.
  69
  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 indefinite life 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. See
Note 5 of the Notes to Consolidated Financial Statements.
 
 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. The Company has recorded discount on debt, net of
accumulated amortization of $69,069 and $447,361 as of December 31, 2008 and
2007, respectively.
 
 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.
  70
 
 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 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
 
 There
were no stock options granted during 2008.
 
 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.
 
 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, 2008, National Digital Medical Archives (“NDMA”) accounted for approximately
21.7% of the Company’s accounts receivable balance. Receivables related to
services performed for Bank of America accounted for approximately 18.9% of the
Company’s accounts receivable balance. This is comprised of receivables directly
from Bank of America and receivables from two vendor management companies that
are issued invoices for the Company’s work at Bank of America, Sapphire
Technologies and ZeroChaos. Additionally, Church & Dwight accounted for
approximately 15.4% of the Company’s accounts receivable balance.
 
 Cash
balances in banks are secured by the Federal Deposit Insurance Corporation
subject to certain limitations.
 
 Advertising
 
 The
Company expenses advertising costs as incurred. Advertising costs amounted to
approximately $53,635 and $82,600 for the years ended December 31, 2008 and
2007, 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.
  71
 
 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, 2008, 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, notes payable, 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.
 
 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.
  72
  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.
 
 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.
  Reclassification
 
 Certain
amounts in prior periods have been reclassified to conform to the 2008 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 -   Going Concern
 
 The
Company has incurred net losses for the years ended December 31, 2004 through
2008, negative cash flows from operating activities for the years ended December
31, 2004 through 2008, and had an accumulated deficit of $71.7 million at
December 31, 2008. The Company has relied upon cash from its financing
activities to fund its ongoing operations as it has not been able to generate
sufficient cash from its operating activities in the past, and there is no
assurance that it will be able to do so in the future. Due to this history of
losses and operating cash consumption, we cannot predict how long we will
continue to incur further losses or whether we will become profitable again, or
if the Company’s business will improve. These factors raise substantial doubt as
to our ability to continue as a going concern. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this
uncertainty.
  73
 
 As of
December 31, 2008, the Company had a cash balance of approximately $0.3 million,
compared to $1.5 million at December 31, 2007, and a working capital deficiency
of $1.3 million.
 
 The
liquidity issues that have resulted from the Company’s history of losses have
been addressed in the past through the sale of Company common stock, preferred
stock and by entering into various debt instruments. During 2008, the Company
issued 10% Convertible Unsecured Notes and warrants to purchase Company common
stock in exchange for $450,000 cash. Additionally, the Company and TAG Virgin
Islands, Inc. executed a Stock Purchase Agreement whereby an investor
represented by TAG Virgin Islands, Inc. purchased 2,500,000 shares of Company
common stock for a total investment of $200,000. Refer to footnotes 7 and
11 of the Notes to Consolidated Financial Statements for further discussion on
the issuance of the 10% Convertible Unsecured Notes and the Common
Stock.
 
 The
Company executed a revolving line of credit agreement in March 2008 with Access
Capital, Inc. (“Access Capital” or “Access”). As of December 31, 2008, the
Company was in default of the Loan and Security Agreement. As a result of the
default, Access has increased the interest rate payable on borrowings under the
line of credit to 18% per annum, has notified the Company’s clients of their
security interest in the amounts due to the Company, and has provided
instruction that payments are to be made directly to Access Capital. Refer to
footnote 6 of the Notes to Consolidated Financial Statements for further
discussion on the Line of Credit.
 
 On June
7, 2004, the Company issued a five-year $2,000,000 Unsecured Convertible Line of
Credit Note. $950,000 of the original principal balance has previously been
converted to Company common stock and the remaining $1,050,000 balance which is
outstanding at December 31, 2008, matures on June 6, 2009. As of December 31,
2008, the Company does not have the ability to repay this note upon maturity.
Refer to footnote 7 of the Notes to Consolidated Financial Statements for
further discussion on the Short Term Note Payable.
 
 In August
2008, the Company notified the American Stock Exchange (“AMEX”) of its intent to
voluntarily delist trading of its common stock, par value $0.001 per share, from
AMEX. The Company’s last day of trading on AMEX was September 5, 2008. On
September 8, 2008, the Company’s common stock began trading on the Over the
Counter Bulletin Board under the symbol CVNS.OB.
 
 The
Company needs additional capital in order to survive. Additional capital will be
needed to fund current working capital requirements, ongoing debt service and to
repay the obligations that are maturing over the upcoming 12 month period. 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 control operating
expenses in order to reduce, or eliminate, the operating losses. Additionally,
we will continue to seek equity and/or debt financing in order to enable us to
continue to meet our financial obligations until we achieve profitability. There
can be no assurance that any such funding will be available to us on favorable
terms, or at all. Failure to obtain sufficient financing would have substantial
negative ramifications to the Company.
 
 Note 3 -   Recently Issued Accounting
Pronouncements
  In
December 2007, the Financial Accounting Standards Board (“FASB”) issued FASB No.
141(R), “Business
Combinations”. FASB 141(R) was issued to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects. This Statement applies to a transaction or other event that
meets the definition of a business combination. It does not apply to the
formation of a joint venture, the acquisition of an asset or a group of assets
that do not constitute a business, a combination between entities or businesses
under common control, or a combination between not-for-profit organizations or
the acquisition of a for-profit business by a not-for-profit organization. This
Statement shall be applied prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Earlier application is
prohibited. The Company does not anticipate that adoption of this Issue will
have a material affect on the Company’s financial condition, results of
operations, cash flows or disclosures.
  74
  In June
2008, the Emerging Issues Task Force (“EITF”) issued EITF 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock”. EITF 07-5
clarifies how to determine whether certain instruments or features were indexed
to an entity’s own stock under EITF 01-6, “The Meaning of “Indexed to a
Company’s Own Stock”. It also resolves issues related to proposed
Statement 133 Implementation Issue No. C21, Scope Exceptions: “Whether Options (Including Embedded
Conversion Options) Are Indexed to both an Entity’s Own Stock and Currency
Exchange Rates”.  EITF 07-5 will become effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The consensus must be applied to all
instruments outstanding on the date of adoption and the cumulative effect of
applying the consensus must be recognized as an adjustment to the opening
balance of retained earnings at transition. The Company does not anticipate that
adoption of this Issue will have a material affect on the Company’s financial
condition, results of operations, cash flows or disclosures.
 
 In
November 2008, the Emerging Issues Task Force (“EITF”) issued EITF 08-6, “Equity Method Investment Accounting
Considerations”.EITF 08-6 clarifies the accounting for certain
transactions and impairment consideration involving equity method investments.
This Issue applies to all investments accounted for under the equity method and
is effective for fiscal years beginning on or after December 15, 2008, and
interim periods within those fiscal years. This Issue shall only be applied
prospectively. The Company does not anticipate that adoption of this Issue will
have a material affect on the Company’s financial condition, results of
operations, cash flows or disclosures.
 
 In
November 2008, the Emerging Issues Task Force (“EITF”) issued EITF 08-7, “Accounting for Defensive Intangible
Assets”.EITF 08-7 clarifies the accounting for defensive intangible
assets subsequent to initial measurement. This Issue is effective for intangible
assets acquired on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008 and shall be applied
prospectively.
 
 In November 2008, the Emerging Issues
Task Force (“EITF”) issued EITF 08-8, “Accounting for an Instrument (or an
Embedded Feature) with a Settlement Amount That is Based on the Stock of an
Entity’s Consolidated Subsidiary”.EITF 08-8 applies to freestanding
financial instruments (and embedded features) for which the payoff to the
counterparty is based, in whole or in part, on the stock of a consolidated
subsidiary. This Issue applies to those instruments (and embedded features) in
the consolidated financial statements of the parent, whether the instrument was
entered into by the parent or the subsidiary. Written options that do not
qualify for equity classification should be reported at fair value and
subsequently marked to fair value through earnings. This Issue is effective for
fiscal years beginning on or after December 15, 2008, and interim periods within
those fiscal years. Early adoption is not permitted. The consensus shall be
applied to outstanding instruments as of the beginning of the fiscal year in
which this Issue is initially applied. The fair value of an outstanding
instrument that was previously classified as an asset or liability shall become
its net carrying amount at that date (that is, the current fair value). The net
carrying amount shall be reclassified to noncontrolling interest. Gains or
losses recorded during the period that the instrument was classified as an asset
or liability shall not be reversed. The Company does not anticipate that
adoption of this Issue will have a material affect on the Company’s financial
condition, results of operations, cash flows or disclosures.
 
 In January 2009, the Financial
Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FSP EITF
99-20-1, “Amendments to the
Impairment Guidance of EITF Issue No. 99-20”.This FSP amends the
impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets,”to
achieve more consistent determination of whether an other-than-temporary
impairment has occurred. The FSP also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in FASB Statement No. 115, ”Accounting for Certain Investments
in Debt and Equity Securities”, and other related guidance. This FSP
shall be effective for interim and annual reporting periods ending after
December 15, 2008, and shall be applied prospectively. Retrospective application
to a prior interim or annual reporting period is not permitted. The Company does
not anticipate that adoption of this Issue will have a material affect on the
Company’s financial condition, results of operations, cash flows or
disclosures.
  75
  Note
4 - Property and equipment
  Property
and equipment consisted of the following:
 
 December 31,
                      
                      
                      December 31,2008
                      
                      
                      2007Computer
      equipment
                      
                      $
                      1,048,776
                      
                      
                      $
                      1,016,582Furniture
      and fixtures
                      
                      
                      161,543
                      
                      
                      
                      161,543Leasehold
      improvements
                      
                      
                      92,459
                      
                      
                      
                      92,4591,302,778
                      
                      
                      
                      1,270,584Accumulated
      depreciation
                      
                      
                      (1,234,242
                      )
                      
                      
                      (1,087,716
                      )$
                      68,536
                      
                      
                      $
                      182,868
 
 Depreciation
and amortization expense related to property and equipment totaled $0.1 million
and $0.1 million for 2008 and 2007, respectively.
 
 Note
5 – Goodwill and Intangible assets
  Intangibles
acquired have been assigned as follows:
 
 December 31,
                    
                    
                    December 31,
                    
                    Amortization2008
                    
                    
                    2007
                    
                    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
                    
                    IndefiniteProprietary
      presentation format
                    
                    
                    173,000
                    
                    
                    
                    173,000
                    
                    3
      years1,810,814
                    
                    
                    
                    2,532,814Accumulated
      amortization
                    
                    
                    (1,810,814
                    )
                    
                    
                    (1,754,344
                    )$
                    -
                    
                    
                    $
                    778,470
 
 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 2008, the Company determined that $1,380,387 of McKnight Associates
goodwill was impaired due to the termination of William McKnight’s employment
with the Company. Additionally, due to a decline in the strategic consulting
business during 2008, the Company determined that the DeLeeuw Associates
goodwill and intangible assets were impaired, resulting in a $5,051,933
impairment charge. The final $63,766 of ISI goodwill was impaired due to a
further reduction in the number of ISI consultants on billing and $361,039 of
the Scosys goodwill was impaired as a result of the Company’s decision to exit
this line of business due to economic issues. In total, for the year ended
December 31, 2008, the Company recorded impairment charges relating to goodwill
and intangible assets of $6,857,125. During 2007, due to an unfavorable economic
change in the ISI business, the Company performed an impairment review and
recorded a $691,580 impairment charge.
 
 Acquired
contracts were amortized over a period that approximated 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 was being amortized over an estimated life
of three years. The customer relationship intangible asset was being amortized
over an estimated life of thirty months. The order backlog intangible asset was
being amortized over an estimated life of five months. All intangible assets
subject
to amortization were amortized during 2008 or prior
years.
  76
  Note
6 - Line of credit
 
 In
February, 2006, the Company amended its financing agreements with Laurus Master
Fund Ltd. (“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 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
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 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 fair value of the
warrant to purchase 1,785,714 shares of Company common stock to be $535,714.
This fair value has been recorded as a component of the loss on the
extinguishment of this debt.
 
 In March
2008, the Company replaced its existing revolving line of credit with Laurus and
executed a replacement line of credit 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
3.25% as of December 31, 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 $1,750 per month
collateral management fee. Further debt incurred by the Company may need to be
subordinated to Access Capital, Inc.
 
 The
Company was in default of the Loan and Security Agreement as of December 31,
2008 since its working capital was below the minimum required working capital of
$400,000. In the event of a default under the Loan and Security Agreement,
Access Capital’s remedies include, but are not limited to, the
following:
 
 ·
                Access
      may perform or observe such covenant on behalf and in the name, place and
      stead of the Company and may take actions which they deem necessary to
      cure or correct such failure, including, but not limited to, payment of
      taxes, satisfaction of liens, performance of obligations owed to debtors,
      procurement of insurance, execution of assignments, security agreements
      and financing statements and the endorsement of
    instruments;
  77
  ·
                upon
      the occurrence of, and for so long as any event of default exists, the
      interest rate is increased to one and one-half percent (1.5%) per
      month;
 ·
                Access
      may notify the Company’s account debtors of their security interest in the
      accounts, collect them directly and charge the collection costs and
      expenses to the Company’s
account;
 ·
                at
      Access Capital’s election, following the occurrence of an event of
      default, they may terminate the Loan and Security Agreement. In the event
      of early termination after the occurrence of default, the Company would be
      liable for various early payment fees, penalties and
    interest;
 ·
                  Access
      shall have the right to demand repayment in full of all obligations,
      whether or not otherwise due, including required prepayment fees,
      interest, and
penalties.
 
 As a
result of this default, to date, Access has increased the interest rate payable
on borrowings under the line of credit to 18% per annum, has notified the
Company’s clients of their security interest in the amounts due to the Company,
and has provided instruction that payments are to be made directly to Access
Capital.
 
 As of
December 31, 2008, approximately $2.3 million was outstanding under the
revolving line of credit. Remaining availability under the line of credit at
December 31, 2008, based on the year end collateral balance, was $0.9 million.
The interest rate on the revolving line was 18.0% as of December 31,
2008.
 
 Note
7 - Short Term Notes Payable
 
 Short
term notes payable consisted of the following:
  December 31,
                
                
                December 31,2008
                
                
                2007Convertible
      line of credit note, due June 6, 2009 unless converted into common
      stock at the Company or the note holder’s option.  Interest
      accrues at 7% per annum.
                
                $
                1,050,000
                
                
                $
                -Convertible
      note dated July 28, 2008, due April 30, 2009
                
                
                200,000
                
                
                
                -Convertible
      note dated September 2, 2008, due September 1, 2009
                
                
                200,000
                
                
                
                -Convertible
      note dated October 2, 2008, due April 1, 2009
                
                
                50,000
                
                
                
                -Unamortized
      fair value of warrants issued with Convertible notes
                
                
                (115,189
                )
                
                
                -$
                1,384,811
                
                
                $
                -
  In June
2004, the Company and TAG Virgin Islands, Inc. executed a five-year $2,000,000
unsecured convertible line of credit note. The note accrues interest at an
annual 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. The note also
contains a beneficial conversion feature, and in accordance with EITF 00-27,
“Application of Issue 98-5 to
Certain Convertible Instruments”, the Company recorded a beneficial
conversion charge of $1.5 million and allocated $0.5 million to the warrant
based on its relative fair value. Accordingly, the discount, as enumerated
above, will be amortized as interest utilizing the effective interest method. 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 fair value of the warrants to purchase
2,499,997 shares of Company common stock to be $325,000. This fair value was
charged to the loss on extinguishment during 2007.
  78
  During
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 the debt due to them under the Unsecured Convertible Line
of Credit Note dated June 7, 2004 into Company common stock. The Company issued
4,615,385 shares of common stock to the investors. The number of shares acquired
was based on the $0.13 per share closing price of the Company’s common 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 fair value of the warrants to purchase
4,615,385 shares of Company common stock to be approximately $553,846. This fair
value was recorded as a charge to the loss on extinguishment of debt and an
addition to additional paid-in capital in 2008.
 
 The
remaining $1,050,000 balance, which is outstanding as of December 31, 2008
matures on June 6, 2009.
 
 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 fair value of the warrants to purchase 3,333,334
shares of Company common stock to be $466,667. This fair value was charged to
the loss on extinguishment during 2007.
  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.
  79
  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 fair value of the warrants to purchase 6,666,668 shares of Company common
stock to be $933,334. This fair value was charged to the loss on extinguishment
during 2007.
 
 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 fair value of the
warrant to purchase 14,166,667 shares of Company common stock to be $3,825,000.
This fair value is being accreted through interest expense over the six month
life of the Note.
 
 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
was to 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. Using the Black-Scholes option pricing model, the Company
calculated the 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 fair
value of the warrants was being charged to interest expense over the four month
term. 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.  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. Using the Black-Scholes option pricing model, the Company
calculated the 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 fair value
was immediately charged to interest expense. 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.
  80
  Using the
Black-Scholes option pricing model, the Company calculated the fair value of the
warrants to purchase 1,666,667 shares of Company common stock to be $233,333.
This fair value was charged to the loss on extinguishment during
2007.
 
 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. 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. Using the Black-Scholes option
pricing model, the Company calculated the 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 fair value was immediately charged to interest expense. 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 fair value of the warrants to purchase 2,666,668 shares
of Company common stock to be $373,334. This fair value was charged to the loss
on extinguishment during 2007.
 
 On July
28, 2008, the Company issued 10% Convertible Unsecured Notes (the “Notes”) to
certain investors represented by TAG Virgin Islands, Inc. for $200,000. These
notes are due on December 27, 2008 and are convertible into 2,500,000 shares of
common stock at the option of the holders. The investors were also granted
warrants to purchase 2,500,000 shares of Company common stock, exercisable at a
price of $0.088 per share (subject to adjustment), and are exercisable for a
period of five years. Using the Black-Scholes option pricing model, the Company
calculated the fair value of the warrants to purchase 2,500,000 shares of
Company common stock to be approximately $200,000. This Note has a five month
term and the fair value of the warrants was charged to interest expense over the
term of the Note. The maturity dates of the Notes have been extended to April
30, 2009.
 
 On
September 2, 2008, the Company issued a 10% Convertible Unsecured Note (the
“Note”) to certain investors represented by TAG Virgin Islands, Inc. for
$200,000. This note is due on March 1, 2009 and is convertible into 2,500,000
shares of common stock at the option of the holders. The investors were also
granted warrants to purchase 2,500,000 shares of Company common stock,
exercisable at a price of $0.088 per share (subject to adjustment), and are
exercisable for a period of five years. Using the Black-Scholes option pricing
model, the Company calculated the fair value of the warrants to purchase
2,500,000 shares of Company common stock to be approximately $200,000. This Note
has a six month term and the fair value of the warrants was charged to interest
expense over the term of the Note. The maturity date of the Note has been
extended to September 1, 2009.
 
 On
October 2, 2008, the Company issued a 10% Convertible Unsecured Note (the
“Note”) to certain investors represented by TAG Virgin Islands, Inc. for
$50,000. This note is due on April 1, 2009 and is convertible into 1,000,000
shares of common stock at the option of the holders. The investors were also
granted warrants to purchase 1,000,000 shares of Company common stock,
exercisable at a price of $0.055 per share (subject to adjustment), and are
exercisable for a period of five years. Using the Black-Scholes option pricing
model, the Company calculated the fair value of the warrants to purchase
1,000,000 shares of Company common stock to be approximately $50,000. This Note
has a six month term and the fair value of the warrants was charged to interest
expense over the term of the Note.
 
 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 “Hocks”), 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 Hocks was settled
in November 2007. This debt was repaid in full in November
2008.
  81
  Note
8 - 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.
  82
  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 as of December 31, 2007 and 2008,
respectively.
  Note
9 - Long Term Debt
 
 Long-term
debt consisted of the following:
 
 December
      31,
                          
                          
                          December 31,2008
                          
                          
                          2007Convertible
      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.
                          
                          $
                          -
                          
                          
                          $
                          1,650,000Notes
      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-
                          
                          
                          
                          1,660,819Relative
      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
                          )Subtotal
                          
                          
                          -
                          
                          
                          
                          1,543,945Less:
      Current portion of long-term debt, including obligations under capital
      leases of zero and $10,819 as of December 31, 2008 and 2007,
      respectively
                          
                          
                          -
                          
                          
                          
                          (10,819
                          )$
                          -
                          
                          
                          $
                          1,533,126
  Note
10 - Income Taxes
  The
Company provides for federal and state income taxes in accordance with current
rates applied to accounting income before taxes. The provision (benefit) for
income taxes is as follows:
 
 Years ended December 31,2008
                  
                  2007Current
                  
                  $
                  -
                  
                  
                  $
                  -Deferred
                  
                  
                  (363,400
                  )
                  
                  
                  -$
                  (363,400
                  )
                  
                  $
                  -
 
 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.
  83
  The
Company has $13.2 million of net operating loss carry-forwards for both federal
and state purposes expiring between 2023 and 2028.
  December 31,2008
                  
                  
                  2007Net
      operating losses
                  
                  $
                  13,190,000
                  
                  
                  $
                  12,205,000Accounts
      receivable
                  
                  
                  107,000
                  
                  
                  
                  63,000Property
      and equipment
                  
                  
                  44,000
                  
                  
                  
                  (1,000
                  )Accounts
      payable and accrued expenses
                  
                  
                  —
                  
                  
                  
                  23,000Debt
                  
                  
                  —
                  
                  
                  
                  (140,000
                  )Goodwill
                  
                  
                  —
                  
                  
                  
                  166,000Intangible
      assets
                  
                  
                  —
                  
                  
                  
                  (294,000
                  )Stock
      based compensation
                  
                  
                  2,579,000
                  
                  
                  
                  2,281,00015,920,000
                  
                  
                  
                  14,303,000Valuation
      allowance
                  
                  
                  (15,920,000
                  )
                  
                  
                  (14,666,400
                  )$
                  —
                  
                  
                  $
                  (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 $15,920,000 and $14,666,400 for the years ended December 31, 2008 and 2007,
respectively, representing a current year change in the valuation allowance of
$1,253,600. 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, 2008, the Company had net operating loss carryfowards for Federal
and State income tax purposes of approximately $13.2 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 and 2008, 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 31,2008
                          
                          
                          2007Provision
      for Federal taxes at statutory rate (34%)
                          
                          
                          (34.0
                          )%
                          
                          
                          (34.0
                          )%State
      taxes, net of Federal benefit
                          
                          
                          (2.3
                          )%
                          
                          
                          (3.3
                          )%Permanent
      difference due to non-deductible items
                          
                          
                          0.3
                          %
                          
                          
                          0.2
                          %Stock
      based compensation
                          
                          
                          —
                          %
                          
                          
                          2.9
                          %Goodwill
      impairment
                          
                          
                          18.7
                          %
                          
                          
                          2.3
                          %Extinguishment
      of debt
                          
                          
                          1.8
                          %
                          
                          
                          9.6
                          %Valuation
      allowance applied against income tax benefit
                          
                          
                          12.0
                          %
                          
                          
                          22.3
                          %Income
      tax provision
                          
                          
                          (3.5
                          )%
                          
                          
                          0.0
                          %
  84
 
 Note
11 - Common Stock
  In July
2005, the Company obtained two $250,000 short term loans from certain investors
represented by Taurus. 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.
 
 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 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
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. 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. 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.
 
 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.
  85
  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.
 
 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 fair value of the warrants to purchase
4,615,385 shares of Company common stock to be approximately $553,846. This fair
value will be recorded as a charge to the loss on extinguishment of debt and an
addition to additional paid-in capital.
 
 As of
June 30, 2008, the Company and TAG Virgin Islands, Inc. executed a Stock
Purchase Agreement whereby an investor represented by TAG Virgin Islands, Inc.
purchased 2,500,000 shares of Company common stock at a purchase price of $0.08
per share, for a total investment of $200,000. The Company also issued a warrant
to purchase 2,500,000 shares of Company common stock to the investor. The
warrant is exercisable at a price of $0.09 per share, and is exercisable for
five years.
 
 Note 12 - 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.
  86
  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. 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.
 
 Note
13 - 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.
  87
 
 Note
14 - Common Stock Warrants
 
 Warrants
outstanding consisted of the following:
  December 31,
                  
                  
                  December 31,Expiration date
                  
                  Exercise price
                  
                  
                  2008
                  
                  
                  2007-
                  
                  $
                  0.01
                  
                  
                  
                  17,857
                  
                  
                  
                  17,8572013
                  
                  
                  0.055-0.09
                  
                  
                  
                  8,500,000
                  
                  
                  
                  -2012-2013
                  
                  
                  0.14-0.21
                  
                  
                  
                  33,346,159
                  
                  
                  
                  28,730,7742010-2012
                  
                  
                  0.22-0.33
                  
                  
                  
                  22,509,531
                  
                  
                  
                  22,509,5312010
                  
                  
                  0.34-0.51
                  
                  
                  
                  804,891
                  
                  
                  
                  804,8912008-2011
                  
                  
                  0.60-0.75
                  
                  
                  
                  2,177,777
                  
                  
                  
                  2,455,5542009-2011
                  
                  
                  0.94-1.30
                  
                  
                  
                  1,830,471
                  
                  
                  
                  1,830,4712009
                  
                  
                  1.58
                  
                  
                  
                  277,778
                  
                  
                  
                  277,7782011
                  
                  
                  4.35-5.25
                  
                  
                  
                  800,000
                  
                  
                  
                  800,00070,264,464
                  
                  
                  
                  57,426,856
 
 Note
15 - Stock Based Compensation
 
 The 2003
Incentive Plan (“2003 Plan”) originally authorized 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. 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,
resulting in up to 10,000,000 shares of common stock currently authorized for
issuance upon the exercise of stock options.
 
 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 2008 or 2007.
 
 The
following summarizes the stock option transactions under the 2003 Plan during
2008:
 
 Shares
                                        
                                        
                                        Weighted average
                                          exercise priceOptions
      outstanding at December 31, 2007
                                        
                                        
                                        5,888,828
                                        
                                        
                                        $
                                        0.75Options
      granted
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Options
      exercised
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Options
      canceled
                                        
                                        
                                        (683,831
                                        )
                                        
                                        
                                        0.63Options
      outstanding at December 31, 2008
                                        
                                        
                                        5,204,997
                                        
                                        
                                        $
                                        0.76
 
 The
following table summarizes information concerning outstanding and exercisable
Company common stock options at December 31, 2008:
  88
 
 Range ofexercise
                                            prices
                                          
                                          Options
                                            outstanding
                                          
                                          
                                          Weighted
                                            average
                                            exercise price
                                          
                                          
                                          Weightedaverage
                                            remaining
                                            contractual life
                                          
                                          
                                          Options
                                            exercisable
                                          
                                          
                                          Weighted
                                            average
                                            exercise price$
                                          0.25-$0.30
                                          
                                          
                                          2,156,666
                                          
                                          
                                          $
                                          0.259
                                          
                                          
                                          
                                          7.8
                                          
                                          
                                          
                                          1,309,980
                                          
                                          
                                          $
                                          0.2550.46-0.60
                                          
                                          
                                          1,005,000
                                          
                                          
                                          
                                          0.461
                                          
                                          
                                          
                                          7.0
                                          
                                          
                                          
                                          1,005,000
                                          
                                          
                                          
                                          0.4610.70-0.830
                                          
                                          
                                          1,389,000
                                          
                                          
                                          
                                          0.821
                                          
                                          
                                          
                                          5.4
                                          
                                          
                                          
                                          1,389,000
                                          
                                          
                                          
                                          0.8212.475-3.45
                                          
                                          
                                          654,331
                                          
                                          
                                          
                                          2.765
                                          
                                          
                                          
                                          5.2
                                          
                                          
                                          
                                          654,331
                                          
                                          
                                          
                                          2.7655,204,997
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          4,358,311
  Note 16 - 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.
 
 Basic and
diluted loss per share was determined as follows:
 
 For the years ended December 31,2008
                          
                          
                          2007Net
      loss
                          
                          $
                          (10,466,366
                          )
                          
                          $
                          (10,211,316
                          )Net
      loss attributable to common stockholders
                          
                          $
                          (11,063,447
                          )
                          
                          $
                          (10,958,603
                          )Weighted
      average common shares used to compute loss per common
share
                          
                          
                          115,358,271
                          
                          
                          
                          67,541,607Basic
      and diluted loss per common share:Net
      loss per common share
                          
                          $
                          (0.09
                          )
                          
                          $
                          (0.15
                          )Net
      loss attributable to common stockholders per common share
                          
                          $
                          (0.10
                          )
                          
                          $
                          (0.16
                          )
 
 For
the years ended December 31, 2008 and 2007, 5,204,997 shares and 5,888,828
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 57,149,079 warrants which were issued
prior to December 31, 2007, and outstanding as of December 31, 2008, and
13,115,385 warrants which were issued in 2008, and outstanding as of December
31, 2008, were excluded from the calculation of diluted loss per share for the
years ended December 31, 2008 and 2007, as appropriate, because the effect was
antidilutive. Also excluded from the calculation of loss per share because their
effect was antidilutive were 666,667 shares of common stock underlying the
$1,050,000 convertible line of credit note to TAG Virgin Islands, Inc.,
6,000,000 shares underlying the short-term notes to TAG Virgin Islands, Inc.
issued in 2008, 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
17 - Major Customers
 
 During
2008, the Company had sales to two major customers, Bank of America (20.3%) and
LEC, a related party (11.9%), which totaled approximately $6,354,325. Amounts
due from these customers included in accounts receivable were approximately
$989,020 at December 31, 2008. Bank of America and LEC accounted for
approximately 18.9% and 7.6% of the Company’s accounts receivable balance,
respectively.
 
 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.
  89
 
 Note
18 - 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, 2008 and 2007 were
approximately $78,690 and $72,223, respectively.
 
 Note
19 - Commitments and Contingencies
 
 Legal
Proceedings
  90
 
 From time
to time, the Company is either a defendant or the plaintiff in various claims
and lawsuits. Although there can be no assurances, management believes that the
disposition of such matters will not have a material adverse impact on the
results or operations or financial position of the Company.
 
 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. Mr. Newman’s employment agreement terminated as
of the close of business on March 25, 2009. As of the date of this filing, while
negotiations are ongoing, the Company and Mr. Newman have not executed a new
employment agreement.
 
 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. Mr. Peipert’s employment agreement terminated as of the close of
business on March 25, 2009. As of the date of this filing, while negotiations
are ongoing, the Company and Mr. Peipert have not executed a new employment
agreement.
  91
 
 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 $26,981. 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 $2,576, however,
this increases to $2,679 per month effective January 1, 2009.
 
 Rent
expense, including automobile rentals, totaled approximately $218,000 and
$307,000 in 2008 and 2007, respectively.
 
 Future
minimum lease payments due under all operating lease agreements as of December
31, 2008 are as follows:
 
 Years Ending December 31
                          
                          Office
                          
                          
                          Subleases
                          
                          
                          Net2009
                          
                          $
                          355,931
                          
                          
                          $
                          107,310
                          
                          
                          $
                          248,6212010
                          
                          
                          373,821
                          
                          
                          
                          143,080
                          
                          
                          
                          230,7412011
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Thereafter
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -$
                          729,752
                          
                          
                          $
                          250,390
                          
                          
                          $
                          479,362
  Note
20 – 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, 2008
and 2007, the Company invoiced LEC $2,340,658 and $1,881,803, respectively, for
the services of consultants subcontracted to LEC by the Company. As of December
31, 2008 and 2007, the Company had accounts receivable due from LEC of
approximately $284,000 and $316,000, 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.
  92
 
 As
of December 31, 2008 and 2007, Mr. Peipert’s outstanding loan balance to the
Company was $102,000 and $107,000, respectively. The unsecured loan by Mr.
Peipert accrues interest at a simple rate of 8% per annum, had a term expiring
on April 30, 2007, and is currently due on demand. However, this loan is
subordinated to the Company’s line of credit arrangement with Access Capital,
Inc.
  Note
21 – Regulatory Agency Communications
 
 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 continued to be monitored by AMEX on a quarterly basis, however, was not
subject to delisting proceedings.
 
 In August
2008, the Company notified the American Stock Exchange (“AMEX”) of its intent to
voluntarily delist trading of its common stock, par value $0.001 per share, from
AMEX. The Company’s last day of trading on AMEX was September 5, 2008. On
September 8, 2008, the Company’s common stock began trading on the Over the
Counter Bulletin Board under the symbol CVNS.OB.
 
 Note
22 – Quarterly Information (unaudited)
 
 The
following tables contain selected quarterly financial data for the fiscal years
2008 and 2007:
  For the three months ended:March 31,
                  
                  
                  June 30,
                  
                  
                  September 30,
                  
                  
                  December 31,2008
                  
                  
                  2008
                  
                  
                  2008
                  
                  
                  2008Revenue
                  
                  $
                  4,705,461
                  
                  
                  $
                  4,635,134
                  
                  
                  $
                  4,986,773
                  
                  
                  $
                  5,416,218Gross
      profit
                  
                  
                  1,031,968
                  
                  
                  
                  1,005,046
                  
                  
                  
                  1,281,688
                  
                  
                  
                  1,576,762Loss
      from operations
                  
                  
                  (1,048,233
                  )
                  
                  
                  (2,254,569
                  )
                  
                  
                  (3,871,395
                  )
                  
                  
                  (1,907,315
                  )Net
      loss
                  
                  
                  (1,744,423
                  )
                  
                  
                  (2,441,419
                  )
                  
                  
                  (4,211,772
                  )
                  
                  
                  (2,068,752
                  )Net
      loss attributable to common stockholders
                  
                  $
                  (1,899,128
                  )
                  
                  $
                  (2,590,415
                  )
                  
                  $
                  (4,360,850
                  )
                  
                  $
                  (2,213,054
                  )Basic
      and diluted loss per common share
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.02
                  )Basic
      and diluted loss per common share attributable to common
      stockholders
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.02
                  )Weighted
      average common shares used to compute loss per common
    share:Basic
      and diluted
                  
                  
                  110,213,822
                  
                  
                  
                  114,884,970
                  
                  
                  
                  117,909,029
                  
                  
                  
                  118,397,765
  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
                    )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
                    
                    $
                    (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 loss per common
    share:Basic
      and diluted
                    
                    
                    56,600,982
                    
                    
                    
                    58,567,995
                    
                    
                    
                    73,796,475
                    
                    
                    
                    80,702,551
  93
  Note
23 - Subsequent Events
 
 On July
28, 2008, the Company issued 10% Convertible Unsecured Notes (the “Notes”) to
certain investors represented by TAG Virgin Islands, Inc. for $200,000. The
maturity dates of the Notes have been extended to April 30, 2009.
 
 On
September 2, 2008, the Company issued a 10% Convertible Unsecured Note (the
“Note”) to certain investors represented by TAG Virgin Islands, Inc. for
$200,000. In March 2009, the maturity date of the Note was extended to September
1, 2009.
  94
  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 30, 2009
 /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
                        
                        President,
      Chief Executive
                        
                        March
      30, 2009Scott
      Newman
                        
                        Officer
      and Chairman/s/ William Hendry
                        
                        Vice
      President, Chief Financial
      Officer,
                        
                        March
      30, 2009William
      Hendry
                        
                        Secretary
      and Treasurer/s/ Glenn Peipert
                        
                        Executive
      Vice President,
      Chief
                        
                        March
      30, 2009Glenn
      Peipert
                        
                        Operating
      Officer and Director/s/ Lawrence K.
      Reisman
                        
                        Director
                        
                        March
      30, 2009Lawrence
      K. Reisman/s/ Thomas Pear
                        
                        Director
                        
                        March
      30, 2009Thomas
      Pear/s/ Frederick Lester
                        
                        Director
                        
                        March
      30, 2009Frederick
      Lester
  95