##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-KSB
 
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year ended December 31, 2006
 Commission File Number: 0001-22563
 
 CDSI HOLDINGS INC.
  
 Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    95-4463937
(I.R.S. Employer
Identification No.)
 100 S.E. Second Street, 32ndFloor, Miami, Florida
(Address of principal executive offices)
    
    33131
(Zip Code)
 305-579-8000
 
 Securities registered under Section 12(b) of the Exchange Act:
 Securities registered under Section 12(g) of the Exchange Act:
  o
 x o
 x
 x o
    o x




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TABLE OF CONTENTS  PART IFORWARD-LOOKING STATEMENTSTHE COMPANYRISK FACTORSPART IIPART III MANAGEMENTSummary Compensation TableSIGNATURESPOWER OF ATTORNEYEX-31.1 Section 302 Certification of the Pres/CEOEX-31.2 Section 302 Certification of the VP/CFOEX-32.1 Section 906 Certification of the Pres/CEOEX-32.2 Section 906 Certification of the VP/CFO    Table of Contents  
 PART I
 ITEM 1. DESCRIPTION OF BUSINESS
 
 FORWARD-LOOKING STATEMENTS
 Certain statements made in this Annual Report on Form 10-KSB are forward-looking statements
(within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans
and objectives of management for future operations. Such statements involve known and unknown
risks, uncertainties and other factors that may cause actual results, performance or achievements
of the Company to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. The forward-looking statements included
herein are based on current expectations that involve numerous risks and uncertainties. The
Companys plans and objectives are based, in part, on assumptions involving judgments with respect
to, among other things, future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that its assumptions underlying
the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the forward-looking statements included in this report
will prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, particularly in view of the Companys limited
operations, the inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be achieved. Readers
are cautioned not to place undue reliance on such forward-looking statements, which speak only as
of the date on which such statements are made. Factors that could cause actual results to differ
materially from those express or implied by such forward-looking statements include, but are not
limited to, the factors set forth in this report under the headings The Company, Risk Factors
and Managements Discussion and Analysis of Financial Condition and Results of Operations. The
Company does not undertake to update any forward-looking statement that may be made from time to
time on its behalf.
 
 THE COMPANY
 Overview
  -1-




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Company History
   ThinkDirectMarketing, Inc.
     -2-




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Employees
  
 RISK FACTORS
 Accumulated Deficit; History of Losses.
 Limited Resources and No Source of Operating Revenues
 A Limited Trading Market Exists for Dialog Group Inc.
 Additional Financing Requirements.
 Blind Pool; Broad Discretion of Management.
 Acquisition and Investment Risks.
 -3-




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Dependence Upon Executive Officers and Board of Directors
 Limited Trading Market
 Absence of Full-Time Management Personnel.
 Concentration of Stock Ownership.
 Absence of Dividends.
 Limitation on Director Liability.
 Dilution.
 -4-




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##### Table of Contents



Forward-looking Statements.
 ITEM 2. PROPERTIES
  ITEM 3. LEGAL PROCEEDINGS
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  -5-




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PART II
 ITEM 5.
    
    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
  High
    
    
    Low2006Fourth Quarter
    
    $
    0.150
    
    
    $
    0.131Third Quarter
    
    
    0.140
    
    
    
    0.120Second Quarter
    
    
    0.150
    
    
    
    0.130First Quarter
    
    
    0.180
    
    
    
    0.1422005Fourth Quarter
    
    $
    0.200
    
    
    $
    0.147Third Quarter
    
    
    0.200
    
    
    
    0.136Second Quarter
    
    
    0.190
    
    
    
    0.120First Quarter
    
    
    0.420
    
    
    
    0.100
  Dividend Policy
  Recent Sales of Unregistered Securities
  Issuer Purchases of Equity Securities
  -6-




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ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Overview
  ThinkDirectMarketing, Inc.
   Results of Operations
 Revenues
  Expenses
  Other Income
  -7-




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Liquidity and Capital Resources
           -8-




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ITEM 7. FINANCIAL STATEMENTS
  ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  ITEM 8A. CONTROLS AND PROCEDURES
   ITEM 8B. OTHER INFORMATION
  -9-




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PART III
MANAGEMENT
 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
  Name
    
    Age
    
    PositionRichard J. Lampen
    
    
    53
    
    
    President, Chief Executive Officer and DirectorJ. Bryant Kirkland III
    
    
    41
    
    
    Vice President, Chief Financial Officer,
Secretary, Treasurer and DirectorRobert M. Lundgren
    
    
    48
    
    
    DirectorHenry Morris
    
    
    53
    
    
    Director
 Richard J. Lampen
 J. Bryant Kirkland III
 Robert M. Lundgren
 -10-




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Henry Morris
  Audit Committee
  Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics
 nd
 ITEM 10. EXECUTIVE COMPENSATION
 Executive Compensation
  -11-




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Summary Compensation Table
 NonqualifiedNon-Equity
    
    
    DeferredIncentive Plan
    
    
    Compensation
    
    
    
    
    
    
    TotalName and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Option
    
    
    Compensation
    
    
    Earnings
    
    
    All Other
    
    
    CompensationPrincipal Position
    
    Year
    
    
    Salary ($)
    
    
    Bonus ($)
    
    
    Stock Awards ($)
    
    
    Awards ($)
    
    
    ($)
    
    
    ($)
    
    
    Compensation ($)
    
    
    ($)Richard J. Lampen
President and Chief
Executive
Officer(1)
    
    
    2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    None2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    None
 
 (1)
    
    Richard J. Lampen, who has served as President and Chief Executive Officer of the
Company since November 5, 1998, did not receive any salary or other compensation from the
Company in 2006 or 2005, other than the normal compensation paid to directors of the Company.
See Compensation of Directors. Stock Options
   -12-




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##### Table of Contents



Option Awards
    
    
    Stock AwardsEquityIncentiveEquity
    
    
    PlanIncentive
    
    
    Awards:Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan
    
    
    Market orIncentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    
    PayoutPlan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of
    
    
    Value ofAwards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unearned
    
    
    UnearnedNumber of
    
    
    
    
    
    
    
    
    
    
    Number
    
    
    Market
    
    
    Shares,
    
    
    Shares,Number of
    
    
    
    
    
    
    Securities
    
    
    
    
    
    
    
    
    
    
    of Shares
    
    
    Value of
    
    
    Units or
    
    
    Units orSecurities
    
    
    Number of
    
    
    Underlying
    
    
    
    
    
    
    
    
    
    
    or Units
    
    
    Shares or
    
    
    Other
    
    
    OtherUnderlying
    
    
    Securities
    
    
    Unexer-
    
    
    
    
    
    
    Option
    
    
    of Stock
    
    
    Units of
    
    
    Rights
    
    
    RightsUnexercised
    
    
    Underlying
    
    
    cised
    
    
    Option
    
    
    Expir-
    
    
    That
    
    
    Stock That
    
    
    That Have
    
    
    ThatOptions (#)
    
    
    Options (#)
    
    
    Unearned
    
    
    Exercise
    
    
    ation
    
    
    Have Not
    
    
    Have Not
    
    
    Not
    
    
    Have NotName
    
    Exercisable
    
    
    Unexercisable
    
    
    Options (#)
    
    
    Price ($)
    
    
    Date
    
    
    Vested (#)
    
    
    Vested ($)
    
    
    Vested (#)
    
    
    Vested ($)Richard J. Lampen
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    $
    5.50
    
    
    
    5/21/07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    $
    0.44
    
    
    
    1/12/09
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Employment Agreements and Other Compensation Plans
  Compensation of Directors
   Changes in PensionValue andNonqualifiedNon-Equity
    
    
    DeferredFees Earned or Paid
    
    
    
    
    
    
    Option
    
    
    Incentive Plan
    
    
    Compensation
    
    
    All OtherName
    
    in Cash ($)
    
    
    Stock Awards ($)
    
    
    Awards ($)
    
    
    Compensation ($)
    
    
    Earnings ($)
    
    
    Compensation ($)
    
    
    Total ($)Richard J. Lampen
    
    $
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,000J. Bryant Kirkland III
    
    $
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,000Robert M. Lundgren
    
    $
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,000Henry Morris
    
    $
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,000
 -13-




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ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  Number of Shares ofName and Address(1)
    
    Common Stock
    
    
    Percentage of OwnershipNew Valley LLC(2)
    
    
    1,490,000
    
    
    
    47.8
    %J. Bryant Kirkland III(3)
    
    
    9,000
    
    
    
    *Richard J. Lampen(3)
    
    
    9,000
    
    
    
    *Henry
Morris(3)
271 Madison Avenue
New York, NY 10016
    
    
    9,000
    
    
    
    *Robert Lundgren(3)
14545 SW 79th Court
Miami, FL 33158
    
    
    16,333
    
    
    
    *All executive officers and directors
as a group (4 persons)(3)
    
    
    43,333
    
    
    
    1.4
    %
 
 *
    
    Less than 1%(1)
    
    Unless otherwise indicated, each named person has sole voting and investment power
with respect to the shares set forth opposite such named persons name.(2)
    
    New Valley LLC, a wholly-owned subsidiary of Vector, has voting and investment power
with regard to such shares. Richard J. Lampen, an executive officer and a director of the
Company, and J. Bryant Kirkland III, an executive officer and a director of the Company, serve
as Executive Vice President and Vice President, respectively, of Vector. Neither Mr. Kirkland
nor Mr. Lampen has investment authority or voting control over the Companys securities owned
by New Valley. The other executive officers of Vector are Bennett S. LeBow, Executive
Chairman, Howard M. Lorber, President and Chief Executive Officer and Marc N. Bell, Vice
President and General Counsel. The directors of Vector are Messrs. LeBow and Lorber, Henry C.
Beinstein, Ronald J. Bernstein, Robert J. Eide, Jeffrey S. Podell and Jean E. Sharpe.(3)
    
    Includes shares subject to options and/or warrants currently exercisable or
exercisable within 60 days of the date hereof. -14-




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Equity Compensation Plan Information
  Number of securities remainingNumber of securities to
    
    
    
    
    
    
    available for future issuancebe issued upon exercise
    
    
    Weighted-average exercise
    
    
    under equity compensationof outstanding options,
    
    
    price of outstanding
    
    
    plans (excluding securitieswarrants and rights
    
    
    options, warrants and rights
    
    
    reflected in column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
(1)
    
    
    653,333
    
    
    $
    4.88
    
    
    
    596,667Equity compensation
plans not approved
by security holders.
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    653,333
    
    
    $
    4.88
    
    
    
    596,667
 
 (1)
    
    Includes options to purchase 153,333 shares of the Companys Common Stock under the 1997
Stock Option Plan and an option to purchase 500,000 shares of Common
Stock,
which expired in March 2007, issued in 1997 to New Valley LLC, which were approved by stockholders. For
additional information concerning the options, see Note 6 to the Companys Financial
Statements. -15-




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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  ITEM 13. EXHIBITS
 ExhibitsThe Exhibits listed below are filed as part of this report.3.1
    
    Form of Restated Certificate of
Incorporation of the Company (1)3.2
    
    Certificate of Amendment to the
Restated Certificate of Incorporation of the Company (2)3.3
    
    Form of By-Laws of the Company  (1)10.1
    
    Form of 1997 Stock Option Plan  (1)10.2
    
    Form of PC411, Inc. New Valley Corporation Stock Option Plan and Agreement  (1)31.1
    
    Certification of Chief Executive Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2
    
    Certification of Chief Financial Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1
    
    Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2
    
    Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*
 
 *
    
    Filed herewith.(1)
    
    Previously filed as an Exhibit to the Companys Registration Statement on Form S-1 (File No.
333-21545). This Exhibit is incorporated herein by reference.(2)
    
    Previously filed as an Exhibit to the Companys Form 8-K filed January 14, 1999. This
Exhibit is incorporated herein by reference. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Audit Fees
 -16-




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Audit-Related Fees.
 Tax Fees
 All Other Fees
 -17-




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SIGNATURES
  CDSI Holdings Inc.By:
    /s/ J. Bryant Kirkland IIIJ. Bryant Kirkland IIIVice President, Treasurer and Chief Financial
Officer 
 POWER OF ATTORNEY
   Signature
    
    Title/s/ Richard J. Lampen

Richard J. Lampen
    
    Director, President and
Chief Executive Officer/s/ J. Bryant Kirkland III

J. Bryant Kirkland III
    
    Director, Vice President, Treasurer and
Chief Financial Officer
(principal accounting and financial officer)/s/ Henry Morris

Henry Morris
    
    Director/s/ Robert Lundgren

Robert Lundgren
    
    Director
 -18-




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CDSI HOLDINGS INC.




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CDSI HOLDINGS INC.
 Index to Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Audited Financial Statements:Balance Sheet
    
    
    F-3Statements of Operations
    
    
    F-4Statements of Stockholders Equity
    
    
    F-5Statements of Cash Flows
    
    
    F-6Notes to Financial Statements
    
    
    F-7
 F-1




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Report of Independent Registered Public Accounting Firm
 
     
  F-2




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CDSI HOLDINGS INC.
  December 31,2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    61,812Investment securities available for sale
    
    
    224Total assets
    
    $
    62,036Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    7,600Total current liabilities
    
    
    7,600Commitments and contingencies
    
    
    Stockholders equity:Preferred stock, $.01 par value. Authorized
5,000,000 shares; no shares issued and outstanding
    
    
    Common stock, $.01 par value. Authorized 25,000,000
shares; 3,120,000 shares issued and outstanding
    
    
    31,200Additional paid-in capital
    
    
    8,209,944Accumulated deficit
    
    
    (8,186,932
    )Accumulated other comprehensive income
    
    
    224Total stockholders equity
    
    
    54,436Total liabilities and stockholders equity
    
    $
    62,036
  F-3




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CDSI HOLDINGS INC.
  Years Ended December 31,2006
    
    
    2005Revenues
    
    $
    
    
    
    $
    Cost and expenses:General and administrative
    
    
    33,983
    
    
    
    34,06133,983
    
    
    
    34,061Operating loss
    
    
    (33,983
    )
    
    
    (34,061
    )Other income:Interest income
    
    
    3,535
    
    
    
    3,1253,535
    
    
    
    3,125Net loss
    
    $
    (30,448
    )
    
    $
    (30,936
    )Net loss per share (basic and diluted)
    
    $
    (0.01
    )
    
    $
    (0.01
    )Shares used in computing net loss
Per share
    
    
    3,120,000
    
    
    
    3,120,000
  F-4




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CDSI HOLDINGS INC.
  AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    EquityBalance at January 1, 2005
    
    
    3,120,000
    
    
    $
    31,200
    
    
    $
    8,209,944
    
    
    $
    (8,125,548
    )
    
    $
    10,500
    
    
    $
    126,096Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,936
    )
    
    
    
    
    
    
    (30,936
    )Net realized gains reclassified
into net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in unrealized loss on
investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,680
    )
    
    
    (8,680
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,616
    )Balance at January 1, 2006
    
    
    3,120,000
    
    
    $
    31,200
    
    
    $
    8,209,944
    
    
    $
    (8,156,484
    )
    
    $
    1,820
    
    
    $
    86,480Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,448
    )
    
    
    
    
    
    
    (30,448
    )Net realized gains reclassified
into net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in unrealized loss on
investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,596
    )
    
    
    (1,596
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,044
    )Balance at December 31, 2006
    
    
    3,120,000
    
    
    $
    31,200
    
    
    $
    8,209,944
    
    
    $
    (8,186,932
    )
    
    $
    224
    
    
    $
    54,436
  F-5




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CDSI HOLDINGS INC.
  Years Ended December 31,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (30,448
    )
    
    $
    (30,936
    )Adjustments to reconcile net loss to
net cash used in operating activities:Changes in assets and liabilities:Accounts payable and accrued expenses
    
    
    600
    
    
    
    (350
    )Net cash used in operating activities
    
    
    (29,848
    )
    
    
    (31,286
    )Net cash flows provided from investing activities:Proceeds from sale of investments
    
    
    
    
    
    
    Net cash flows provided from investing activities
    
    
    
    
    
    
    Net cash flows provided from financing activities
    
    
    
    
    
    
    Net decrease in cash
    
    
    (29,848
    )
    
    
    (31,286
    )Cash and cash equivalents beginning of period
    
    
    91,660
    
    
    
    122,946Cash and cash equivalents at end of period
    
    $
    61,812
    
    
    $
    91,660Supplemental cash flow information:Cash paid during year for:Interest
    
    
    
    
    
    
    Income taxes
    
    
    
    
    
    
    
  F-6




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CDSI HOLDINGS INC.
  (1)
    
    Business and OrganizationCDSI Holdings Inc. (the Company or CDSI) was incorporated in Delaware on December 29,
1993. On January 12, 1999, the Companys stockholders voted to change the corporate name of
the Company from PC411, Inc. to CDSI Holdings Inc. Prior to May 8, 1998, the Companys
principal business was an on-line electronic delivery information service that transmits name,
address, telephone number and other related information digitally to users of personal
computers (the PC411 Service). On May 8, 1998, the Company acquired Controlled Distribution
Systems, Inc. (CDS), a company engaged in the marketing and leasing of an inventory control
system for tobacco products. In February 2000, CDSI announced CDS will no longer actively
engage in the business of marketing and leasing the inventory control system. Effective
November 12, 2003, the Company and its wholly-owned subsidiary CDS merged with the Company as
the surviving corporation.At December 31, 2006, the Company had an accumulated deficit of approximately $8,186,932. The
Company has reported an operating loss in each of its fiscal quarters since inception and it
expects to continue to incur operating losses in the immediate future. The Company has
reduced operating expenses and is seeking acquisition and investment opportunities. There is
a risk the Company will continue to incur operating losses.CDSI intends to seek new business opportunities. As CDSI has only limited cash resources,
CDSIs ability to complete any acquisition or investment opportunities it may identify will
depend on its ability to raise additional financing, as to which there can be no assurance.
There can be no assurance that the Company will successfully identify, complete or integrate
any future acquisition or investment, or that acquisitions or investments, if completed, will
contribute favorably to its operations and future financial condition.(2)
    
    Summary of Significant Accounting PoliciesCash and Cash EquivalentsCash and cash equivalents include money market funds with a maturity of three months or less.Fair Value of Financial InstrumentsThe fair values of the Companys cash and cash equivalents and accrued expenses approximate
their carrying values due to the relatively short maturities of these instruments.
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CDSI HOLDINGS INC.
  Investment Securities Available for SaleThe Company owns 2,800 shares of Dialog Group Inc. (Dialog) Common Stock and classifies its
investment in Dialog as Investment Securities Available for Sale as of December 31, 2006.
The Dialog Common Stock is carried at fair value, based on the last trade prior to December
31, 2006, and net unrealized gains are included as a component of stockholders
equity. However, no assurance can be given that the Company will ultimately realize fair
value for its Dialog shares as there is only a limited trading market for the shares and the
Company may not be able to sell any material portion of its shares at prevailing market
prices. The Company sold 50,000 shares of Dialog stock in 2004 for a net gain of $4,888.
Realized gains and losses are included in other income. The cost of securities sold is
determined based on average cost. See Notes 3 and 4.Income TaxesThe Company utilizes the liability method of accounting for deferred income taxes. Under the
liability method, deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.Computation of Basic and Diluted Net Loss per ShareBasic net loss per share of Common Stock has been computed by dividing the net loss applicable
to common shareholders by the weighted average number of shares of common stock outstanding
during the year. Diluted loss per share is computed by dividing net loss applicable to common
shareholders by the weighted average number of common shares outstanding, increased by the
assumed conversion of other potentially dilutive securities during the period. Stock options
and warrants totaling 653,333 shares at December 31, 2006 and 2005 were excluded from the
calculation of diluted per share results presented because their effect was anti-dilutive.
Accordingly, diluted net loss per common share is the same as basic net loss per common share.Use of EstimatesThe preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.Concentrations of RisksFinancial instruments which potentially subject the Company to concentrations of credit risk
consist principally of cash held in overnight money market accounts. The Company has no
formal policy requiring collateral to support the financial instruments subject to credit
risk.
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CDSI HOLDINGS INC.
  (3)
    
    ThinkDirectMarketing, Inc. TransactionOn November 5, 1998, the Company contributed the non-cash assets and certain liabilities of
the PC411 Service to ThinkDirectMarketing, Inc. (TDMI) (formerly known as Digital Asset
Management, Inc.). The Company received preferred stock representing an initial 42.5%
interest in TDMI in exchange for the contribution of the PC411 Services net assets. The
Companys carrying value in the net assets contributed to TDMI totaled $73,438. The Company
recorded $462,360 as a capital contribution in connection with the transaction, which
represented the Companys 42.5% interest in the capital raised by TDMI in excess of the
carrying value of the Companys net assets contributed to TDMI. The Company agreed, under
certain conditions, to fund up to $200,000 of an $800,000 working capital line. The Company
funded $100,000 of the working capital line in the second quarter of 1999. In July 1999, the
Company agreed to extend the maturity of its working capital line and was released from any
further obligation to fund additional amounts under the working capital line.In October 2000, TDMI and Cater Barnard plc (formerly known as VoyagerIT.com) entered into an
agreement whereby Cater Barnard purchased for $5,000,000 shares of TDMIs convertible
preferred stock and convertible notes on various dates between November 10, 2000 and June 8,
2001. On October 16, 2001, Cater Barnard agreed to use its best efforts to fund an additional
$1,250,000 to TDMI by January 31, 2002 and on the same date, the TDMI stockholders granted
Cater Barnard an option to purchase by January 31, 2002 all of TDMIs common stock not held by
Cater Barnard for an aggregate purchase price of 78,750 shares of Convertible Preferred Stock
of Dialog Group Inc. (Dialog, formerly known as IMX Pharmaceuticals, Inc.). Dialog was then
a majority-owned subsidiary of Cater Barnard to which Cater Barnard had transferred its
interest in TDMI. The preferred stock was initially convertible into 1,575,000 shares of
Dialog Common Stock.On January 31, 2002, Dialog acquired all the shares of TDMI it did not already own by
exercising the option previously granted to Cater Barnard. CDSI received 8,250 shares of
Dialog Class B Convertible Preferred Stock in exchange for its interest in TDMI. Each share of
Dialog Class B Preferred Stock was entitled to receive an annual dividend of $4.00 on December
31 of each year. The dividend was payable at the option of Dialog in shares of its Common
Stock. The shares of Dialog Class B Preferred Stock to be received by the Company were
initially convertible into 165,000 shares of Dialog Common Stock.On November 4, 2002, the holders of Dialog Class B Preferred Stock and Dialog agreed to (i)
increase the number of common shares into which the Dialog Class B Preferred Stock is
convertible from 1,575,000 to 3,150,000 and (ii) eliminate the annual dividend on the Class B
Preferred Stock. As a result, the Class B Preferred Stock held by CDSI became convertible
into 330,000 shares of Dialog Common Stock and, on February 7, 2003, CDSI converted its
preferred shares into 330,000 shares of Dialog Common Stock. The Company sold 50,000 shares
of Dialog stock for $4,888 in the third quarter of 2004. See Note 4. On September 18, 2006,
Dialog effected a 1-for-100 reverse stock split. Based on public filings by Dialog,
management currently estimates that CDSIs interest in Dialog (currently 2,800 shares) is less
than a 0.01% on a fully-diluted basis.
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CDSI HOLDINGS INC.
  On January 8, 2007, the Dialog reported that it had completed the sale of substantially
all of its operating assets.(4)
    
    Investment Securities Available for SaleThe Companys 2,800 shares of Dialog Common Stock may be sold by the Company pursuant to Rule
144(k) of the Securities Act of 1933. See Note 3. In accordance with Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, the Company has classified these shares as Investment Securities Available for
Sale as of December 31, 2006 The Dialog Common Stock is carried at fair value, based on the
last trade prior to December 31, 2006 and net unrealized gains are included as a component of
stockholders equity. However, no assurance can be given that the Company will ultimately
realize fair value for its Dialog shares as there is only a limited
trading market for the shares and the Company may not be able to sell any material portion of its shares at
prevailing market prices.(5)
    
    Related Party TransactionsCertain accounting and related finance functions are performed on behalf of the Company by
employees of the parent of the Companys principal stockholder, Vector Group Ltd. (Vector).
Expenses incurred relating to these functions are allocated to the Company and paid as
incurred to Vector based on managements best estimate of the cost involved. The amounts
allocated were immaterial for all periods presented herein.(6)
    
    Stock OptionsThe Company grants equity compensation under its 1997 Stock Option Plan (the 1997 Plan),
which provides for the grant of options to purchase the Companys stock to the employees and
directors of the Company. The term of the options granted under the 1997 Plan is limited to 10
years. As of December 31, 2006, there were approximately 596,667 shares available for issuance
under the 1997 Plan.Prior to January 1, 2006, the Company accounted for share-based compensation plans in
accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, as permitted by SFAS No. 123. The Company elected to use the intrinsic value
method of accounting for employee and director share-based compensation expense for its
non-compensatory employee and director stock option awards and did not recognize compensation
expense for the issuance of options with an exercise price equal to the market price of the
underlying common stock on the date of grant.On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), which requires the
Company to value unvested stock options granted prior to the adoption of SFAS No. 123(R) under
the fair value method of accounting and expense this amount in the statement of operations over
the stock options remaining vesting period. The Company adopted this new standard,
prospectively, on January 1, 2006. Because all options outstanding were fully vested at
January 1, 2006, there was no impact on the Companys financial statements. In addition, because all
options were fully vested on
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CDSI HOLDINGS INC.
  January 1, 2005, there would have been no impact of the Companys
financial statements for the year ended December 31, 2005.As permitted by SFAS No. 123 and SFAS No. 123(R), the fair value of option grants is estimated
at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option
pricing model was developed for use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including expected stock price
characteristics which are significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the fair value estimate, the
existing models do not necessarily provide a reliable single measure of the fair value of
stock-based compensation awards.There were no option grants in the years ended December 31, 2006 and 2005. If options had been
granted, the assumptions used in computing fair value under the Black-Scholes option pricing
model would have been based on the expected option life considering both the contractual term
of the option and expected employee exercise behavior, the interest rate associated with U.S.
Treasury issues with a remaining term equal to the expected option life and the expected
volatility of the Companys common stock over the expected term of the option.A summary of the Companys stock option activity during the years ended December 31, 2005 and
2006, respectively, are as follows:
 Weighted-AverageWeighted-
    
    
    RemainingAverage
    
    
    ContractualExercise
    
    
    Term
    
    
    Aggregate IntrinsicShares
    
    
    Price
    
    
    (in years)
    
    
    Value(1)Outstanding at January 1, 2005
    
    
    153,333
    
    
    $
    2.03
    
    
    
    3.2
    
    
    $
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited or expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding
at December 31, 2005
    
    
    153,333
    
    
    $
    2.03
    
    
    
    2.2
    
    
    $
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited or expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at December 31, 2006
    
    
    153,333
    
    
    $
    2.03
    
    
    
    1.2
    
    
    $
    Exercisable at December 31, 2006
    
    
    153,333
    
    
    
    
    
    
    
    
    
    
    $
    Options vested during period
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
 
 (1)
    
    The aggregate intrinsic value represents the amount by which the fair value of the
underlying common stock ($0.14 and $0.15 at December 31, 2006 and 2005,
respectively) exceeds the option exercise price.In addition to the options issued in connection with the stock option plans, the Company had
granted New Valley LLC, a wholly-owned subsidiary of Vector, options to acquire 500,000 shares
of Common Stock at $5.75 per share, which fully vested upon the completion of the Companys
initial public offering in May 1997. The options expired in March 2007. (7)
    
    Preferred StockThe Company has the authority to issue 5,000,000 shares of Preferred Stock, which may be
issued from time to time in one or more series.
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CDSI HOLDINGS INC.
  (8)
    
    Income TaxesDuring the years ended December 31, 2006 and 2005, the Company had no income and therefore
made no provision for Federal and state income taxes.At December 31, 2006, the Company had approximately $6,980,000 of net operating loss
carryforwards for federal and state tax reporting purposes available to offset future taxable
income, if any; such carryforwards expire between 2009 and 2027
(federal) and 2006 and 2026
(state). At December 31, 2005, the Company had approximately $6,950,000 of net operating loss
carryforwards for federal and state tax reporting purposes available to offset future taxable
income, if any; such carryforwards expire between 2009 and 2026
(federal) and 2005 and 2027
(state). Deferred tax assets and liabilities principally relate to net operating loss
carryforwards and aggregate approximately $2,485,000 before valuation allowance. In assessing
the realizability of the net deferred tax assets, management considers whether it is more
likely than not that some or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during periods in which those temporary differences become deductible. As of December
31, 2006, the Company has provided a full valuation allowance against net deferred tax assets
due to the Companys uncertainty of future taxable income against which the deferred tax asset
may be utilized. Accordingly, no deferred tax asset has been recorded on the accompanying
balance sheet.(9)
    
    ContingenciesAs of December 31, 2006, the Company was not authorized to transact business in any state
other than Delaware, which is its state of incorporation. The Company received an
inquiry from the Florida Department of State (the FDS) inquiring whether the Company should
have registered with the FDS in previous years, beginning in 1998. In
March 2006, the Company responded
to the inquiry and stated it believes its activities in previous years did not
meet the requirements for such registration; however, no assurance can be provided that the
Companys position will be accepted by the FDS. The Company is unable to quantify the amount
of any registration fees and other costs attributable to any failure to register and has not
accrued any amounts in its financial statements related to such inquiry.The Company has recently filed for refunds of approximately $21,700 for unclaimed property in
a state the Company previously conducted business. No assurance can be given that the Company
will prevail in receiving such refund claims.
 F-12