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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, 2004 Commission File Number: 0001-22563   CDSI HOLDINGS INC.    Delaware
    
    95-4463937(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 100 S.E. Second Street, 32ndFloor, Miami, Florida
    
    33131(Address of principal executive offices)
    
    (Zip Code)
 305-579-8000
(Issuers telephone number)   Securities registered under Section 12(b) of the Exchange Act:None Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.01 per share
Redeemable Class A Common Stock Purchase Warrants Check whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of issuers knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. x The issuers revenues for the year ended December 31, 2004 were $0. The aggregate market value of the voting stock of the issuer held by non-affiliates of the
issuer on March 23, 2004 based on the closing price on such date was $374,900. As
of March 30, 2005 the issuer had a total of 3,120,000 shares of Common Stock outstanding. Transitional Small Business Disclosure Format: Yes o No x




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TABLE OF CONTENTS  PART IITEM 1. DESCRIPTION OF BUSINESSFORWARD-LOOKING STATEMENTSTHE COMPANYRISK FACTORSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONITEM 7. FINANCIAL STATEMENTSITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 8A. CONTROLS AND PROCEDURESITEM 8B. OTHER INFORMATIONPART III MANAGEMENTITEM 9. DIRECTORS AND EXECUTIVE OFFICERSITEM 10. EXECUTIVE COMPENSATIONITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 13. EXHIBITSItem 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESSIGNATURESPOWER OF ATTORNEYSection 302 Chief Executive Officer CertificationSection 302 Chief Financial Officer CertificationSection 906 Chief Executive Officer CertificationSection 906 Chief Financial Officer Certification    Table of Contents  
 PART I 
 ITEM 1. DESCRIPTION OF BUSINESS 
 FORWARD-LOOKING STATEMENTS Certain statements made in this Annual Report onForm 10-KSBare 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 CDSI Holdings Inc. (the Company) holds limited amounts of cash and an approximate 0.2%
interest on a fully diluted basis in Dialog Group Inc. (Dialog, formerly known as IMX
Pharmaceuticals Inc.). Prior to February 2000, its former wholly-owned subsidiary, Controlled
Distribution Systems, Inc. (CDS), was primarily engaged in marketing and leasing a prepaid,
wireless, remote-operated retail inventory control and dispensing system for tobacco products
called the Coinexx Star 10. Prior to October 2000, CDS also owned traditional cigarette vending
machines and a related vending route. In February 2000, the Company terminated all operations
relating to marketing and leasing the Coinexx Star 10 system. On October 5, 2000, CDS completed
the sale to Gutlove & Shirvant, Inc. (Gutlove) of the assets of its cigarette vending route,
including vending machines and a van. Dialog is a provider of relationship marketing
communications services, business and consumer targeting databases for the healthcare, financial
and other direct-to-customer, direct-to-professional business markets.




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The Company intends to seek new business opportunities. As the Company has only limited cash
resources, the Company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. As of the date of this report, the Company has not identified any potential acquisition
or investment. 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. Company History The Company was incorporated in Delaware in December 1993 under the name PC411, Inc. In
January 1999, it changed its name to CDSI Holdings Inc. to reflect the change in its principal
business. The Company was originally formed to develop an on-line service that transmits name,
address, telephone number and other related information digitally to users of personal computers.
In May 1998 the Company acquired CDS and, in December 1998, CDS acquired substantially all of the
assets of TD Rowe Corporations New York cigarette vending route. In November 1998, the Company
transferred substantially all of the non-cash assets and certain liabilities used in its on-line
data distribution business to ThinkDirectMarketing Inc. (TDMI) in exchange for an initial 42.5%
interest in that company. The other investors of TDMI included Acxiom Corporation, Cater Barnard
plc and TDMIs management and employees. In January 2002, Dialog acquired all the stock of TDMI
that it did not already own, and the Company presently holds 280,000 shares of Dialog Common Stock. Effective November 12, 2003, the Company and its wholly-owned subsidiary CDS merged with the
Company as the surviving corporation. ThinkDirectMarketing, Inc. On November 5, 1998, the Company contributed substantially all the non-cash assets and certain
liabilities related to its on-line electronic delivery information service to TDMI, and received
preferred stock of TDMI. On January 31, 2002, Dialog acquired all the shares of TDMI that it did
not already own by exercising an option previously granted by the remaining TDMI stockholders. The
Company 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 was 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 Class B Preferred Shares into
330,000 shares of Dialog Common Stock. The Company sold 50,000 shares of Dialog stock for $4,888
in 2004. Based on public filings by Dialog, management estimates that CDSIs interest in Dialog is
approximately 0.2% on a fully-diluted basis. Dialog is registered under the Securities Exchange Act of 1934 and is required to file
periodic and other information with the Securities and Exchange Commission (symbol DLGG).
However, Dialog was delinquent in filing its Form 10-QSB for the quarter ended September 30, 2003
which was not filed until January 26, 2004. As a result, its Common Stock was delisted, effective
December 31, 2003, from trading on the NASD OTC Bulletin Board. Dialog was also delinquent in
filing its Form 10-KSB for the -2-




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year ended December 31, 2003, which was not filed until April 29, 2004. Effective February 8,
2005, Dialogs common stock resumed trading on the NASD OTC Bulletin Board. Employees As of December 31, 2004, the Company had two employees, its President and Chief Executive
Officer and its Vice President and Chief Financial Officer, both of whom are also employees of New
Valley Corporation (New Valley), its largest stockholder. The Company believes that it has good
relations with its employees. 
 RISK FACTORS Accumulated Deficit; History of Losses.At December 31, 2004, the Company had an accumulated
deficit of approximately $8.1 million. The Company has reported an operating loss in each of its
fiscal quarters since inception and 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 that the Company will continue to incur operating losses. Limited Resources and No Source of Operating Revenues. At December 31, 2004, the Company had
cash and cash equivalents of $122,946 and net working capital of $126,096. Since the sale of CDSs
vending route in October 2000, the Company has had no source of operating revenue. The Company
will not achieve any significant revenues until the consummation of an acquisition or investment,
if ever. Moreover, there can be no assurance that any acquisition or investment, if achieved, will
result in material revenues from its operations or that it will operate on a profitable basis. A Limited Trading Market Exists for Dialog Group Inc.The Company owns 280,000 shares of
Common Stock of Dialog, which are carried at $10,500 on the Companys Balance Sheet at December 31,
2004. 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, 2004. The Dialog Common Stock is
carried at fair value, based on the last trade prior to December 31, 2004, 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. During 2004, the average daily trading volume of Dialogs Common Stock
was approximately 92,838 shares, with 104 days of 252 trading days having no trading activity. No
assurances can be given that an orderly trading market will be maintained for Dialogs Common Stock
as Dialog was delinquent in filing a quarterly report with the Securities and Exchange Commission
in 2003 and, as a result, its shares were delisted from the NASD OTC Bulletin Board. Following the
delisting, the Dialog shares traded on the OTC Pink Sheets until the shares resumed trading on the
NASD OTC Bulletin Board on February 8, 2005. See Note 3 to the Companys Financial Statements. Additional Financing Requirements.The Companys ability to complete any acquisition or
investment opportunities it may identify will depend upon the availability of, and its ability to
secure, new equity or debt financing. The Company has no commitments for any financing. Further,
there can be no assurance that the Company will be able to generate levels of revenues and cash
flows sufficient from any acquisition or investment to fund operations or that the Company will be
able to obtain financing on satisfactory terms, if at all, to achieve profitable operations. Blind Pool; Broad Discretion of Management.Prospective investors who invest in the Company
will do so without an opportunity to evaluate the specific merits or risks of any proposed
transactions. As a result, investors will be entirely dependent on the broad discretion and
judgment of -3-




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management in connection with the application of the Companys working capital and the selection of
an acquisition or investment target. There can be no assurance that determinations ultimately made
by the Company will permit the Company to achieve profitable operations. Acquisition and Investment Risks.As part of its business strategy, the Company may evaluate
new acquisition and investment opportunities. Acquisitions involve numerous risks, including
difficulties in the assimilation of the operations and products or services of the acquired
companies, the expenses incurred in connection with the acquisition and subsequent assimilation of
operations and products or services and the potential loss of key employees of the acquired
company. There can be no assurance that the Company will successfully identify, complete or
integrate any future acquisitions or investments or that completed acquisitions or investments will
contribute favorably to the Companys operations and future financial condition. Dependence Upon Executive Officers and Board of Directors. The ability of the Company to
successfully effect a transaction will be largely dependent upon the efforts of its management and
the Board of Directors. The Company only has two employees, none of whom work full-time for the
Company. No assurance can be given that the Board of Directors and management will be successful
in consummating a transaction and achieving profitability. Limited Trading Market. During 1999, the Companys securities were delisted from the Nasdaq
SmallCap market for failure to comply with the minimum listing maintenance requirements. As a
result, the Companys securities currently trade on the OTC Bulletin Board of the National
Association of Security Dealers, Inc. Consequently, a stockholder could likely find it more
difficult to sell or to obtain quotations as to prices of the Companys securities. In addition,
there is a limited trading market in the Companys securities. During 2004, the average daily
trading volume of the Companys Common Stock was approximately 2,697 shares, with 192 days of 252
trading days having no trading activity. No assurances can be given that the Companys Common
Stock will continue to trade on the OTC Bulletin Board or that an orderly trading market will be
maintained for the Companys Common Stock. Absence of Full-Time Management Personnel.In November 1998, all of the Companys executive
officers resigned and were hired by TDMI. In addition, in February 1999, the former President of
CDS resigned. The Companys current President and Chief Executive Officer and its Vice President
and Chief Financial Officer are executive officers of New Valley. Neither of these individuals
devotes his full time and attention to the affairs of the Company. Concentration of Stock Ownership.Alki Corp., a wholly-owned subsidiary of New Valley,
beneficially owns approximately 55.0% of the Companys outstanding Common Stock. As a result, New
Valley, through its subsidiary, controls all matters requiring stockholder approval, including the
election of directors, the appointment of officers and approval of significant corporate
transactions including a merger, an acquisition or a sale of all or substantially all of the
Companys assets. Such concentration of ownership may also have the effect of delaying or
preventing a change in control of the Company. In addition, the Company is subject to a State of
Delaware statute regulating business combinations, which may also hinder or delay a change of
control. Absence of Dividends.The Company has never paid nor does it expect in the foreseeable future
to pay any dividends. Limitation on Director Liability.To the extent permitted under the Delaware General
Corporation Law, the Companys Restated Certificate of Incorporation limits the liability of
directors for monetary damages for breaches of a directors fiduciary duty, including breaches that
constitute gross negligence. As a result, under certain circumstances, neither the Company nor its
stockholders may be able to recover damages from directors. -4-




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Dilution.The Board of Directors of the Company, without any action by the stockholders, is
authorized to designate and issue additional classes or series of capital stock (including classes
or series of preferred stock) as it deems appropriate and to establish the rights, preferences and
privileges of such classes or series. The issuance of any new class or series of capital stock
would not only dilute the ownership interest of the current stockholders of the Company but may
also adversely affect the voting power and other rights of holders of Common Stock. The rights of
holders of preferred stock and other classes of common stock that may be issued may be superior to
the rights of the holders of the existing class of Common Stock in terms of the payment of ordinary
and liquidating dividends and voting rights. Forward-looking Statements.This report contains forward-looking statements that involve
risks and uncertainties. Words such as anticipate, believes, expects, future and intends
and similar expressions are used to identify forward-looking statements. You should not unduly
rely on these forward-looking statements, which apply only as of the date of this report. The
Companys actual results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks described above and elsewhere in this report. 
 ITEM 2. PROPERTIES The Companys corporate offices are located in the executive offices of New Valley. Until
April 2003, CDS leased approximately 5,738 square feet of office space in Fort Lee, New Jersey that
was previously used for its corporate offices, sales, customer service and administrative
functions. From January 2003 until April 2003, the Company sublet at its cost the New Jersey
facility on a month-to-month basis. In April 2003, the Company reached a settlement with the
lessor where it was released from the remaining lease obligations of $76,124 in exchange for the
forfeiture of a security deposit of $18,505. The Company believes that its current facilities are
adequate for the foreseeable future. 
 ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any pending legal proceedings. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -5-




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PART II 
 ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
               PURCHASES OF EQUITY SECURITIES The Companys Common Stock is currently traded on the OTC Bulletin Board under the symbol
CDSI. The following table sets forth for the periods indicated, the reported high and low
closing bid quotations per share for the Companys Common Stock. The sale prices set forth below
reflect inter-dealer quotations, do not include retail mark-ups, markdowns or commissions and do
not necessarily represent actual transactions. High
    
    
    Low2004Fourth Quarter
    
    $
    0.140
    
    
    $
    0.080Third Quarter
    
    
    0.090
    
    
    
    0.045Second Quarter
    
    
    0.140
    
    
    
    0.080First Quarter
    
    
    0.160
    
    
    
    0.0802003Fourth Quarter
    
    $
    0.300
    
    
    $
    0.090Third Quarter
    
    
    0.200
    
    
    
    0.070Second Quarter
    
    
    0.200
    
    
    
    0.050First Quarter
    
    
    0.060
    
    
    
    0.040
 As of March 23, 2005, there were 31 holders of record of the Companys Common Stock. Dividend Policy The Company has never declared or paid dividends on its Common Stock and does not expect to
pay any dividends in the foreseeable future. Recent Sales of Unregistered Securities No securities were issued by the Company in 2004. Issuer Purchases of Equity Securities No securities of the Company were repurchased by the Company during the fourth quarter of
2004. -6-




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ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Overview Based on public filings by Dialog, management estimates that the Company owns an approximate
0.2% interest in Dialog on a fully diluted basis. The Company intends to seek new investments in
other business opportunities. As the Company has only limited cash resources, the Company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. ThinkDirectMarketing, Inc. On November 5, 1998, the Company contributed substantially all the non-cash assets and certain
liabilities related to its on-line electronic delivery information service to TDMI, and received
preferred stock of TDMI. See Note 3 to the Financial Statements for additional information
concerning the Companys former investment in TDMI. On January 31, 2002, Dialog acquired all the shares of TDMI it did not already own by
exercising an option previously granted by the remaining TDMI stockholders. The Company received
convertible preferred stock of Dialog in exchange for its interest in TDMI, and, on February 7,
2003, CDSI converted its Class B Preferred Shares into 330,000 shares of Dialog Common Stock. The
Company sold 50,000 shares of Dialog stock for $4,888 in 2004. The Companys remaining 280,000
Dialog shares may be sold by the Company pursuant to Rule 144(k) of the Securities Act of 1933.
See Notes 3 and 4 to the Financial Statements. Results of Operations Revenues For the years ended December 31, 2004 and 2003, the Company did not generate revenues from
operations. Expenses Expenses associated with corporate activities were $41,776 and $52,209 for the years ended
December 31, 2004 and 2003, respectively. The expenses in both years were primarily associated
with costs necessary to maintain a public company. The decrease in expenses in the 2004 periods
primarily relate to lower audit fees accrued for CDSIs 2004 annual audit as a result of CDSI
changing independent registered public accounting firms in the third quarter of 2004 and lower
printing expenses in 2004 versus 2003. The expenses for the year ended December 31, 2003 have been
reduced by adjustments of previously established accruals of $2,605. The adjustment in 2003
related to a liability established when the Company vacated previously leased office space. The
Company evaluates accruals on a quarterly basis and adjusts as appropriate. Other Income Other income for the year ended December 31, 2004 consisted of gains on the sale of
investments and interest income. CDSI recorded a $4,888 gain on its disposal of 50,000 shares of
Dialog -7-




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stock for the year ended December 31, 2004. See Notes 3 and 4 to the
consolidated financial statements. Interest income was $1,675 and $2,037 for the years ended
December 31, 2004 and 2003, respectively. The decrease in interest income was due primarily to
lower prevailing interest rates and lower cash balances in 2004 versus 2003. Liquidity and Capital Resources At December 31, 2004, the Company had an accumulated deficit of approximately $8.1 million.
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. No assurance can be
given that the Company will not continue to incur operating losses. The Company has limited available cash, limited cash flow, limited liquid assets and no credit
facilities. The Company has not been able to generate sufficient cash from operations and, as a
consequence, financing has been required to fund ongoing operations. Since completion of the
Companys initial public offering of its common stock (the IPO) in May 1997, the Company has
primarily financed its operations with the net proceeds of the IPO. The funds were used to
complete the introduction of the PC411 Service over the Internet, to expand marketing, sales and
advertising, to develop or acquire new services or databases, to acquire CDS and for general
corporate purposes. In connection with the IPO, the Company issued 2,322,500 Redeemable Class A
Warrants (the Warrants), including 1,000,000 of which were held by New Valley. The Warrants,
which entitled the holder to purchase one share of Common Stock at an initial exercise price of
$6.10, expired unexercised on May 13, 2002. Cash used for operations for the years ended December 31, 2004 and 2003 was $41,776 and
$50,753, respectively. Cash provided from investing activities of $4,888 for the year ended December 31, 2004
consisted of gains on the sale of 50,000 shares of Dialog Common Stock. See Notes 3 and 4 to the
consolidated financial statements. The Company does not expect significant capital expenditures during the year ended December
31, 2005. At December 31, 2004, the Company had cash and cash equivalents of $122,946. The Company does
not currently have any commitments for any additional financing, and there can be no assurance that
any such commitments can be obtained. Any additional equity financing may be dilutive to its
existing stockholders, and debt financing, if available, may involve pledging some or all of its
assets and may contain restrictive covenants with respect to raising future capital and other
financial and operational matters. Inflation and changing prices had no material impact on revenues or the results of operations
for the years ended December 31, 2004 and 2003. The Companys 280,000 shares of Dialog Common Stock may be sold pursuant to Rule 144(k) of the
Securities Act of 1933. 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 September 30, 2004. The Dialog
Common Stock is carried at fair value ($14,280), based on the last trade prior to September 30,
2004, 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 -8-




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trading market for the shares and the Company may not be able to sell any material portion of
its shares at prevailing market prices. No assurances can be given that an orderly trading market
will be maintained for Dialogs Common Stock. Dialog was delinquent in filing a quarterly report
with the Securities and Exchange Commission and, as a result, its Common Stock was delisted,
effective December 31, 2003, from the NASD OTC Bulletin Board. Following the delisting, the Dialog
shares traded on the OTC Pink Sheets until the shares resumed trading on the NASD OTC Bulletin
Board on February 8, 2005. Dialog was also delinquent in filing its Form 10-KSB for the year ended
December 31, 2003, which was not filed until April 29, 2004. The Company sold 50,000 shares of
Dialog stock for $4,888 in the third quarter of 2004. Management is currently evaluating alternatives to supplement the Companys present cash and
cash equivalents to meet its liquidity requirements over the next twelve months. Such alternatives
include seeking additional investors and/or lenders and disposing of the shares of Dialog Common
Stock held by the Company. Although there can be no assurance, the Company believes that it will
be able to continue as a going concern for the next twelve months. The Company or its affiliates, including New Valley, may, from time to time, based upon
present market conditions, purchase shares of the Common Stock in the open market or in privately
negotiated transactions. 
 ITEM 7. FINANCIAL STATEMENTS Reference is made to the Financial Statements, the report thereon and notes thereto,
commencing on page F-1 to this report. 
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On September 7, 2004, the Audit Committee voted to dismiss the independent registered public
accounting firm of PricewaterhouseCoopers LLP and approve the engagement of the firm of Becher
Della Torre Gitto & Company PC, as the Companys independent registered public accounting firm for
the fiscal year ending December 31, 2004. The reports of PricewaterhouseCoopers on the financial statements of CDSI as of and for the
two fiscal years ended December 31, 2003 and 2002 did not contain an adverse opinion or a
disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope
or accounting principle and during the fiscal years ended December 31, 2003 and 2002 and through
September 7, 2004 there were no disagreements with PricewaterhouseCoopers on any matter of
accounting principles or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers, would have
caused PricewaterhouseCoopers to make reference thereto in its reports on the financial statements
for such years. -9-




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ITEM 8A. CONTROLS AND PROCEDURES Under the supervision and with the participation of the Companys management, including its
principal executive officer and principal financial officer, the Company has evaluated the
effectiveness of its disclosure controls and procedures as of the end of the period covered by this
report, and, based on that evaluation, its principal executive officer and principal financial
officer have concluded that these controls and procedures are effective. There were no changes in
the Companys internal control over financial reporting during the period covered by this report
that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting. Disclosure controls and procedures are the Companys controls and other procedures that are
designed to ensure that information required to be disclosed by it 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 Securities and Exchange 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 it in the reports that it files or submits under the
Exchange Act is accumulated and communicated to its management, including its principal executive
officer and principal financial officer, as appropriate to allow timely decisions regarding
disclosure . 
 ITEM 8B. OTHER INFORMATION None. -10-




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PART III
MANAGEMENT 
 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS Set forth below are the names, ages and positions of the Companys directors and executive
officers as of March 23, 2005. Name
    
    Age
    
    PositionRichard J. Lampen.
    
    
    51
    
    
    President, Chief Executive Officer and DirectorJ. Bryant Kirkland III
    
    
    39
    
    
    Vice President, Chief Financial Officer,
Secretary, Treasurer and DirectorRobert M. Lundgren.
    
    
    46
    
    
    DirectorHenry Morris.
    
    
    51
    
    
    Director
 Richard J. Lampen, age 51, has served as President and Chief Executive Officer of the
Company since November 1998 and as a director of the Company since January 1997. Since October
1995, Mr. Lampen has been the Executive Vice President of New Valley, a publicly-held company
principally engaged in the real estate business and seeking to acquire additional operating
companies and real estate properties. Since July 1996, he has served as the Executive Vice
President of New Valley affiliate, Vector Group Ltd. (Vector), a New York Stock Exchange listed
holding company. From May 1992 to September 1995, Mr. Lampen was a partner at Steel Hector &
Davis, a law firm located in Miami, Florida. From January 1991 to April 1992, Mr. Lampen was a
Managing Director at Salomon Brothers Inc., an investment bank, and was an employee at Salomon
Brothers Inc from 1986 to April 1992. Mr. Lampen is a director of New Valley and Ladenburg
Thalmann Financial Services Inc. Mr. Lampen has served as a director of a number of other
companies, including U.S. Can Corporation, The International Bank of Miami, N.A. and Specs Music
Inc., as well as a court-appointed independent director of Trump Plaza Funding, Inc. Mr. Lampen
received a Bachelor of Arts degree from The Johns Hopkins University in 1975 and received a Juris
Doctorate degree in 1978 from Columbia Law School. J. Bryant Kirkland III, age 39, has served as the Companys Vice President, Chief Financial
Officer, Secretary and Treasurer since January 1998 and as a director of the Company since November
1998. Mr. Kirkland has served in various financial capacities with New Valley since November 1994
and since January 1998 as the Vice President, Treasurer and Chief Financial Officer of New Valley.
Since January 2001, Mr. Kirkland has served as a Vice President of Vector and from June 2001 until
October 2002, Mr. Kirkland served as Chief Financial Officer of Ladenburg Thalmann Financial
Services Inc. Mr. Kirkland received a Bachelor of Science in Business Administration from the
University of North Carolina in 1987. Robert M. Lundgren, age 46, has served as a director of the Company since January 1997. He
also served as Vice President, Chief Financial Officer, Secretary and Treasurer of the Company from
January 1997 through January 14, 1998. Mr. Lundgren has served as Director of Finance and
Operations of Palmer Trinity School in Miami, Florida since July 2002. Mr. Lundgren was an
independent consultant from October 2001 until July 2002. From January 14, 1998 to October 2001,
Mr. Lundgren was employed by Solar Cosmetic Labs, Inc. as Chief Financial Officer. From November
1994 through January 14, 1998, Mr. Lundgren was employed by New Valley where he served as Vice
President and Chief Financial Officer from May 1996 to January 14, 1998. From November 1992
through November 1994, Mr. Lundgren worked for Deloitte & Touche as a Senior Manager in the audit
practice. Mr. Lundgren has been a certified public accountant since 1981 and holds a Bachelor of
Science in Accounting from Wake Forest University. -11-




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Henry Morris, age 51, became a director of the Company in May 1997. Since 1989, Mr. Morris
has been the Chairman and President of Morris & Carrick, Inc., a political and media consulting
firm. Mr. Morris is also Chairman of the Board and Chief Executive Officer of Curran & Connors,
Inc., a designer and producer of annual reports and corporate literature. Mr. Morris is a director
of eSpeed, Inc., which operates electronic interactive marketplaces for financial and non-financial
products. Mr. Morris received a Bachelor of Arts degree in 1974 from Columbia College and a Juris
Doctorate degree in 1978 from Columbia Law School. Each director of the Company holds office until the next annual meeting of stockholders, or
until his successor is elected and qualified. At present, the Companys By-laws provide for not
less than two directors or more than nine directors. Currently, there are four directors. The
By-laws permit the Board of Directors to fill any vacancy and such director may serve until the
next annual meeting of stockholders or until his successor is elected and qualified. Officers
serve at the discretion of the Board of Directors. Audit Committee The Audit Committee of the Companys Board of Directors consists of Messrs. Lundgren and
Morris. The Companys Board of Directors has determined that Mr. Lundgren is an audit committee
financial expert, and that Messrs. Lundgren and Morris are independent, as those terms are
defined under the applicable Securities and Exchange Commission rules. In determining that Messrs.
Lundgren and Morris are independent, the Board used the definition of independence in Rule
4200(a)(15) of the NASDs listing standards. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Companys officers and
directors, and persons who own more than ten percent of a registered class of the Companys equity
securities, to file reports of ownership and changes in ownership with the Securities and Exchange
Commission (the SEC). Officers, directors and greater than ten percent shareholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms which they file.
Based solely on review of the copies of such forms furnished to the Company, or written
representations that no Forms 5 were required, the Company believes that, during and with respect
to the fiscal year ended December 31, 2003, all officers and directors complied with applicable
Section 16(a) filing requirements. Code of Ethics The Company has adopted a Code of Ethics that applies to the Companys two employees, its
President and Chief Executive Officer and its Vice President and Chief Financial Officer. The
Company will provide, without charge, a copy of the Code of Ethics on the written request of any
person addressed to the Companys Chief Financial Officer at CDSI Holdings Inc., 100 S.E. Second
Street, 32nd Floor, Miami, Florida 33131. 
 ITEM 10. EXECUTIVE COMPENSATION Executive Compensation The following table sets forth the combined remuneration paid or accrued by the Company during
its last three fiscal years to those persons who were, at December 31, 2004, the Companys Chief
Executive Officer or who were executive officers whose cash compensation exceeded $100,000 (the
named executive officers). -12-




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Summary Compensation Table Long TermCompensationName and
    
    
    
    
    
    
    Annual Compensation
    
    Common Shares
    
    
    All OtherPrincipal Position
    
    Year
    
    
    Salary
    
    
    Bonus
    
    
    Underlying Options
    
    
    CompensationRichard J. Lampen
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    --
    
    
    
    President and Chief
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Executive Officer(1)
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   (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 2004, 2003 or 2002, other than the normal compensation paid to directors of the
Company. See Compensation of Directors. Stock Options In order to attract and retain persons necessary for the business of the Company, the Company
adopted the 1997 Stock Option Plan (the Option Plan) covering up to 750,000 shares, pursuant to
which officers, directors and key employees of the Company and consultants to the Company are
eligible to receive incentive and/or non-incentive stock options. The Option Plan, which expires
ten years from the date of its adoption, is administered by the Board of Directors or the
Compensation Committee. The selection of participants, allotment of shares, determination of price
and other conditions relating to the grant of options is determined by the Board of Directors or
the Compensation Committee. Incentive stock options granted under the Option Plan are exercisable
for a period of up to 10 years from the date of grant at an exercise price which is not less than
the fair market value of the Common Stock on the date of the grant, except that the term of an
incentive stock option granted under the Option Plan to a stockholder owning more than 10% of the
outstanding Common Stock may not exceed five years and its exercise price may be not less than 110%
of the fair market value of the shares on the date of the grant. Under the Option Plan, each director who is not a full-time employee of the Company,
immediately upon first taking office, is granted options to purchase 6,000 shares of Common Stock
exercisable at the fair market value of such shares on the date of grant. Options for 3,000 shares
covered thereby are exercisable immediately and options for 3,000 shares become exercisable on the
first anniversary of the date of grant. Subsequently, the Option Plan provides for annual grants of
options to purchase 3,000 shares of Common Stock upon reelection as a director of the Company. At
the Companys annual meeting on January 12, 1999, each director was granted options to purchase
3,000 shares of Common Stock at $0.44 per share. Employment Agreements There is no employment agreement between the Company and Mr. Lampen, the named executive
officer. Compensation of Directors The Company pays each director who is not a full-time employee of the Company an annual
retainer of $5,000, payable quarterly, and reimburses the directors for reasonable travel expenses
incurred in connection with their activities on behalf of the Company. See Stock Options. -13-




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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
                  RELATED STOCKHOLDER MATTERS The following table sets forth, as of March 23, 2005, the beneficial ownership of the
Companys Common Stock (the only class of voting securities) by (i) each person known to the
Company to own beneficially more than five percent of the Common Stock, (ii) each of the Companys
directors, (iii) each of the Companys named executive officers (as such term is defined in the
Summary Compensation Table above) and (iv) all directors and executive officers as a group. Unless
otherwise indicated, each person possesses sole voting and investment power with respect to the
shares indicated as beneficially owned, and the business address of each person is 100 S.E. Second
Street, Miami, Florida 33131. Number of Shares of
    
    
    PercentageName and Address(1)
    
    Common Stock
    
    
    of OwnershipNew Valley Corporation(2)(3)
    
    
    1,990,000
    
    
    
    55.0
    %Alki Corp.(3)204D Weldin BuildingWilmington, DE 19810J. Bryant Kirkland III(4)
    
    
    9,000
    
    
    
    *Richard J. Lampen(4)
    
    
    9,000
    
    
    
    *Henry Morris(4)
271 Madison Avenue
New York, NY 10016
    
    
    9,000
    
    
    
    *Robert Lundgren(4)
14545 SW 79th Court
Miami, FL 33158
    
    
    16,333
    
    
    
    *All executive officers and directors
as a group (4 persons)(4)
    
    
    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)
    
    Includes 500,000 shares subject to warrants, which are currently exercisable or
exercisable within 60 days of the date hereof.(3)
    
    Both New Valley and Alki Corp. (Alki), a wholly-owned subsidiary of New Valley,
have shared voting and investment power with regard to such shares. J. Bryant Kirkland III,
an executive officer and a director of the Company, serves as Vice President, Chief Financial
Officer and Treasurer of New Valley and Alki and Richard J. Lampen, an executive officer and a
director of the Company, serves as Executive Vice President of New Valley and Alki and as a
director of New Valley. Neither Mr. Kirkland nor Mr. Lampen has investment authority or
voting control over the Companys securities owned by New Valley or Alki. The other executive
officers and directors of New Valley are Bennett S. LeBow, Chairman and Chief Executive
Officer of New Valley; Howard M. Lorber, President of New Valley and a director of New Valley
and Chairman, President and Chief Executive Officer of Alki; Marc N. Bell, Vice President,
Associate General Counsel and Secretary of New Valley and Alki; and Henry C. Beinstein, Arnold
I. Burns, Ronald J. Kramer, Barry W. Ridings and Victor M. Rivas, directors of New Valley.(4)
    
    Includes shares subject to options and/or warrants currently exercisable or
exercisable within 60 days of the date hereof. -14-




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##### Table of Contents



Equity Compensation Plan Information The following table summarizes information about the options, warrants and rights and other
equity compensation under the Companys equity plans as of December 31, 2004. 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 issued in 1997 to a wholly-owned subsidiary of New Valley, 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 Certain accounting and related finance functions are performed on behalf of the Company by
employees of the Companys principal stockholder, New Valley. Expenses incurred relating to these
functions are allocated to the Company and paid as incurred to New Valley based on managements
best estimate of the cost involved. The amounts allocated were immaterial for all periods
presented herein. 
 ITEM 13. EXHIBITS Exhibits The 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 The Audit Committee reviews and approves audit and permissible non-audit services performed by
 Becher Della Torre Gilto & Company PC, as well as the fees
charged for such
services. In its review of non-audit service fees and its appointment of Becher Della Torre Gitto
& Company PC as the Companys independent accountants, the Audit Committee considered whether the provision
of such services is compatible with maintaining Becher Della Torre Gitto
& Company PC independence. All of
the services provided and fees charged by Becher Della Torre Gitto
& Company PC in 2004 and
by PricewaterhouseCoopers LLP in 2004 and 2003 were pre-approved by the Audit Committee. Audit Fees. The aggregate fees billed by Becher Della Torre Gitto & Company PC for
professional services for the audit of the annual financial statements of the Company for 2004 and
the review of the financial statements included in the Companys quarterly report on Form 10-QSB
for the quarter ended September 30, 2004 was $6,500, net of expenses. The aggregate fees billed by
PricewaterhouseCoopers LLP for professional services for reviews of the financial statements
included in the Companys quarterly reports on Form 10-QSB for the quarters ended March 31, 2004
and June 30, 2004 was $4,000, net of expenses. The aggregate fees billed by PricewaterhouseCoopers
LLP for professional services for the audit of the annual financial statements of the Company and
the reviews of -16-




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##### Table of Contents



the financial statements included in the Companys quarterly reports on Form 10-QSB for 2003 was
$16,000, net of expenses. Audit-Related Fees.There were no other fees billed by Becher Della Torre Gitto & Company PC
during the last two fiscal years for assurance and related services that were reasonably related to
the performance of the audit or review of the Companys financial statements and not reported under
Audit Fees above. The aggregate fees billed by PricewaterhouseCoopers LLP during the last two
fiscal years for assurance and related services that were reasonably related to the performance of
the audit or review of the Companys financial statements and not reported under Audit Fees above
includes $1,500 billed in connection with the review of the Companys Form 8-K, dated September 7,
2004, in connection with the change of the independent registered
certified public accounting firm and a $750 fee incurred in connection
with the issuance of PricewaterhouseCoopers consent for its report for the year
ended December 31, 2003 to be included in the Companys
Form 10-KSB for the year ended December 31, 2004. Tax Fees. There were no fees billed by Becher Della Torre Gitto & Company PC or
PricewaterhouseCoopers LLP during the last two fiscal years for professional services rendered by
such firms for tax compliance, tax advice and tax planning. All Other Fees. There were no other fees billed by Becher Della Torre Gitto & Company PC or
PricewaterhouseCoopers LLP during the last two fiscal years for products and services provided by
such firms. -17-




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SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on March 30, 2005, on its behalf by the undersigned, thereunto
duly authorized. CDSI Holdings Inc.By:
    /s/ J. Bryant Kirkland IIIJ. Bryant Kirkland IIIVice President and Chief Financial
Officer 
 POWER OF ATTORNEY The undersigned directors and officers of CDSI Holdings Inc. hereby constitute and appoint
Richard J. Lampen and J. Bryant Kirkland III, and each of them, with full power to act without the
other and with full power of substitution and resubstitution, our true and lawful attorneys-in-fact
with full power to execute in our name and behalf in the capacities indicated below, this Annual
Report on Form 10-KSB and any and all amendments thereto and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and Exchange Commission,
and hereby ratify and confirm all that such attorneys-in-fact, or any of them, or their substitutes
shall lawfully do or cause to be done by virtue hereof. In accordance with the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Company and in the capacities indicated on March 30, 2005. 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 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. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2004 and 2003 (With Report of Independent Registered Certified Public Accounting Firms Thereon)




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CDSI HOLDINGS INC. AND SUBSIDIARIES Index to Consolidated Financial Statements PageReport of
Independent Registered Public Accounting Firm
    
    
    F-2Report of
Independent Registered Certified Public Accounting Firm
    
    
    F-3Audited Financial Statements:Consolidated Balance Sheet
    
    
    F-4Consolidated Statements of Operations
    
    
    F-5Consolidated Statements of Stockholders Equity
    
    
    F-6Consolidated Statements of Cash Flows
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8




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Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of
CDSI Holdings Inc.: We have audited the accompanying balance sheet of CDSI Holdings Inc. (the Company) as of December
31, 2004, and the related statements of operations, stockholders equity, and cash flows for the
year then ended. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audit. The
financial statements of CDSI Holdings Inc. as of December 31, 2003, were audited by other auditors
whose report dated February 5, 2004, expressed an unqualified opinion on those statements. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 2004 financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2004, and the results of its
operations and its cash flows for the year then ended in conformity with U.S. generally accepted
accounting principles. /s/ Becher Della Torre Gitto & Company, PC  
 F-2




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Report of Independent Registered Certified Public Accounting Firm To the Board of Directors and Stockholders
of CDSI Holdings Inc.: In our opinion, the consolidated statements of operations, of stockholders equity and of cash
flows for the year ended December 31, 2003 (appearing on pages F-5 to F-7 of this Form 10-KSB)
present fairly, in all material respects, the results of operations and of cash flows of CDSI
Holdings Inc. and its subsidiaries for the year ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. These financial
statements are the responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our audit of these
statements 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.
An audit 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, and evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. PricewaterhouseCoopers LLP
Miami, Florida
February 5, 2004 F-3




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CDSI HOLDINGS INC. Balance Sheet December 31,2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    122,946Investment securities available for sale
    
    
    10,500Total assets
    
    $
    133,446Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    7,350Total current liabilities
    
    
    7,350Commitments 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
    
    
    (8,125,548
    )Accumulated other comprehensive income
    
    
    10,500Total stockholders equity
    
    
    126,096Total liabilities and stockholders equity
    
    $
    133,446
 See accompanying notes to consolidated financial statements. F-4




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CDSI HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Operations Years Ended December 31,2004
    
    
    2003Revenues
    
    $
    
    
    
    $
    Cost and expenses:General and administrative
    
    
    41,776
    
    
    
    52,20941,776
    
    
    
    52,209Operating loss
    
    
    (41,776
    )
    
    
    (52,209
    )Other income:Gain on sale of investments
    
    
    4,888
    
    
    
    Interest income
    
    
    1,675
    
    
    
    2,0376,563
    
    
    
    2,037Net loss
    
    $
    (35,213
    )
    
    $
    (50,172
    )Net loss per share (basic and diluted)
    
    $
    (0.01
    )
    
    $
    (0.02
    )Shares used in computing net loss
per share
    
    
    3,120,000
    
    
    
    3,120,000
 See accompanying notes to consolidated financial statements. F-5




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CDSI HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of
Stockholders Equity AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    EquityBalance at December 31,
2002
    
    
    3,120,000
    
    
    $
    31,200
    
    
    $
    8,209,944
    
    
    $
    (8,040,163
    )
    
    $
    
    
    
    $
    200,981Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,172
    )
    
    
    
    
    
    
    (50,172
    )Unrealized gain on
investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,150
    
    
    
    18,150Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,022
    )Balance at December 31,
2003
    
    
    3,120,000
    
    
    
    31,200
    
    
    
    8,209,944
    
    
    
    (8,090,335
    )
    
    
    18,150
    
    
    
    168,959Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,213
    )
    
    
    
    
    
    
    (35,213
    )Net unrealized gains
reclassified into net
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,888
    )Change in unrealized
loss on
investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,762
    )
    
    
    (7,650
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,863
    )Balance at December 31,
2004
    
    
    3,120,000
    
    
    $
    31,200
    
    
    $
    8,209,944
    
    
    $
    (8,125,548
    )
    
    $
    10,500
    
    
    $
    126,096
 See accompanying notes to consolidated financial statements. F-6




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CDSI HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended December 31,2004
    
    
    2003Cash flows from operating activities:Net loss
    
    $
    (35,213
    )
    
    $
    (50,172
    )Adjustments to reconcile net loss to
net cash used in operating activities:Gain on sale of investments
    
    
    (4,888
    )
    
    
    Changes in assets and liabilities:Accounts payable and accrued expenses
    
    
    (6,175
    )
    
    
    (581
    )Net cash used in operating activities
    
    
    (46,276
    )
    
    
    (50,753
    )Net cash flows provided from investing activitiesProceeds from sale of investments
    
    
    4,888
    
    
    
    Net cash flows provided from investing activities
    
    
    4,888
    
    
    
    Net cash flows provided from investing activities
    
    
    
    
    
    
    Net decrease in cash
    
    
    (41,388
    )
    
    
    (50,753
    )Cash and cash equivalents beginning of period
    
    
    164,334
    
    
    
    215,087Cash and cash equivalents at end of period
    
    $
    122,946
    
    
    $
    164,334Supplemental cash flow information:Cash paid during year for:Interest
    
    
    
    
    
    
    Income taxes
    
    
    
    
    
    
    
 See accompanying notes to consolidated financial statements. F-7




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CDSI HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  (1)
    Business and Organization  CDSI 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, 2004, the Company had an accumulated
deficit of approximately $8,125,548.
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 explore investments in other 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. As of the date of this report, the Company has not identified any potential
acquisition or investment. 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 PoliciesThe consolidated financial statements include the accounts of the Company and its
majority-owned subsidiaries. All significant intercompany transactions have been eliminated.Cash 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. F-8




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CDSI HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Continued  Investment Securities Available for SaleThe Company owns 280,000 shares of Dialog Group Inc. (Dialog) Common Stock and classifies
its investment in Dialog as Investment Securities Available for Sale. The Dialog Common
Stock is carried at fair value, based on the last trade prior to December 31, 2004, 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, 2004 and 2003 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 United States 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. F-9




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CDSI HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Continued  (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 was
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 2004. Based on public filings by Dialog, management currently
estimates that CDSIs interest in Dialog is approximately 0.2% on a fully-diluted basis. F-10




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CDSI HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Continued  (4)
    Investment Securities Available for SaleThe Companys 280,000 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, 2004. The Dialog Common Stock is carried at fair value, based on the
last trade prior to December 31, 2004, 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 Companys principal stockholder, New Valley Corporation (New Valley).
Expenses incurred relating to these functions are allocated to the Company and paid as
incurred to New Valley based on managements best estimate of the cost involved. The amounts
allocated were immaterial for all periods presented herein.(6)
    Stock OptionsThe Companys 1997 Stock Option Plan (the 1997 Plan) 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. Subject to certain limitations
under the 1997 Plan, the number of awards, the terms and conditions of any award granted
thereunder (including the exercise price, grant price or purchase price) are at the discretion
of the Board of Directors. The Board of Directors has reserved 750,000 shares of the Companys
common stock for issuance under the 1997 Plan and, at December 31, 2003, 153,333 of the
granted options were outstanding and exercisable. F-11




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CDSI HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Continued  The following table summarizes information regarding outstanding and exercisable options as of
December 31, 2004: Exercise
    
    Number
    
    Weighted Average
    
    NumberPrice
    
    Outstanding
    
    Contractual Life (Years)
    
    Exercisable$0.28
    
    
    6,000
    
    
    
    3.85
    
    
    
    6,0000.44
    
    
    12,000
    
    
    
    4.04
    
    
    
    12,0001.50
    
    
    110,000
    
    
    
    3.25
    
    
    
    110,0005.50
    
    
    25,333
    
    
    
    2.39
    
    
    
    25,333153,333
    
    
    
    
    
    
    
    153,333
  The Company applies APB Opinion No. 25 and related Interpretations in accounting for its stock
options. In 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting
for Stock-Based Compensation, which, if fully adopted, changes the methods of recognition of
cost on certain stock options. Had compensation cost for the Companys stock options been
determined based on the fair value at the date of grant consistent with SFAS 123, the
Companys net loss and basic and diluted net loss per share would have been $(35,213) or
$(0.01) in 2004 and $(50,172) or $(0.02) in 2003.No options were granted or forfeited for the year ended December 31, 2004 and the weighted
average exercise price per share of options outstanding is $2.02.In addition to the options issued in connection with the stock option plans, the Company has
granted Alki Corp., a wholly-owned subsidiary of New Valley, 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 expire in January 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. F-12




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CDSI HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Continued  (8)
    Income TaxesDuring the years ended December 31, 2004 and 2003, the Company had no income and therefore
made no provision for Federal and state income taxes.At December 31, 2004, the Company had approximately $6,910,000 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 2025 (federal) and 2005 and 2025
(state). Deferred tax assets and liabilities principally relate to net operating loss
carryforwards and aggregate approximately $2,400,000 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, 2004, 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. F-13