##### 



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, 2007
 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
 x o
 x
 x o
    o x




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##### 



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
 Additional Financing Requirements.
 Blind Pool; Broad Discretion of Management.
 Acquisition and Investment Risks.
 Dependence Upon Executive Officers and Board of Directors
 3




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##### 



Limited Trading Market
 Absence of Full-Time Management Personnel.
 Concentration
of Stock Ownership.
 Absence of Dividends.
 Limitation on Director Liability.
 Dilution.
 Forward-looking Statements.
 ITEM 2.
    
    PROPERTIES
  ITEM 3.
    
    LEGAL PROCEEDINGS
  ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  4




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##### 



PART II
 ITEM 5.
    
    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
  High
    
    
    Low2007Fourth Quarter
    
    $
    0.250
    
    
    $
    0.155Third Quarter
    
    
    0.300
    
    
    
    0.175Second Quarter
    
    
    0.220
    
    
    
    0.170First Quarter
    
    
    0.250
    
    
    
    0.1452006Fourth Quarter
    
    $
    0.150
    
    
    $
    0.131Third Quarter
    
    
    0.140
    
    
    
    0.120Second Quarter
    
    
    0.150
    
    
    
    0.130First Quarter
    
    
    0.180
    
    
    
    0.142
  Dividend Policy
  Recent Sales of Unregistered Securities
  Issuer Purchases of Equity Securities
  5




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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
   6




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##### 



Liquidity and Capital Resources
          ITEM 7.
    
    FINANCIAL STATEMENTS
  ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  7




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##### 



ITEM 8A(T).
    
    CONTROLS AND PROCEDURES
 (a) Evaluation of Disclosure Controls and Procedures
  (b) Managements Annual Report on Internal Control over Financial Reporting
 Internal Control  Integrated Framework
  (c) Inherent Limitations on Effectiveness of Controls
  (d) Changes in Internal Control Over Financial Reporting
  ITEM 8B.
    
    OTHER INFORMATION
  8




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##### 



PART III
MANAGEMENT
 ITEM 9.
    
    DIRECTORS AND EXECUTIVE OFFICERS
  Name
    
    Age
    
    PositionRichard J. Lampen.
    
    
    54
    
    
    President, Chief Executive Officer and DirectorJ. Bryant Kirkland III
    
    
    42
    
    
    Vice President, Chief Financial Officer,
Secretary, Treasurer and DirectorRobert M. Lundgren.
    
    
    49
    
    
    Director
 Richard J. Lampen
 J. Bryant Kirkland III
 Robert M. Lundgren
 9




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##### 



Audit Committee
  Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics
 nd
 ITEM 10.
    
    EXECUTIVE COMPENSATION
 Executive Compensation
  Summary Compensation Table
 NonqualifiedNon-Equity
    
    DeferredOption
    
    Incentive Plan
    
    Compensation
    
    All Other
    
    TotalName and
    
    
    
    
    
    Salary
    
    Bonus
    
    Stock Awards
    
    Awards
    
    Compensation
    
    Earnings
    
    Compensation
    
    CompensationPrincipal Position
    
    Year
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)Richard J. Lampen
    
    
    2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NonePresident and Chief
Executive
Officer(1)
    
    
    2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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 2007 or 2006, other than the normal compensation paid to directors of the Company.
See Compensation of Directors. Stock Options
   10




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##### 



Option Awards
    
    
    Stock AwardsEquityIncentiveEquity
    
    
    PlanIncentive
    
    
    Awards:Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan
    
    
    Market orIncentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    
    PayoutPlan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of
    
    
    Value ofAwards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unearned
    
    
    UnearnedNumber of
    
    
    
    
    
    
    Number of
    
    
    
    
    
    
    
    
    
    
    Number
    
    
    Market
    
    
    Shares,
    
    
    Shares,Securities
    
    
    Number of
    
    
    Securities
    
    
    
    
    
    
    
    
    
    
    of Shares
    
    
    Value of
    
    
    Units or
    
    
    Units orUnderlying
    
    
    Securities
    
    
    Underlying
    
    
    
    
    
    
    
    
    
    
    or Units
    
    
    Shares or
    
    
    Other
    
    
    OtherUnexercised
    
    
    Underlying
    
    
    Unexercised
    
    
    
    
    
    
    
    
    
    
    of Stock
    
    
    Units of
    
    
    Rights
    
    
    RightsOptions
    
    
    Options
    
    
    Unearned
    
    
    Option
    
    
    Option
    
    
    That
    
    
    Stock That
    
    
    That Have
    
    
    That(#)
    
    
    (#)
    
    
    Options
    
    
    Exercise
    
    
    Expiration
    
    
    Have Not
    
    
    Have Not
    
    
    Not Vested
    
    
    Have NotName
    
    Exercisable
    
    
    Unexercisable
    
    
    (#)
    
    
    Price ($)
    
    
    Date
    
    
    Vested (#)
    
    
    Vested ($)
    
    
    (#)
    
    
    Vested ($)Richard J. Lampen
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    $
    0.44
    
    
    
    1/12/09
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Employment Agreements and Other Compensation Plans
  Compensation of Directors
   Changes inPensionFees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value andEarned
    
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    
    Nonqualifiedor Paid
    
    
    Stock
    
    
    Option
    
    
    Incentive Plan
    
    
    Deferred
    
    
    All Otherin Cash
    
    
    Awards
    
    
    Awards
    
    
    Compensation
    
    
    Compensation
    
    
    CompensationName
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    Earnings ($)
    
    
    ($)
    
    
    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
 11




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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 OwnershipVector Group
Ltd.(2)
    
    
    1,490,000
    
    
    
    47.8
    %Jay Gottlieb(3)
    
    
    309,680
    
    
    
    9.9
    %27 Misty Brooke LaneNew Fairfield, CT 06812J. Bryant Kirkland III(4)
    
    
    9,000
    
    
    
    *Richard J. Lampen(4)
    
    
    3,000
    
    
    
    *Robert Lundgren(4)
    
    
    3,000
    
    
    
    *14545 SW
79th Court
Miami, FL 33158All executive officers and directors
as a group (3 persons)(4)
    
    
    15,000
    
    
    
    *
 
 *
    
    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)
    
    Vector has voting and investment power
with regard to such shares. Prior to November 2007, Vectors
subsidiary, New Valley LLC, held 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)
    
    Based on Schedule 13G filed on August 23, 2006, as amended, by Jay Gottlieb.(4)
    
    Includes shares subject to options and/or warrants currently exercisable or
exercisable within 60 days of the date hereof. 12




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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)
    
    
    128,000
    
    
    $
    1.34
    
    
    
    Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    128,000
    
    
    $
    1.34
    
    
    
    
 
 (1)
    
    Includes options to purchase 128,000 shares of the Companys Common Stock under the 1997
Stock Option Plan, which were approved by stockholders. For additional information concerning
the options, see Note 6 to the Companys Financial Statements. 13




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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)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
 Audit-Related Fees.
 Tax Fees
 All Other Fees
 14




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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
    
    Director, President andRichard J. Lampen
    
    Chief Executive Officer/s/ J. Bryant Kirkland III
    
    Director, Vice President, Treasurer andJ. Bryant Kirkland III
    
    Chief Financial Officer
(principal accounting and financial officer)/s/ Robert Lundgren
    
    DirectorRobert Lundgren
 15




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##### 



CDSI HOLDINGS INC.




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##### 



CDSI HOLDINGS INC.
 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 31,2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    50,288Investment securities available for saleTotal assets
    
    $
    50,288Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    6,650Total current liabilities
    
    
    6,650Commitments 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
    
    
    (8,197,506
    )Accumulated other comprehensive income
    
    
    Total stockholders equity
    
    
    43,638Total liabilities and stockholders equity
    
    $
    50,288
  F-3




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##### 



CDSI HOLDINGS INC.
  Years Ended December 31,2007
    
    
    2006Revenues
    
    $
    
    
    
    $
    Cost and expenses:General and administrative
    
    
    35,070
    
    
    
    33,98335,070
    
    
    
    33,983Operating loss
    
    
    (35,070
    )
    
    
    (33,983
    )Other income:Gain on sale of Dialog common stock
    
    
    204
    
    
    
    Recovery of unclaimed property
    
    
    21,791
    
    
    
    Interest income
    
    
    2,501
    
    
    
    3,53524,292
    
    
    
    3,535Net loss
    
    $
    (10,574
    )
    
    $
    (30,448
    )Net loss per share (basic and diluted)
    
    $
    (0.00
    )
    
    $
    (0.01
    )Shares used in computing net lossPer 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, 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 January 1, 2007
    
    
    3,120,000
    
    
    $
    31,200
    
    
    $
    8,209,944
    
    
    $
    (8,186,932
    )
    
    $
    224
    
    
    $
    54,436Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,574
    )
    
    
    
    
    
    
    (10,574
    )Net realized gains reclassified
into net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (204
    )
    
    
    (204
    )Change in unrealized gain on
investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )Net change in unrealized gains
on investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (224
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,798
    )Balance at December 31, 2007
    
    
    3,120,000
    
    
    $
    31,200
    
    
    $
    8,209,944
    
    
    $
    (8,197,506
    )
    
    $
    
    
    
    $
    43,638
  F-5




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##### 



CDSI HOLDINGS INC.
  Years Ended December 31,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (10,574
    )
    
    $
    (30,448
    )Adjustments to reconcile net loss to
net cash used in operating activities:Changes in assets and liabilities:Gain on investment securities
    
    
    (204
    )
    
    
    Accounts payable and accrued expenses
    
    
    (950
    )
    
    
    600Net cash used in operating activities
    
    
    (11,728
    )
    
    
    (29,848
    )Net cash flows provided from investing activities:Sale of investment securities
    
    
    204
    
    
    
    Net cash flows provided from investing activities
    
    
    204
    
    
    
    Net cash flows provided from financing activities
    
    
    
    
    
    
    Net decrease in cash
    
    
    (11,524
    )
    
    
    (29,848
    )Cash and cash equivalents beginning of period
    
    
    61,812
    
    
    
    91,660Cash and cash equivalents at end of period
    
    $
    50,288
    
    
    $
    61,812Supplemental cash flow information:Cash paid during year for:Interest
    
    
    
    
    
    
    Income taxes
    
    
    
    
    
    
    
  F-6




---



##### 



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, 2007, the Company had an accumulated deficit of approximately $8,197,506. 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.
 F-7




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##### 



CDSI HOLDINGS INC.
 Investment Securities Available for SalePrior to April 10, 2007, the Company owned 2,800 shares of Dialog Group Inc. (Dialog) Common
Stock and classified its investment in Dialog as Investment Securities Available for Sale as
of December 31, 2006. The Dialog Common Stock was carried at fair value, based on the last
trade prior to December 31, 2006, and net unrealized gains were included as a component of
stockholders equity. The Company sold 50,000 shares of Dialog stock in 2004 for a net gain
of $4,888 and 2,800 shares of Dialog sock in 2007 for a net gain of $204. Realized gains and
losses are included in other income. 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 128,000 and 653,333 shares at December 31, 2007 and 2006, respectively,
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 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
(500 shares adjusted for reverse stock split) 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.
On April 10, 2007, the Company sold its remaining 2,800 shares of Dialog stock for $204 and
the Company recorded a gain of $204 from the sale for the year ended December 31, 2007.
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##### 



CDSI HOLDINGS INC.
 (4)
    
    Investment Securities Available for SaleIn accordance with Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities, the Company classified its 2,800 shares of
Dialog Common Stock as Investment Securities Available for Sale as of December 31, 2006. The
Dialog Common Stock was carried at fair value, based on the last trade prior to December 31,
2006 and net unrealized gains were included as a component of stockholders equity. On April
10, 2007, the Company sold its remaining 2,800 shares of Dialog stock for $204 and the Company
recorded a gain of $204 from the sale for the year ended December 31, 2007. See Note 3.(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 granted equity compensation under its 1997 Stock Option Plan (the 1997 Plan),
which expired on January 29, 2007 and provided 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 was limited to 10 years from the date of grant.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.
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##### 



CDSI HOLDINGS INC.
 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, 2007 and 2006. 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.Approximately 25,333 options to acquire shares of Common Stock expired in 2007. In addition to
the options issued to employees, 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.
These options expired in March 2007.A summary of the Companys stock option activity during the years ended December 31, 2006 and
2007, respectively, are as follows:
 Weighted-AverageWeighted-
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateExercise
    
    
    Term
    
    
    IntrinsicShares
    
    
    Price
    
    
    (in years)
    
    
    Value(1)Outstanding at January 1, 2006
    
    
    153,333
    
    
    $
    2.03
    
    
    
    2.2
    
    
    $
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited or expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at December 31, 2006
    
    
    153,333
    
    
    $
    2.03
    
    
    
    1.2
    
    
    $
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited or expired
    
    
    (25,333
    )
    
    
    5.50Outstanding at December 31, 2007
    
    
    128,000
    
    
    $
    1.34
    
    
    
    0.35
    
    
    $
    Exercisable at December 31, 2007
    
    
    128,000
    
    
    
    
    
    
    
    
    
    
    $
    Options vested during period
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
 
 (1)
    
    The aggregate intrinsic value represents the amount by which the fair value of the
underlying common stock ($0.19 and $0.14 at December 31, 2007 and 2006,
respectively) exceeds the option exercise price. (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, 2007 and 2006, the Company had no income and therefore
made no provision for Federal and state income taxes.At December 31, 2007 and 2006, the Company had approximately $6,995,000 and $6,980,000,
respectively, 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 2027 (state). Deferred tax assets and liabilities principally
relate to net operating loss carryforwards and aggregate approximately $2,490,000 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, 2007, 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, 2007, 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 received refunds of approximately $21,791 in 2007 for unclaimed property in a
state the Company previously conducted business.
 F-12