<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

                        COMMISSION FILE NUMBER 0001-22563

                               CDSI HOLDINGS INC.
        (Exact name of small business issuer as specified in its charter)

<TABLE>
<S>                                                       <C>
               DELAWARE                                         95-4463937
    (State or other jurisdiction of                          (I.R.S. Employer
     incorporation or organization)                       Identification Number)
</TABLE>

<TABLE>
<S>                                                             <C>
   100 S.E. SECOND STREET, 32ND FLOOR
                MIAMI, FL                                          33131
(Address of principal executive offices)                        (Zip Code)
</TABLE>

                                 (305) 579-8000
                (Issuer's telephone number, including area code)

     CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE EXCHANGE ACT 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
                                            ---      ---

     INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).

                                        YES  X    NO
                                            ---      ---

     AS OF NOVEMBER 14, 2006, THERE WERE OUTSTANDING 3,120,000 SHARES OF THE
ISSUER'S COMMON STOCK, $.01 PAR VALUE.

================================================================================

<PAGE>

                               CDSI HOLDINGS INC.
                         QUARTERLY REPORT ON FORM 10-QSB
                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
PART I. FINANCIAL INFORMATION

Item 1.  Condensed Financial Statements (Unaudited):

         Condensed Balance Sheets as of September 30,
            2006 and December 31, 2005...................................     2

         Condensed Statements of Operations for the
            three months and nine months ended September 30,
            2006 and 2005................................................     3

         Condensed Statements of Cash Flows for the
            nine months ended September 30, 2006 and 2005................     4

         Notes to the Condensed Financial Statements.....................     5

Item 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations..........................    11

Item 3.  Controls and Procedures.........................................    15

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings...............................................    16

Item 6.  Exhibits........................................................    16

SIGNATURE................................................................    17
</TABLE>


                                        1
<PAGE>

                               CDSI HOLDINGS INC.

                            CONDENSED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                September 30,   December 31,
                                                                    2006            2005
                                                                -------------   ------------
<S>                                                             <C>             <C>
                           ASSETS:

Current assets:
   Cash and cash equivalents ................................    $    67,409    $    91,660
   Investment securities available for sale .................            196          1,820
                                                                 -----------    -----------
      Total assets ..........................................    $    67,605    $    93,480
                                                                 ===========    ===========

            LIABILITIES AND STOCKHOLDERS' EQUITY:

Current liabilities:
   Accounts payable and accrued expenses ....................    $     6,350    $     7,000
                                                                 ===========    -----------
      Total current liabilities .............................          6,350          7,000
                                                                 -----------    -----------

Commitments 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 .......         31,200         31,200
   Additional paid-in capital ...............................      8,209,944      8,209,944
   Accumulated deficit ......................................     (8,180,085)    (8,156,484)
   Accumulated other comprehensive income ...................            196          1,820
                                                                 -----------    -----------
      Total stockholders' equity ............................         61,255         86,480
                                                                 -----------    -----------
      Total liabilities and stockholders' equity ............    $    67,605    $    93,480
                                                                 ===========    ===========
</TABLE>

            See accompanying Notes to Condensed Financial Statements


                                        2

<PAGE>

                               CDSI HOLDINGS INC.

                       CONDENSED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                   Three Months Ended              Nine Months Ended
                                             -----------------------------   -----------------------------
                                             September 30,   September 30,   September 30,   September 30,
                                                  2006            2005            2006            2005
                                             -------------   -------------   -------------   -------------
<S>                                          <C>             <C>             <C>             <C>
Revenues .................................    $       --      $       --      $       --      $       --
                                              ----------      ----------      ----------      ----------

Cost and expenses:
   General and administrative ............         8,349           8,480          26,329          25,986
                                              ----------      ----------      ----------      ----------
                                                   8,349           8,480          26,329          25,986
                                              ----------      ----------      ----------      ----------
Operating loss ...........................        (8,349)         (8,480)        (26,329)        (25,986)
                                              ----------      ----------      ----------      ----------

Other income:

   Interest income .......................           882             809           2,728           2,245
                                              ----------      ----------      ----------      ----------

Net loss .................................    $   (7,467)     $   (7,671)     $  (23,601)     $  (23,741)
                                              ==========      ==========      ==========      ==========
Net loss per share (basic and diluted) ...    $    (0.00)     $    (0.00)     $    (0.01)     $    (0.01)
                                              ==========      ==========      ==========      ==========

Shares used in computing net loss per
   share .................................     3,120,000       3,120,000       3,120,000       3,120,000
                                              ==========      ==========      ==========      ==========
</TABLE>

            See accompanying Notes to Condensed Financial Statements


                                        3

<PAGE>

                               CDSI HOLDINGS INC.

                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                 Nine Months Ended
                                                           -----------------------------
                                                           September 30,   September 30,
                                                                2006           2005
                                                           -------------   -------------
<S>                                                        <C>             <C>
Cash flows used in operating activities:
   Net loss ............................................     $(23,601)       $ (23,741)
   Decrease in accounts payable and accrued expenses ...         (650)          (1,325)
                                                             --------        ---------

Net cash used in operating activities ..................      (24,251)         (25,066)
                                                             --------        ---------

Net cash flows from investing activities ...............           --               --
                                                             --------        ---------

Net cash flows from financing activities ...............           --               --
                                                             --------        ---------

Net decrease in cash ...................................      (24,251)         (25,066)
Cash and cash equivalents at beginning of period .......       91,660          122,946
                                                             --------        ---------

Cash and cash equivalents at end of period .............     $ 67,409        $  97,880
                                                             ========        =========
</TABLE>

            See accompanying Notes to Condensed Financial Statements


                                        4
<PAGE>

                               CDSI HOLDINGS INC.

                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (UNAUDITED)

(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 September 30, 2006, the Company had an accumulated deficit of
     $8,180,085. 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. 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)  PRINCIPLES OF REPORTING

     The financial statements of the Company as of September 30, 2006 presented
     herein have been prepared by the Company and are unaudited. In the opinion
     of management, all adjustments, consisting only of normal recurring
     adjustments, necessary to present fairly the financial position as of
     September 30, 2006 and the results of operations and cash flows for all
     periods presented have been made. Results for the interim periods are not
     necessarily indicative of the results for the entire year.

     These financial statements should be read in conjunction with the audited
     financial statements and notes thereto for the year ended December 31, 2005
     included in the Company's Form 10-KSB filed with the Securities and
     Exchange Commission (Commission File No. 0001-22563).


                                        5

<PAGE>

                               CDSI HOLDINGS INC.

             NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)

     USE OF ESTIMATES

     The preparation of the 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.

(3)  THINKDIRECTMARKETING TRANSACTION

     On November 5, 1998, the Company contributed the non-cash assets and
     certain liabilities of the PC411 Service to ThinkDirectMarketing, Inc.
     ("TDMI") (formerly known as Digital Asset Management, Inc.). The Company
     received preferred stock representing an initial 42.5% interest in TDMI in
     exchange for the contribution of the PC411 Service's net assets. The
     Company's carrying value in the net assets contributed to TDMI totaled
     $73,438. The Company recorded $462,360 as a capital contribution in
     connection with the transaction, which represented the Company's 42.5%
     interest in the capital raised by TDMI in excess of the carrying value of
     the Company's net assets contributed to TDMI. The Company agreed, under
     certain conditions, to fund up to $200,000 of an $800,000 working capital
     line. The Company funded $100,000 of the working capital line in the second
     quarter of 1999. In July 1999, the Company agreed to extend the maturity of
     its working capital line and was released from any further obligation to
     fund additional amounts under the working capital line.

     In October 2000, TDMI and Cater Barnard plc (formerly known as
     VoyagerIT.com) entered into an agreement whereby Cater Barnard purchased
     for $5,000,000 shares of TDMI's convertible preferred stock and convertible
     notes on various dates between November 10, 2000 and June 8, 2001. On
     October 16, 2001, Cater Barnard agreed to use its best efforts to fund an
     additional $1,250,000 to TDMI by January 31, 2002 and on the same date, the
     TDMI stockholders granted Cater Barnard an option to purchase by January
     31, 2002 all of TDMI's common stock not held by Cater Barnard for an
     aggregate purchase price of 78,750 shares of Convertible Preferred Stock of
     Dialog Group Inc. ("Dialog", formerly known as IMX Pharmaceuticals, Inc.).
     Dialog was then a majority-owned subsidiary of Cater Barnard to which Cater
     Barnard had transferred its interest in TDMI. The preferred stock was
     initially convertible into 1,575,000 shares of Dialog Common Stock.

     On January 31, 2002, Dialog acquired all the shares of TDMI it did not
     already own by exercising the option previously granted to Cater Barnard.
     CDSI received 8,250 shares of Dialog Class B Convertible Preferred Stock in
     exchange for its interest in TDMI. Each share of Dialog Class B Preferred
     Stock was entitled to receive an annual dividend of $4.00 on December 31 of
     each year. The dividend was payable at the option of Dialog in shares of
     its Common Stock. The shares of Dialog Class B Preferred Stock to be
     received by the Company were initially convertible into 165,000 shares of
     Dialog Common Stock.

     On November 4, 2002, the holders of Dialog Class B Preferred Stock and
     Dialog agreed to (i) increase the number of common shares into which the
     Dialog Class B Preferred Stock is convertible from 1,575,000 to 3,150,000
     and (ii) eliminate the annual dividend on the Class B Preferred Stock. As a
     result, the Class B Preferred Stock held by CDSI became convertible into
     330,000 shares of Dialog Common Stock and, on February 7, 2003, CDSI
     converted its preferred shares into 330,000


                                        6

<PAGE>

                               CDSI HOLDINGS INC.

             NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)

     shares of Dialog Common Stock. The Company sold 50,000 shares of Dialog
     stock for $4,888 in the third quarter of 2004. See Note 4. On September 18,
     2006, Dialog effected a 1-for-100 reverse stock split. Based on public
     filings by Dialog, management currently estimates that CDSI's interest in
     Dialog (currently 2,800 shares) is less than a 0.1% on a fully-diluted
     basis.

(4)  INVESTMENT SECURITIES AVAILABLE FOR SALE

     The Company's 2,800 shares of Dialog Common Stock may be sold by the
     Company pursuant to Rule 144(k) of the Securities Act of 1933. See Note 3.
     In accordance with Statement of Financial Accounting Standards No. 115,
     "Accounting for Certain Investments in Debt and Equity Securities", the
     Company has classified these shares as "Investment Securities Available for
     Sale" as of September 30, 2006. The Dialog Common Stock is carried at fair
     value, 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 TRANSACTIONS

     Certain 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)  NET LOSS PER SHARE

     Basic loss per share of common stock is computed by dividing net loss
     applicable to common stockholders by the weighted average shares of common
     stock outstanding during the period (3,120,000 shares). Diluted per share
     results reflect the potential dilution from the exercise or conversion of
     securities into common stock.

     Stock options and warrants (both vested and non-vested) totaling 653,333
     shares at September 30, 2006 and 2005, 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.


                                        7

<PAGE>

                               CDSI HOLDINGS INC.

             NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)

(7)  COMPREHENSIVE LOSS

     Comprehensive loss of the Company includes net loss and changes in the
     value of investment securities available for sale that have not been
     included in net income. Comprehensive loss applicable to Common Shares for
     the three and nine months ended September 30, 2006 and 2005 is as follows:

<TABLE>
<CAPTION>
                                    THREE MONTHS ENDED    NINE MONTHS ENDED
                                       SEPTEMBER 30,        SEPTEMBER 30,
                                    ------------------   -------------------
                                      2006      2005       2006       2005
                                    -------   -------    --------   --------
<S>                                 <C>       <C>        <C>        <C>
Net loss ........................   $(7,467)  $(7,671)   $(23,601)  $(23,741)
Net change in unrealized gain
   on investment securities .....      (644)   (1,120)     (1,624)    (7,980)
                                    -------   -------    --------   --------
   Comprehensive loss ...........   $(8,111)  $(8,791)   $(25,225)  $(31,721)
                                    =======   =======    ========   ========
</TABLE>

(8)  STOCK OPTIONS

     The Company grants equity compensation under its 1997 Stock Option Plan
     ("the 1997 Plan"), which provides for the grant of options to purchase the
     Company's stock to the employees and directors of the Company. The term of
     the options granted under the 1997 Plan is limited to 10 years. As of
     September 30, 2006, there were approximately 596,667 shares available for
     issuance under the 1997 Plan.

     Prior to January 1, 2006, the Company accounted for share-based
     compensation plans in accordance with the provisions of APB Opinion No. 25,
     "Accounting for Stock Issued to Employees," as permitted by SFAS No. 123.
     The Company elected to use the intrinsic value method of accounting for
     employee and director share-based compensation expense for its
     non-compensatory employee and director stock option awards and did not
     recognize compensation expense for the issuance of options with an exercise
     price equal to the market price of the underlying common stock on the date
     of grant.

     On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R),
     which requires the Company to value unvested stock options granted prior to
     the adoption of SFAS No. 123(R) under the fair value method of accounting
     and expense this amount in the statement of operations over the stock
     option's remaining vesting period. The Company adopted this new standard,
     prospectively, on January 1, 2006. Because all options outstanding were
     fully vested at January 1, 2006, there was no impact on the Company's
     financial statements. In addition, because all options were fully vested on
     January 1, 2005, there would have been no impact of the Company's financial
     statements for the three and nine months ended September 30, 2005.

     As permitted by SFAS No. 123 and SFAS No. 123(R), the fair value of option
     grants is estimated at the date of grant using the Black-Scholes option
     pricing model. The Black-Scholes option pricing model was developed for use
     in estimating the fair value of traded options which have no vesting
     restrictions and are fully transferable. In addition, option valuation
     models require the input of highly subjective assumptions including
     expected stock price characteristics which are significantly different from
     those of traded options, and because changes in the subjective input
     assumptions can


                                        8

<PAGE>

                               CDSI HOLDINGS INC.

             NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)

     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 three and nine months ended September
     30, 2006 and 2005. If options had been granted, the assumptions used in
     computing fair value under the Black-Scholes option pricing model would
     have been based on the expected option life considering both the
     contractual term of the option and expected employee exercise behavior, the
     interest rate associated with U.S. Treasury issues with a remaining term
     equal to the expected option life and the expected volatility of the
     Company's common stock over the expected term of the option.

     A summary of the Company's stock option activity during the three and nine
     months ended September 30, 2006 follows:

<TABLE>
<CAPTION>
                                                               Weighted-
                                                                Average
                                                  Weighted-    Remaining
                                                   Average    Contractual   Aggregate
                                                   Exercise       Term      Intrinsic
                                         Shares     Price      (in years)    Value(1)
                                        -------   ---------   -----------   ---------
<S>                                     <C>       <C>         <C>           <C>
Outstanding at December 31, 2005 ....   153,333     $2.03         2.2          $--
Granted .............................        --        --          --           --
Exercised ...........................        --        --          --           --
Forfeited or expired ................        --        --          --           --
                                        -------     -----         ---          ---
Outstanding at September 30, 2006 ...   153,333     $2.03         1.4          $--
                                        =======     =====         ===          ===
Exercisable at September 30, 2006 ...   153,333                                $--
                                        =======                                ===
Options vested during period ........        --                                $--
                                        =======                                ===
</TABLE>

----------
(1)  The aggregate intrinsic value represents the amount by which the fair value
     of the underlying common stock ($0.14 at September 30, 2006) exceeds the
     option exercise price.

     In addition to the options issued in connection with the stock option
     plans, the Company has granted New Valley LLC, a wholly-owned subsidiary of
     Vector, options to acquire 500,000 shares of Common Stock at $5.75 per
     share, which fully vested upon the completion of the Company's initial
     public offering in May 1997. The options expire in January 2007.


                                        9

<PAGE>

                               CDSI HOLDINGS INC.

             NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)

(9)  CONTINGENCIES

     As of September 30, 2006, the Company was not authorized to transact
     business in any state other than Delaware, which is its state of
     incorporation. The Company received an inquiry from the Florida Department
     of State (the "FDS") inquiring whether the Company should have registered
     with the FDS in previous years, beginning in 1998. The Company has
     responded to the inquiry and 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.


                                       10
<PAGE>

                               CDSI HOLDINGS INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS

Overview

     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. 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 unaudited condensed 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 preferred stock of Dialog in exchange for its
interest in TDMI. The preferred stock was convertible into 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 the third quarter of 2004. On September 18, 2006, Dialog
effected a 1-for-100 reverse stock split. The Company's remaining 2,800 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 unaudited condensed financial statements.

Results of Operations

     REVENUES

     For the three and nine months ended September 30, 2006 and 2005, the
Company did not generate revenues from operations.


                                       11

<PAGE>

                               CDSI HOLDINGS INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS (CONTINUED)

     EXPENSES

     Expenses associated with corporate activities were $ 8,349 and $26,329 for
the three and nine months ended September 30, 2006, respectively, as compared to
$8,480 and $25,986 for the same periods in the prior year. The expenses were
primarily associated with costs necessary to maintain a public company.

     INTEREST INCOME

     Interest income was $882 and $2,728 for the three and nine months ended
September 30, 2006, compared to $809 and $2,245 for the three and nine months
ended September 30, 2005. The increase is due primarily to higher prevailing
interest rates offset by lower cash balances in 2006 versus 2005.

Liquidity and Capital Resources

     At September 30, 2006, the Company had an accumulated deficit of $8.2
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.

     Cash used for operations for the nine months ended September 30, 2006 and
2005 was $24, 251 and $25,066, respectively. The decrease is associated
primarily with a lower net loss and the timing of payments of accounts payable
and accrued liabilities. The Company evaluates its accruals on a quarterly basis
and makes adjustments when appropriate.

     The Company does not expect significant capital expenditures during the
year ended December 31, 2006.

     At September 30, 2006, the Company had cash and cash equivalents of
$67,409.

     Inflation and changing prices had no material impact on revenues or the
results of operations for the nine months ended September 30, 2006 and 2005.

     The Company's 2,800 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


                                       12

<PAGE>

                               CDSI HOLDINGS INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS (CONTINUED)

shares as "Investment Securities Available for Sale" as of September 30, 2006.
The Dialog Common Stock is carried at fair value ($196), 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. No assurances can be given that an orderly trading market will be
maintained for Dialog's Common Stock. Dialog was delinquent in filing reports
with the Securities and Exchange Commission in 2003 and 2004 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. 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.

     We are not authorized to transact business in any state other than
Delaware, which is our state of incorporation. We received an inquiry from the
Florida Department of State inquiring whether we should have registered with the
Florida Department of State in previous years, beginning in 1998. We have
responded to the inquiry and believe our activities in prior years did not meet
the requirements for such registration; however, no assurance can be provided
that our position will be accepted by the Florida Department of State. We are
unable to quantify the amount of any registration fees and other costs
attributable to any failure to register and have not accrued any amounts in our
financial statements related to such inquiry.

     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 Vector Group Ltd., 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.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     The Company and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"), including any
statements that may be contained in the foregoing "Management's Discussion and
Analysis of Financial Condition and Results of Operations", in this report and
in other filings with the Securities and Exchange Commission and in its reports
to stockholders, which represent the Company's expectations or beliefs with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties and, in connection
with the "safe-harbor" provisions of the Reform Act, the Company has identified
under "Risk Factors" in Item 1 of the Company's Form 10-KSB for the year ended
December 31, 2005 filed with the Securities and Exchange Commission and in this
section important factors that could cause actual results to differ materially
from those contained in any forward-looking statements made by or on behalf of
the Company.

     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


                                       13

<PAGE>

                               CDSI HOLDINGS INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS (CONTINUED)

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. The Company does not undertake to
update any forward-looking statement that may be made from time to time on its
behalf.


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<PAGE>

ITEM 3. 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.


                                       15

<PAGE>

                               CDSI HOLDINGS INC.

                           PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     Reference is made to Note 9 to our unaudited condensed financial
statements.

Item 6. Exhibits

     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.


                                       16

<PAGE>

                                    SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                        CDSI HOLDINGS INC.
                                        (Registrant)


Date: November 14, 2006                 By: /s/ J. Bryant Kirkland III
                                            ------------------------------------
                                            J. Bryant Kirkland III
                                            Vice President, Treasurer
                                            and Chief Financial Officer
                                            (Duly Authorized Officer and
                                            Chief Accounting Officer)


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