UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549








FORM
10-Q








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





For the
quarterly period ended:  September 30, 2009





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





For the
transition period from ___________ to ___________.





Commission
File Number: 0-13591





BPO
MANAGEMENT SERVICES, INC.


(Exact
Name of Registrant as Specified in Its Charter)





Pennsylvania
            
            23-2214195(State
      or Other Jurisdiction of Incorporation or
              Organization)
            
            (IRS
      Employer Identification No.)







1290
      N. Hancock, Ste 200, Anaheim, CA
            
            92807(Address
      of Principal Executive Offices)
            
            (Zip
      Code)







(714)
      974-2670(Registrant’s  Telephone
      Number, Including Area Code)





Indicate
by check mark whether the registrant (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 ý   No o





Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for shorter period that the registrant was required to submit and
post such files).  Yes  ̈   No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer,” “and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
      accelerated filer
            o
            Accelerated
      filer
            oNon-accelerated
      filer
            o
            Smaller
      reporting company
            x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes o  
No ý





The
number of shares outstanding of the registrant’s only class of common stock,
$0.10 par value, was 15,116,838 on November 12, 2009.














PART
      IFINANCIAL
      INFORMATIONPageItem
      1.  Financial Statements
            3Condensed
      Consolidated Statements of Operations and Comprehensive Loss for the three
      and nine months ended September 30, 2009 and 2008
    (Unaudited)
            3Condensed
      Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and
      December 31, 2008
            4Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      30, 2009 and 2008 (Unaudited)
            5Notes
      to Condensed Consolidated Financial Statements (Unaudited)
            7Item
      2.  Management's Discussion and Analysis of Financial Condition
      and Results of Operations
            18Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
            27Item
      4T.  Controls and Procedures
            27PART
      IIOTHER
      INFORMATIONItem
      1.  Legal Proceedings
            28Item
      1-A  Risk Factors
            28Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
            28Item
      3.  Defaults Upon Senior Securities
            28Item
      4.  Submission of Matters to a Vote of Security
      Holders
            28Item
      5.  Other Information
            28Item
      6.  Exhibits
            29Signatures
            30Exhibits
      Attached to this Quarterly Report on Form 10-Q
            31




2





PART I -
FINANCIAL INFORMATION





ITEM 1.
FINANCIAL STATEMENTS





BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Unaudited)




Three
      months ended
              
              
              Nine
      months endedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Revenues:IT
      outsourcing services
              
              $
              2,676,977
              
              
              $
              3,377,155
              
              
              $
              8,510,841
              
              
              $
              9,827,698Healthcare
              
              
              3,334,816
              
              
              
              -
              
              
              
              10,446,628
              
              
              
              -Human
      resource outsourcing servicing
              
              
              86,139
              
              
              
              366,157
              
              
              
              614,978
              
              
              
              1,338,992Total
      revenues
              
              
              6,097,932
              
              
              
              3,743,312
              
              
              
              19,572,447
              
              
              
              11,166,690Operating
      expenses:Cost
      of services provided
              
              
              4,511,790
              
              
              
              1,938,998
              
              
              
              14,007,957
              
              
              
              5,213,168Selling,
      general and administrative
              
              
              1,955,387
              
              
              
              2,037,938
              
              
              
              6,780,035
              
              
              
              6,210,920Research
      and development
              
              
              124,429
              
              
              
              81,221
              
              
              
              349,189
              
              
              
              228,258Depreciation
      and amortization
              
              
              1,032,106
              
              
              
              544,781
              
              
              
              3,045,721
              
              
              
              1,660,672Share-based
      compensation
              
              
              -
              
              
              
              207,091
              
              
              
              18,333
              
              
              
              621,275Restructuring
      costs
              
              
              -
              
              
              
              -
              
              
              
              382,207
              
              
              
              -Goodwill
      and intangible asset impairment
              
              
              2,356,452
              
              
              
              -
              
              
              
              2,356,452
              
              
              
              -Total
      operating expenses
              
              
              9,980,164
              
              
              
              4,810,029
              
              
              
              26,939,894
              
              
              
              13,934,293Loss
      from operations
              
              
              (3,882,232
              )
              
              
              (1,066,717
              )
              
              
              (7,367,447
              )
              
              
              (2,767,603
              )Interest
      expenseRelated
      parties
              
              
              18,782
              
              
              
              27,148
              
              
              
              57,948
              
              
              
              80,853Other,
      net
              
              
              110,816
              
              
              
              12,953
              
              
              
              346,840
              
              
              
              54,029Total
      interest expense
              
              
              129,598
              
              
              
              40,101
              
              
              
              404,788
              
              
              
              134,882Loss
      before income taxes
              
              
              (4,011,830
              )
              
              
              (1,106,818
              )
              
              
              (7,772,235
              )
              
              
              (2,902,485
              )Income
      tax expense
              
              
              -
              
              
              
              19,500
              
              
              
              15,600
              
              
              
              63,952Loss
      from continuing operations
              
              
              (4,011,830
              )
              
              
              (1,126,318
              )
              
              
              (7,787,835
              )
              
              
              (2,966,437
              )Discontinued
      operations (Note 3):Loss
      from sale of discontinued business
              
              
              (203,854
              )
              
              
              (736,088
              )
              
              
              (2,942,175
              )
              
              
              (1,599,374
              )Net
      loss
              
              
              (4,215,684
              )
              
              
              (1,862,406
              )
              
              
              (10,730,010
              )
              
              
              (4,565,811
              )Foreign
      currency translation gain (loss)
              
              
              (110,658
              )
              
              
              (8,372
              )
              
              
              349,677
              
              
              
              (188,566
              )Comprehensive
      loss
              
              $
              (4,326,342
              )
              
              $
              (1,870,778
              )
              
              $
              (10,380,333
              )
              
              $
              (4,754,377
              )Loss
      per share - basic and dilutedLoss
      from continuing operations
              
              $
              (0.27
              )
              
              $
              (0.09
              )
              
              $
              (0.51
              )
              
              $
              (0.24
              )Loss
      from discontinued operations
              
              
              (0.01
              )
              
              
              (0.06
              )
              
              
              (0.19
              )
              
              
              (0.13
              )Net
      loss per share - basic and diluted
              
              $
              (0.28
              )
              
              $
              (0.15
              )
              
              $
              (0.70
              )
              
              $
              (0.37
              )Basic
      and diluted weighted average commonshares
    outstanding
              
              
              15,138,379
              
              
              
              12,671,034
              
              
              
              15,156,517
              
              
              
              12,529,216





See
accompanying notes to condensed consolidated financial
statements.


2008
amounts have been reclassified to reflect discontinued operations. See Note
3
 3
  BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 AS OF
SEPTEMBER 30, 2009 AND DECEMBER 31, 2008 (UNAUDITED)


2009
            
            
            2008ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            1,004,790
            
            
            $
            2,895,711Accounts
      receivable, net of allowance for doubtful accounts of $534,858 and$505,338, respectively
            
            
            3,933,364
            
            
            
            5,408,156Prepaid
      expenses and other current assets
            
            
            1,046,258
            
            
            
            928,647Current
      assets held for sale
            
            
            -
            
            
            
            2,290,630Total
      current assets
            
            
            5,984,412
            
            
            
            11,523,144Equipment,
      net
            
            
            6,828,277
            
            
            
            7,170,213Goodwill
            
            
            -
            
            
            
            2,282,064Intangible
      assets, net
            
            
            3,633,328
            
            
            
            4,192,955Other
      assets
            
            
            614,513
            
            
            
            1,244,641Non-current
      assets held for sale
            
            
            -
            
            
            
            4,447,545$
            17,060,530
            
            
            $
            30,860,562LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Current
      portion of lines of credit and long-term debt
            
            $
            3,050,345
            
            
            $
            2,196,652Current
      portion of capital lease obligations
            
            
            487,343
            
            
            
            394,765Accounts
      payable
            
            
            5,737,822
            
            
            
            4,687,333Accrued
      expenses
            
            
            2,989,265
            
            
            
            2,856,021Restructuring
      liability
            
            
            316,711
            
            
            
            -Accrued
      interest-related party
            
            
            57,948
            
            
            
            -Accrued
      dividend payable
            
            
            1,369,331
            
            
            
            1,369,331Accrued
      dividend payable-related party
            
            
            651,281
            
            
            
            651,281Amount
      due former shareholders of acquired companies
            
            
            -
            
            
            
            1,000,000Deferred
      revenues
            
            
            1,609,883
            
            
            
            2,091,277Related
      party notes payable
            
            
            830,246
            
            
            
            930,246Other
      current liabilities
            
            
            120,000
            
            
            
            137,715Current
      liabilities associated with assets held for sale
            
            
            -
            
            
            
            4,101,437Total
      current liabilities
            
            
            17,220,175
            
            
            
            20,416,058Lines
      of credit and long-term debt, net of current portion
            
            
            -
            
            
            
            722,304Capital
      lease obligations, net of current portion
            
            
            799,488
            
            
            
            690,278Other
      long-term liabilities
            
            
            1,110,440
            
            
            
            742,520Non-current
      liabilities associated with assets held for sale
            
            
            -
            
            
            
            5,694Total
      liabilities
            
            
            19,130,103
            
            
            
            22,576,854Commitments
      and contingencies (Note 9)Stockholders'
      equityConvertible
      preferred stock, Series B, par value $1.00; authorized 21,105,000shares; 21,103,955 shares issued and outstanding
            
            
            21,103,955
            
            
            
            21,103,955Common
      stock, par value $0.10; authorized 1,900,000,000 shares;15,138,379  shares issued and outstanding
            
            
            1,513,838
            
            
            
            1,516,559Additional
      paid-in capital
            
            
            14,716,978
            
            
            
            14,687,206Accumulated
      deficit
            
            
            (39,436,739
            )
            
            
            (28,706,729
            )Accumulated
      other comprehensive income (loss), foreign currency translation
      adjustments
            
            
            32,395
            
            
            
            (317,283
            )Total
      stockholders' equity
            
            
            (2,069,573
            )
            
            
            8,283,708$
            17,060,530
            
            
            $
            30,860,562





See
accompanying notes to condensed consolidated financial statements.


2008
amounts have been reclassified to reflect assets and liabilities held for sale
of discontinued operations. See Note 3


4


BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)




2009
              
              
              2008Cash
      flows from operating activities:Net
      loss
              
              $
              (10,730,010
              )
              
              $
              (4,565,811
              )Adjustments
      to reconcile net loss to net cash providedby (used in) operating
      activities:Loss
      from sale of discontinued operations
              
              
              2,942,175
              
              
              
              1,599,374Depreciation
              
              
              2,568,181
              
              
              
              872,604Amortization
      of intangible assets
              
              
              477,540
              
              
              
              788,068Increase
      in the reserve for doubtful accounts
              
              
              321,120
              
              
              
              -Non-cash
      equity compensation expense
              
              
              27,051
              
              
              
              621,275Goodwill
      and intangible asset impairment
              
              
              2,356,452
              
              
              
              -Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              1,153,672
              
              
              
              (1,074,931
              )Prepaid
      expenses and other current assets
              
              
              247,425
              
              
              
              (316,499
              )Other
      assets
              
              
              265,092
              
              
              
              (404,744
              )Accounts
      payable
              
              
              1,050,489
              
              
              
              (481,800
              )Accrued
      expenses
              
              
              133,244
              
              
              
              554,594Restructuring
      liability
              
              
              316,711
              
              
              
              -Accrued
      interest-related parties
              
              
              57,948
              
              
              
              (27,306
              )Accrued
      dividends-related parties
              
              
              -
              
              
              
              897,556Amount
      due former shareholders of acquired companies
              
              
              -
              
              
              
              (215,944
              )Deferred
      revenues
              
              
              (481,394
              )
              
              
              400,836Other
      long-term liabilities
              
              
              370,364
              
              
              
              -Net
      cash provided by (used in) operating activities
              
              
              1,076,060
              
              
              
              (1,352,728
              )Cash
      flows from investing activities:Purchase
      of equipment and internally developed capitalized software,
      net
              
              
              (1,639,067
              )
              
              
              (659,895
              )Release
      of restricted cash
              
              
              -
              
              
              
              922,888Net
      cash provided by (used in) investing activities
              
              
              (1,639,067
              )
              
              
              262,993Cash
      flows from financing activities:Proceeds
      from bank loans
              
              
              111,230
              
              
              
              491,292Repayment
      of notes issued to former shareholders of acquired
    companies
              
              
              (1,000,000
              )
              
              
              (885,827
              )Repayment
      of capital lease obligations
              
              
              (385,390
              )
              
              
              (161,036
              )Proceeds
      from issuance of preferred stock, net of cash paid for commissions and
      direct costs
              
              
              -
              
              
              
              5,157,996Dividends
      accrued on preferred stock
              
              
              -
              
              
              
              (753,461
              )Repayment
      of notes payable - related party
              
              
              (100,000
              )
              
              
              (200,000
              )Net
      cash provided by (used in) financing activities
              
              
              (1,374,160
              )
              
              
              3,648,964Net
      cash used in discontinued operations
              
              
              (711,131
              )
              
              
              (419,882
              )Effect
      of exchange rate changes on cash and cash equivalents
      (cumulative)
              
              
              757,377
              
              
              
              (72,212
              )Net
      change in cash
              
              
              (1,890,921
              )
              
              
              2,067,135Cash
      and cash equivalents, beginning of period
              
              
              2,895,711
              
              
              
              857,941Cash
      and cash equivalents, end of period
              
              $
              1,004,790
              
              
              $
              2,925,076
  See
accompanying notes to condensed consolidated financial
statements.


2008
amounts have been reclassified to reflect cash flows from discontinued
operations. See Note 3


5


BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)


2009
              
              
              2008Supplemental
      disclosure of cash flow information:Cash
      paid for:Interest
              
              $
              346,840
              
              
              $
              300,050Income
      taxes
              
              $
              15,600
              
              
              $
              70,465Supplemental
      disclosure of non-cash investing and financingactivities:Acquisition
      of equipment under capital leases
              
              $
              587,178
              
              
              $
              434,146Issuance
      of Series F Preferred Stock
              
              $
              -
              
              
              $
              8,949













See
accompanying notes to condensed consolidated financial statements.
 2008
amounts have been reclassified to reflect cash flows from discontinued
operations. See Note 3


6





BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009








1. 
Organization and Basis of Presentation





Organization





BPO
Management Services, Inc. was incorporated in 1982 in the state of Pennsylvania
and was previously named Healthaxis, Inc.  On December 30, 2008,
Healthaxis Inc. (as used in these Condensed Consolidated Financial Statements,
“Healthaxis”) acquired the publicly held BPO Management Services, Inc. (“Legacy
BPOMS”) in a reverse merger and immediately changed its name to BPO Management
Services, Inc., also referred to “BPOMS.”  BPOMS is a provider of
business process outsourcing services providing information technology
outsourcing (“ITO”) services, Healthcare administrative systems and related
services and financial and accounting outsourcing (“Healthcare”) services and
human resource outsourcing (“HRO”) services to middle market
enterprises.





For
accounting purposes, the acquisition has been treated as a recapitalization of
Legacy BPOMS as the acquirer. The historical consolidated financial statements
prior to December 30, 2008, are those of the Legacy BPOMS. All share-related
data have been presented giving effect to the recapitalization resulting from
the reverse merger.  References in these Condensed Consolidated
Financial Statements to the “Company” or “BPOMS” refer to BPOMS.





Basis of
Presentation





The
following unaudited condensed financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange
Commission.  Certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations, although the company believes that the disclosures made
are adequate to make the information not misleading.  Operating results for
the three and nine month period ended September 30, 2009 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2009. The interim condensed consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements and related footnotes included in our Annual Report on
Form 10-K for the year ended December 31, 2008. For 2008, amounts have been
reclassified to reflect discontinued operations on the condensed consolidated
statements of operations, condensed consolidated balance sheets, condensed
consolidated statements of cash flows and in the notes contained herein (see
Note 3).





2.
 Summary of Significant Accounting Policies





Principles
of Consolidation





The
condensed consolidated financial statements include the accounts of BPOMS and
its wholly-owned subsidiaries. All significant intercompany accounts,
transactions and profits among the consolidated entities have been
eliminated upon consolidation. Each of the following entities is included
in consolidation as of date of its inception or acquisition.








7




Company
            
            Inception/Acquisition
      DateBPO
      Management Services, Inc. (the "Company") or
      ("BPOMS")
            
            Inception
      date:  July 26, 2005Adapsys
      Document Management LP ("ADM") (2)
            
            Acquired:  July
      29, 2005Adapsys
      LP ("ADP") (2)
            
            Acquired:  July
      29, 2005Digica,
      Inc. ("Digica") (1)
            
            Acquired:  January
      1, 2006Novus
      Imaging Solutions, Inc. ("Novus") (2)
            
            Acquired:  September
      30, 2006NetGuru
      Systems, Inc. ("NGSI")
            
            Acquired:  December
      15, 2006Research
      Engineers, GmbH ("GmbH")
            
            Acquired:  December
      15, 2006DocuCom
      Imaging Solutions, Inc. ("DocuCom") (2)
            
            Acquired:  June
      21, 2007Human
      Resource Micro-Systems, Inc. ("HRMS")
            
            Acquired:  June
      29, 2007Blue
      Hill Data Services, Inc. ("Blue Hill")
            
            Acquired:  October
      10, 2007BPO
      Management Services, Ltd. ("BPOMS Ltd") (2)
            
            Amalgamation: 
      January 1, 2008Healthaxis
      Inc. ("Healthaxis") (3)
            
            Acquired:  December
      30, 2008




(1)
Effective January 1, 2008, Digica was merged with Blue Hill


(2) On
January 1, 2008, ADM, ADP, Novus and DocuCom were amalgamated into one
company, BPO Management Services, Ltd.  These operations were sold in
July 2009 as discussed in Note 3.


(3)
Because the merger of Legacy BPOMS and Legacy Healthaxis took place at the
end of fiscal 2008, the operating results for the three and nine months ended
September 30, 2009 include those of the Healthcare segment, while the operating
results for the three and nine months ended September 30, 2008 do not
include the Healthcare segment.


Going
Concern





The
Company incurred a loss from continuing operations of $7.8 million and a net
decline in cash of $1.9 million for the nine months ended September 30, 2009.
The Company has historically funded its operations from the private placement of
shares of its common stock and preferred stock and through the founders’ bridge
loan facility established in August 2006. To meet the needs of the current
business and to fund growth, the Company anticipates raising capital by issuing
its securities and/or debt in one or more private transactions, by way of a
strategic merger or divestiture of certain assets or operations.





The
Company’s future capital requirements will depend upon many factors. These
factors include but are not limited to sales and marketing efforts, the
development of new products and services, possible future corporate mergers or
strategic acquisitions or divestitures, the progress of research and development
efforts, and the status of competitive products and services.  If the
Company’s anticipated financing transactions do not take place at all and/or are
unreasonably delayed, the Company may not have adequate funds to extinguish all
remaining liabilities of the Company and fund its current operations going
forward.





Although
the Company expects to meet its operating capital needs through one or more
financing transactions, merger or divestiture of certain assets or operations,
there can be no assurance that funds required will be available on terms
acceptable to the Company, if at all. If the Company is unable to raise
sufficient funds on acceptable terms, it may be not be able to complete its
business plan or otherwise continue to operate its business. If equity financing
is available to the Company on acceptable terms, it could result in dilution to
the Company’s existing stockholders.





The
report of the Company's independent registered public accounting firm dated
March 31, 2009 contained in the Company's condensed consolidated financial
statements as of and for the year ended December 31, 2008 included a paragraph
that explains that the Company had incurred recurring operating losses, a
working capital deficit and an accumulated deficit of $28.7 million as of
December 31, 2008. The report concluded that these matters, among others, raised
substantial doubt about the Company's ability to continue as agoingconcern.





8




Concentration
of Risk





The
Company is subject to credit risk primarily through its accounts receivable
balances. The Company does not require collateral for its accounts receivable
balances. For the three and nine months ended September 30, 2009 one customer
accounted for $1.1 million (18%) and $3.2 million (16%), respectively, of the
Company’s total revenues.  At September 30, 2009 and December 31,
2008, two customers individually accounted for more than 10% of the Company’s
accounts receivable as shown in the table below.





Percent of accounts and note
      receivableSeptember 30, 2009
            
            
            Dec. 31, 2008Customer
      A
            
            19%
            
            
            13%Customer
      B
            
            11%
            
            
            11%





Research
and Development





The
Company's research and development ("R&D") costs consist mainly of
software developers' salaries. The Company follows Generally Accepted
Accounting Principals (“GAAP”) to capitalize software development costs
when technological feasibility has been established and to stop
capitalization when the product is available for general release to
customers. The Company capitalized software development costs of approximately
$140,755 and $142,741 during the three months ended September 30, 2009 and 2008,
respectively and $446,544 and $380,341 during the nine months ended September
30, 2009 and 2008, respectively.





Subsequent
Events





The
Company’s Management has evaluated subsequent events through November 13,
2009, which is the date that the Company’s condensed consolidated financial
statements were filed. Management is aware of no material subsequent events that
have occurred since September 30, 2009 that would require recognition or
disclosure in the condensed consolidated financial statements.





Reclassifications





Certain
reclassifications have been made to the prior period condensed consolidated
financial statements to conform to the current presentation.  For
2008, amounts have been reclassified to reflect discontinued operations on the
condensed consolidated statements of operations, condensed consolidated balance
sheets, condensed consolidated statements of cash flows and in the notes
contained herein (see Note 3).





Basic and
Diluted Loss Per Share





In
accordance with GAAP, we calculate basic and diluted net loss per share
using the weighted average number of common shares outstanding during the
periods presented and adjust the amount of net loss, used in this
calculation, for preferred stock dividends declared during the
period.





We
incurred a net loss in each period presented, and as such, did not
include the effect of potentially dilutive common stock equivalents in the
diluted net loss per share calculation, as their effect would be
anti-dilutive for all periods. Potentially dilutive common stock
equivalents would include the common stock issuable upon the conversion of
preferred stock and the exercise of warrants and stock options that have
conversion or exercise prices below the market value of our common stock at
the measurement date. As of September 30, 2009 and 2008, all potentially
dilutive common stock equivalents amounted to 27,643,809 and 142,383,018
shares, respectively.





9





The
following table illustrates the computation of basic and diluted loss per
share from continuing and discontinued operations:





Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,Loss
      From Continuing Operations:
              
              2009
              
              
              2008
              
              
              2009
              
              
              2008Numerator:Loss
      from continuing operations
              
              $
              (4,011,830
              )
              
              $
              (1,126,318
              )
              
              $
              (7,787,835
              )
              
              $
              (2,966,437
              )Less:Preferred
      dividends paid in stock
              
              
              -
              
              
              
              (34,759
              )
              
              
              -
              
              
              
              (68,836
              )Loss
      and numerator used in computing basicand diluted loss per
      share
              
              $
              (4,011,830
              )
              
              $
              (1,161,077
              )
              
              $
              (7,787,835
              )
              
              $
              (3,035,273
              )Loss
      From Discontinued Operations:Numerator:Loss
      from discontinued operations and numeratorused in computing basic
      and diluted loss per share
              
              $
              (203,854
              )
              
              $
              (736,088
              )
              
              $
              (2,942,175
              )
              
              $
              (1,599,374
              )Denominator:Denominator
      for basic and diluted net loss per share-weighted average number of
      common shares outstanding
              
              
              15,138,379
              
              
              
              12,671,034
              
              
              
              15,156,517
              
              
              
              12,529,216Loss
      per share - basic and dillutedLoss
      from continuing operations
              
              $
              (0.27
              )
              
              $
              (0.09
              )
              
              $
              (0.51
              )
              
              $
              (0.24
              )Loss
      from discontinued operations
              
              
              (0.01
              )
              
              
              (0.06
              )
              
              
              (0.19
              )
              
              
              (0.13
              )Net
      loss per share - basic and diluted
              
              $
              (0.28
              )
              
              $
              (0.15
              )
              
              $
              (0.70
              )
              
              $
              (0.37
              )





The
following table sets forth potential shares of common stock that are
not included in the diluted net loss per share because to do so would
be antidilutive since the company reported net losses in all the
reporting periods:





As
      of September 30,2009
            
            
            2008Options
      to purchase shares of common stock
            
            
            4,492,563
            
            
            
            5,002,954Warrants
      to purchase shares of common stock
            
            
            2,047,291
            
            
            
            68,086,261Shares
      of convertible preferred stock - Legacy BPOMS Series A
            
            
            -
            
            
            
            1,637,710Shares
      of convertible preferred stock - Legacy BPOMS Series B
            
            
            -
            
            
            
            1,449,204Shares
      of convertible preferred stock - Legacy BPOMS Series D
            
            
            -
            
            
            
            22,833,341Shares
      of convertible preferred stock - Legacy BPOMS Series D-2
            
            
            -
            
            
            
            20,999,998Shares
      of convertible preferred stock - Legacy BPOMS Series F
            
            
            
            
            
            
            22,373,550Shares
      of convertible preferred stock - Series B
            
            
            21,103,955
            
            
            
            -Total
            
            
            27,643,809
            
            
            
            142,383,018




10


Impact of
Recently Issued Accounting Standards





In June
2009, the FASB issued a new accounting standard which provides guidance in
accounting for transfers of financial assets to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets.  This standard must be applied as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter.  Earlier
application is prohibited.   This standard must be applied to
transfers occurring on or after the effective date.  We are currently
evaluating the potential impact that the adoption of this statement will have on
our financial position and results of operations and will adopt the provisions
of this standard in fiscal 2010.




In June
2009, the FASB issued a new accounting standardwhich changes the
consolidation rules as they relate to variable interest entities. Specifically,
the new standard makes significant changes to the model for determining who
should consolidate a variable interest entity, and also addresses how often this
assessment should be performed.  This standard is effective for
financial statements issued for fiscal years beginning after November 15, 2009,
with earlier adoption prohibited.  We are currently evaluating the
potential impact that the adoption of this standard will have on our financial
position and results of operations and will adopt the provisions of this
standard in fiscal 2010.





In June
2009, the FASB issued new accounting standards codification and the hierarchy of
generally accepted accounting principles.  This Codification is now the
single source of authoritative United States accounting and reporting standards
applicable for all non-governmental entities, with the exception of the SEC and
its staff.  The Codification, which changes the referencing of financial
standards, is effective for interim or annual financial periods ending after
September 15, 2009.  Therefore, in all references made to US GAAP will now
use the new Codification numbering system prescribed by the FASB.  As the
Codification is not intended to change or alter existing US GAAP, it is not
expected to have any impact on our consolidated financial position or results of
operations.




In
October 2009, the FASB issued a new accounting standard which provides guidance
for arrangements with multiple deliverables. Specifically, the new standard
requires an entity to allocate arrangement consideration at the inception of an
arrangement to all of its deliverables based on their relative selling
prices. In addition, the new standard eliminates the use of the residual
method of allocation and requires the relative-selling-price method in all
circumstances in which an entity recognizes revenue for an arrangement with
multiple deliverables. In October 2009, the FASB also issued a new
accounting standard which changes revenue recognition for tangible products
containing software and hardware elements. Specifically, if certain
requirements are met, revenue arrangements that contain tangible products with
software elements that are essential to the functionality of the products are
scoped out of the existing software revenue recognition accounting guidance and
will be accounted for under the multiple-element arrangements revenue
recognition guidance discussed above. Both standards will be effective for us in
the first quarter of 2011. Early adoption is permitted. We are
currently evaluating the impact of the adoption of these accounting standards on
our condensed consolidated financial statements.





3.  Sale
of Discontinued Operations





In the
second quarter of 2009, the Board of Directors authorized management to pursue
the sale of the BPOMS’ Canadian operations (“BPOMS Ltd.”). On July 30, 2009,
BPOMS entered into a Share Purchase Agreement with CriticalControl Solutions
Corp., an Alberta corporation located in Calgary, Alberta, Canada which then
closed on July 31, 2009.  Under the terms of the Agreement, BPOMS sold
all of the issued and outstanding capital stock of BPOMS Ltd., an Ontario
corporation and all intercompany debt owed by BPOMS, Ltd., to the
buyer.  The total purchase price payable at closing to BPOMS was
100,000 Canadian Dollars.  BPOMS, Ltd., with the backing of the buyer,
became responsible for its outstanding liabilities (which totaled $4.7 million
Canadian Dollars at closing).





BPOMS
Ltd. operations have been accounted for as discontinued operations in prior
periods.  The results of operations of these businesses have been
removed from the results of continuing operations for all periods
presented.  The assets and liabilities of discontinued operations have
been reclassified and are segregated in the condensed consolidated balance
sheets. The Company recorded an impairment charge of approximately $2,420,170 in
the second quarter of 2009 to write down the discontinued operations to its
estimated fair value. During the third quarter of 2009, the sale of BPOMS, Ltd.
resulted in an additional charge to discontinued operations of approximately
$203,854. BPOMS, Ltd. was the operating subsidiary in which all of the Company’s
Canadian operations were maintained and represents a substantial component of
its ECM business.




11


The
operating results of the Canadian based business have been classified as
discontinued operations and are summarized below:




Discontinued
      OperationsFor
      the three months ended
              
              
              For
      the nine months endedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Revenues
              
              $
              -
              
              
              $
              2,149,545
              
              
              $
              6,252,893
              
              
              $
              9,829,511Loss
      from discontinued operations
              
              $
              (203,854
              )
              
              $
              (2,462,660
              )
              
              $
              (2,942,175
              )
              
              $
              (1,599,374
              )Loss
      per share from discontinuted operations
              
              $
              (0.01
              )
              
              $
              (0.19
              )
              
              $
              (0.19
              )
              
              $
              (0.13
              )Basic
      and diluted weighted averagecommon shares
    outstanding
              
              
              15,138,379
              
              
              
              12,671,034
              
              
              
              15,156,517
              
              
              
              12,529,216
  The
assets and liabilities of BPOMS Ltd. held for sale as of December 31, 2008 are
summarized below:





December
      31,Assets
      Held For Sale
              
              2008Cash
      and cash equivalents
              
              $
              -Accounts
      receivable, net
              
              
              2,017,649Inventory
              
              
              181,968Prepaid
      expenses and other current assets
              
              
              91,013Total
      current assets
              
              
              2,290,630Equipment,
      net
              
              
              565,564Goodwill
              
              
              2,574,107Intangible
      assets, net
              
              
              1,307,874Other
      assets
              
              
              -Total
      non-current assets
              
              $
              4,447,545Liabilities
      Associated With Assets Held For SaleBank
      debt
              
              $
              1,257,482Accounts
      payable
              
              
              1,016,200Accrued
      expenses
              
              
              572,551Deferred
      revenues
              
              
              865,862Income
      taxes payable
              
              
              146,695Other
      current liabilities
              
              
              242,647Total
      current liabilities
              
              
              4,101,437Long-term
      bank debt
              
              
              5,694Total
      non-current liabilities
              
              $
              5,694





12




4.  Business
Combinations





On
December 30, 2008, the Company completed a reverse merger with Healthaxis, in
which it exchanged its outstanding common and preferred series shares for the
outstanding common and preferred shares of Healthaxis.  The following
table summarizes estimated fair values of the assets acquired and liabilities
assumed from Healthaxis at the date of acquisition:





HealthaxisCash
      & cash equivalents
              
              $
              1,973,907Accounts
      receivable
              
              
              2,212,972Prepaids
              
              
              2,068,757Property,
      plant and equipment
              
              
              2,917,563Other
      assets
              
              
              959,349Goodwill
              
              
              2,282,064Identifiable
      intangible assets
              
              
              1,600,000Total
      assets acquired
              
              
              14,014,612Current
      liabilities
              
              
              5,656,486Other
      non current liabilities
              
              
              1,360,147Total
      liabilities assumed
              
              
              7,016,633Net
      assets acquired
              
              $
              6,997,979


An
acquired identifiable intangible asset in the amount of $1,600,000 was assigned
to customer contracts.  The purchase price and costs associated with
the reverse merger of Healthaxis exceeded the Company’s allocation of the fair
value of net assets acquired by $2,282,064, which was assigned to
goodwill.  The amount assigned to goodwill is not expected to be
deductible for United States income tax or state income tax
purposes.





The
following unaudited pro forma information presents the combined results of
operations of the Company as though the merger with Healthaxis had been
consummated on January 1, 2008. The pro forma financial information does
not necessarily reflect the actual results of operations had the merger been
consummated at the beginning of the period or which may be attained in the
future.





13





Unaudited
Pro Forma Statement of Operations For the Three Months Ended September 30,
2008:




BPOMS
                
                
                Healthaxis
                
                
                Pro
      FormaRevenues
                
                $
                3,743,312
                
                
                $
                3,676,000
                
                
                $
                7,419,312Net
      loss
                
                $
                (1,862,406
                )
                
                $
                (7,678,000
                )
                
                $
                (9,540,406
                )Basic
      and diluted loss percommon share
                
                $
                (0.15
                )
                
                $
                (0.91
                )
                
                $
                (0.63
                )Basic
      and diluted weighted averagecommon shares
    outstanding
                
                
                12,671,034
                
                
                
                8,427,295
                
                
                
                15,138,379
  Unaudited
Pro Forma Statement of Operations For the Nine Months Ended September 30,
2008:
  BPOMS
                
                
                Healthaxis
                
                
                Pro
      FormaRevenues
                
                $
                11,166,690
                
                
                $
                11,615,000
                
                
                $
                22,781,690Net
      loss
                
                $
                (4,565,811
                )
                
                $
                (8,301,000
                )
                
                $
                (12,866,811
                )Basic
      and diluted loss percommon share
                
                $
                (0.36
                )
                
                $
                (0.99
                )
                
                $
                (0.85
                )Basic
      and diluted weighted averagecommon shares
    outstanding
                
                
                12,529,216
                
                
                
                8,385,149
                
                
                
                15,156,517




5. 
Lines of Credit and Long-Term Debt





Blue Hill
has a credit facility from Comerica Bank which includes a revolving operating
line limited to the lesser of the $1,000,000 maximum availability or 80% of
eligible accounts receivable and carries interest at the daily adjusting LIBOR
rate plus 4.0%, which amounted to 4.25% at September 30, 2009, a $500,000 term
loan amortized over a four year period and bearing interest at the Comerica Bank
prime rate plus 1.25%, which amounted to 4.5% at September 30, 2009, a specific
advance facility for equipment purchases up to a maximum of $500,000 bearing
interest at the Comerica Bank prime rate plus 1.00%, which amounted to 4.25% at
September 30, 2009 and a specific advance facility for equipment purchases up to
a maximum of $700,000 bearing interest at the daily adjusting LIBOR rate plus
6.0%, which amounted to 6.25% at September 30, 2009. The loans are supported by
a general security interest in all the assets of Blue Hill and the operating
facility is also supported by the guaranty of Legacy BPOMS and the subordination
of loans of a minimum of $1,400,000, payable by Blue Hill to Legacy BPOMS, to
Comerica Bank. At September 30, 2009 Blue Hill had an outstanding balance of
$646,485 under the operating line, $291,667 under the term loan, $43,687 under
the equipment loan and $674,000 under the second equipment
loan.  These loan agreements contain covenants pertaining to
maintenance of various ratios.  At September 30, 2009, the Company was
in breach of these covenants.  Under the terms of the agreement, the
bank may call the loans if the Company is in violation of any restrictive
covenant.  The bank has provided a notice of default to the Company
and has not waived the ratio requirement. Accordingly the entire amount of the
loans, $1,655,839, including the long-term portion of approximately $717,108,
has been included in current liabilities.





14


On July
22, 2009, certain of the Company’s healthcare subsidiaries entered into an
amended and restated loan and security agreement with Silicon Valley Bank (the
“Amended LSA”).  Under this agreement, the subsidiaries may borrow up
to the lesser of (i) $1.6 million or (ii) 80% of eligible accounts receivable
subject to certain adjustments.  Advances under the Amended LSA bear
interest at SVB’s prime rate (4.0% at September 30, 2009) plus 3.5% plus a
collateral handling fee of 0.35% per month.  The Amended LSA contains
customary affirmative and negative covenants including the maintenance of a
specified level of EBITDA as defined by the Amended LSA.  Advances
under the Amended LSA are covered by a first priority lien on substantially all
the assets of the Company’s healthcare subsidiaries, including intellectual
property.  The Amended LSA matures June 14, 2010.  At
September 30, 2009, the Company’s healthcare subsidiaries had outstanding
balances of $1,224,130 and $170,376 under the related revolving line and
equipment line, respectively.





6.  Related
Party Transactions





The
Company is a party to a Remote Resourcing Agreement with Healthcare BPO Partners
L.P., a company affiliated with a significant shareholder.  Healthcare BPO
Partners, based in Jaipur, India, provides personnel and infrastructure that is
utilized by the Company to provide business process outsourcing services and
other software development and technical support services to support the
Company’s operations.  The resources provided by Healthcare BPO Partners
supplement the Company’s existing wholly-owned operations in Utah, Texas and
Jamaica.  For the three and nine months ended September 30, 2009, the
Company incurred costs of approximately $111,000, and $334,000 related to the
Resourcing Agreement. At September 30, 2009 and December 31, 2008, the
Company had accounts payable to Healthcare BPO Partners of approximately $86,000
and $124,000, respectively.





7. 
Segment and Geographic Data





The
Company is a business process outsourcing services provider. The
Company's operating segments are:





●
            Information
      Technology services outsourcing (ITO),●
            Healthcare
      administrative systems and related services and financial and accounting
      outsourcing services or (Healthcare) and●
            Human
      resources outsourcing (HRO)





The
Company applies GAAP which requires segments to be determined and reported
based on how management measures performance and makes decisions about
allocating resources. The Company's management monitors unallocable
expenses related to the Company's corporate activities in a
separate "Corporate," which is reflected in the tables below.





Due to
the classification of BPOMS Ltd. as discontinued operations, these operations
have been removed from the segment discussion contained herein.  The
operations of BPOMS Ltd. comprised approximately 95% of the segment the Company
had previously reported as its ECM operations, thus the Company has eliminated
any further discussion of the ECM segment and has reclassified the remaining
former ECM operations in its ITO Operations discussion.





15




The
significant components of worldwide operations by reportable
operating segment for the three and nine months ended September 30, 2009
and 2008, respectively, are:





For
      the three months ended
              
              
              For
      the nine months endedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      revenuesITO
              
              $
              2,676,977
              
              
              $
              3,377,155
              
              
              $
              8,510,841
              
              
              $
              9,827,698Healthcare
              
              
              3,334,816
              
              
              
              -
              
              
              
              10,446,628
              
              
              
              -HRO
              
              
              86,139
              
              
              
              366,157
              
              
              
              614,978
              
              
              
              1,338,992Consolidated
              
              $
              6,097,932
              
              
              $
              3,743,312
              
              
              $
              19,572,447
              
              
              $
              11,166,690Operating
      income (loss)ITO
              
              $
              (825,345
              )
              
              $
              (65,139
              )
              
              $
              (2,324,955
              )
              
              $
              107,271Healthcare
              
              
              145,019
              
              
              
              -
              
              
              
              396,211
              
              
              
              -HRO
              
              
              (59,589
              )
              
              
              (154,683
              )
              
              
              (259,973
              )
              
              
              (314,002
              )Corporate
              
              
              (3,142,317
              )
              
              
              (846,895
              )
              
              
              (5,178,730
              )
              
              
              (2,560,872
              )Consolidated
              
              $
              (3,882,232
              )
              
              $
              (1,066,717
              )
              
              $
              (7,367,447
              )
              
              $
              (2,767,603
              )Depreciation
      and amortization expenseITO
              
              $
              544,151
              
              
              $
              456,406
              
              
              $
              1,538,490
              
              
              $
              1,312,539Healthcare
              
              
              411,935
              
              
              
              -
              
              
              
              1,275,045
              
              
              
              -HRO
              
              
              13,611
              
              
              
              23,289
              
              
              
              40,768
              
              
              
              153,868Corporate
              
              
              62,409
              
              
              
              65,086
              
              
              
              191,418
              
              
              
              194,265Consolidated
              
              $
              1,032,106
              
              
              $
              544,781
              
              
              $
              3,045,721
              
              
              $
              1,660,672





The
Company's continuing consolidated operations are based in domestic and foreign
subsidiaries and branch offices in the U.S. and Germany. The following are
significant components of worldwide operations by geographic
location:




For
      the three months ended
              
              
              For
      the nine months endedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      revenuesNorth
      America
              
              $
              6,009,192
              
              
              $
              3,496,174
              
              
              $
              19,220,235
              
              
              $
              10,561,481Europe
              
              
              88,740
              
              
              
              247,138
              
              
              
              352,212
              
              
              
              605,209Consolidated
              
              $
              6,097,932
              
              
              $
              3,743,312
              
              
              $
              19,572,447
              
              
              $
              11,166,690At
              
              
              AtSeptember
      30,
              
              
              December
      31,Long-Lived
      Assets
              
              2009
              
              
              2008North
      America
              
              $
              11,049,120
              
              
              $
              18,956,867Europe
              
              
              26,998
              
              
              
              15,515Consolidated
              
              $
              11,076,118
              
              
              $
              18,972,382





16





8.  Restructuring
Plan and Liability





In the
second quarter of 2009, the Company initiated a restructuring program to reduce
overhead costs, which included workforce reduction and consolidation of
administrative activities.  These restructuring charges are generally
of a nonrecurring nature and are excluded from segment financial results, which
is our measure used for evaluating performance and for decision-making
purposes.  For the quarter ended June 30, 2009, we recorded
approximately $150,000 related to employee severance and approximately $232,000
for lease exit costs based on the present value of remaining lease rentals
reduced by estimated sublease rentals that could be reasonably obtained for the
property.  The Company paid approximately $31,000 during the three
months ended September 30, 2009 with a remaining restructuring liability of
$316,711 as of September 30, 2009.





9.  Commitments
and Contingencies





From time
to time we may be involved in claims arising in the ordinary course of business.
However, except as described below, there are no other pending legal proceedings
or claims to which we are a party or of which any of our property is subject
that in the opinion of management, could reasonably be expected to have a
material adverse effect on our business or financial condition. Due to our cash
flow constraints, the number of vendors with past due balances and the aggregate
dollar amount of those past due balances have continued to grow.  We expect
that the number of threatened claims will continue to grow and that some of
these vendors may file lawsuits seeking to collect amounts owed.  The
Company does not believe that current threats of litigation from any single
vendor would materially impact the Company, but the aggregate value of the
claims could have a material negative impact on the Company if a substantial
number of these vendors file lawsuits against us.




BridgePointe
Master Fund Ltd.





The
Company is a defendant along with two of its officers in a lawsuit that
commenced on May 28, 2009 in the Supreme Court of the State of New York, County
of New York, Index No. 601661-2009 entitled BridgePointe Master Fund Ltd. v. BPO
Management Services, Inc., James Cortens, and Patrick Dolan.The
complaint asserts, among other things, claims for (1) breach of certain
provisions of warrants held by BridgePointe; (2) breach of the implied covenant
of good faith and fair dealing related to certain stock agreements to which
Legacy BPOMS and BridgePointe were parties; and (3) breach of fiduciary duty
against two executive officers of BPO Management Services, Inc., Mr. Patrick
Dolan and Mr. James Cortens.  The complaint seeks damages in excess of $3.2
million from the Company and the other defendants.  The Company does not
currently believe that the claims have any merit.  On August 25, 2009, the
Company filed its answer and a motion to dismiss the claims against the two
officers and directors named in the suit.  The Company intends to continue
to vigorously defend the lawsuit.





10.  Goodwill
and Intangible Asset Impairment





The Company performs its annual goodwill and intangible asset
impairment review in the fourth quarter of each year or when events and
circumstances indicate that goodwill or intangible assets may be
impaired.  As of September 30, 2009, management reviewed the carrying
value of goodwill and intangible assets due to a change in circumstances and
determined that goodwill and intangible asset impairment was probable and
reasonably estimable.  The Company recognized a goodwill impairment
charge of approximately $2.3 million and an intangible asset impairment charge
of approximately $74,000.





17





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





Forward-Looking
Statements





This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”).  These forward-looking statements are
based on our current expectations, assumptions, estimates, and projections about
us and our industry and generally include the plans and objectives of management
for future operations, including plans and objectives relating to our future
economic performance.  You can identify certain forward-looking
statements by our use of forward-looking terminology such as the words “may,”
“will,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,”
“forecasts,” “projects,” “should,” “could,” “seek,” “pro forma,” “goal,”
“continues,” “anticipates,” or similar expressions.  These
forward-looking statements include, in particular, statements about our plans,
strategies, and prospects under this heading, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” and under the
heading “Business.”  These forward-looking statements necessarily
depend upon assumptions and estimates that may prove to be
incorrect.  Although we believe that the assumptions and estimates
reflected in the forward-looking statements are reasonable, we cannot guarantee
that we will achieve our plans, intentions, or expectations.  The
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results to differ in significant ways from
any future results expressed or implied by the forward-looking
statements.  Some of these risks, uncertainties and other factors are
identified under the heading “Risk Factors,” and you should carefully consider
such risks, uncertainties and other factors before deciding to invest or
maintain an investment in shares of our stock.  Any of the factors
referenced under the heading “Risk Factors” or elsewhere could cause our future
financial results, including our net income (loss) or growth in net income
(loss) to differ materially from prior results, which in turn could, among other
things, cause the price of our common stock to fluctuate
substantially.





Overview





On
December 30, 2008, Healthaxis Inc., a Pennsylvania corporation incorporated in
1982 (“Legacy Healthaxis”), completed a merger resulting in BPO Management
Services, Inc., a Delaware corporation (“Legacy BPOMS”), becoming a wholly-owned
subsidiary of Healthaxis (the “Merger”).  Legacy Healthaxis changed
its name to “BPO Management Services, Inc.” upon the closing of the Merger
(“BPOMS”).  Immediately following the closing of the Merger, Legacy
BPOMS’ pre-Merger shareholders held approximately 75% of BPOMS’ shares, and
Legacy Healthaxis’ pre-Merger shareholders retained approximately 25% of BPOMS’
shares, all on a fully diluted, as-converted basis.  Notwithstanding
the fact that Legacy Healthaxis was the legal acquirer under the Merger and
remains the registrant for SEC reporting purposes, the Merger was accounted for
as a reverse acquisition with Legacy BPOMS as the accounting
acquirer.  BPOMS has accounted for the Merger as a purchase business
combination, using Legacy BPOMS’ historical financial information and accounting
policies and applying fair value estimates to the acquired assets, liabilities
and commitments of Legacy Healthaxis as of December 30, 2008.





The
financial information contained in this report reflects the Merger as if Legacy
BPOMS had issued consideration to Legacy Healthaxis shareholders.  As
a result, financial information derived from the Condensed Consolidated
Statements of Operations and Condensed Consolidated Statements of Cash Flows
included with this report for the three and nine months ended September 30, 2008
reflects the consolidated financial results of Legacy BPOMS alone, while
financial information derived from the Condensed Consolidated Statements of
Operations and Condensed Consolidated Statements of Cash Flows for the three and
nine months ended September 30, 2009 reflects the post-merger consolidated
financial results of BPOMS.  Financial information derived from the
Consolidated Balance Sheet at December 31, 2008 reflects the consolidated assets
and liabilities of Legacy BPOMS and Legacy Healthaxis at December 31, 2008,
while financial information derived from the Condensed Consolidated Balance
Sheet at September 30, 2009 reflects the post-merger consolidated assets and
liabilities of BPOMS.  Please see Note 4 in the Notes to Condensed
Consolidated Financial Statements for additional discussion of the Merger and a
pro forma presentation of financial results for the combined companies for the
three and nine months ended September 30, 2008.





Legacy
BPOMS was incorporated in 1981 under the name Research Engineers, Inc., changed
its name to netGuru, Inc. in 2000 and to BPO Management Services, Inc. on
December 15, 2006 immediately following its reverse merger with privately-held
BPO Management Services, Inc. (“Private BPOMS”).  Private BPOMS was
incorporated in July 2005. On December 15, 2006, Private BPOMS acquired all of
the outstanding common stock of publicly-held netGuru, Inc. in a reverse
merger. Private BPOMS was the accounting acquirer.





18




We
provide business process outsourcing (BPO) services primarily to middle-market
enterprises in the United States.  “BPO” refers to the outsourcing
of entire business processes, typically to reduce cost and/or to improve
the performance of that process.  Our objective is to provide a
comprehensive suite of BPO functions to support the back-office business
requirements of middle-market enterprises on an outsourced and/or recurring
revenue basis.





Our
primary business offerings are:





●
            Information
      technology services outsourcing or “ITO”;●
            Healthcare
      administrative systems and related services and financial and accounting
      outsourcing services or “Healthcare and F&A”, and●
            Human
      resources information systems and related outsourcing services, or
      “HRO”





As of
July 31, 2009, the Company divested its Canadian operations, and thus the
financial information in this report is provided for the Canadian operations as
discontinued operations, and the results of the Canadian operations have
therefore been removed from the following discussion of the results of
continuing operations.





Our
business plan for 2009 is to focus on our core strengths in information
technology outsourcing and our offerings in managed services and software for
healthcare benefits administration, finance and accounting, and human
resources.  We believe that our growth opportunities in these areas
are the keys for putting BPOMS on a faster track for growth and
profitability.  In the second quarter of 2009, we initiated a
restructuring program to reduce overhead costs, which included workforce
reduction and consolidation of administrative activities.  We will
continue our work on integrating the Company’s operations to achieve additional
financial synergies.  Our longer term strategy continues to focus on
organic growth and accretive acquisitions.  Our business and strategic
plans for 2009 are likely to be negatively impacted by the current severe
financial conditions and resulting poor business environment.  In the
current environment, customers and prospects are likely to delay or avoid making
decisions on whether to outsource business process functions, making sales
extremely difficult to close.  The financial health of some of our
customers may also be at risk and we may see declines in volume as some
customers scale back their operations or cease activities that rely on our
services.  The current condition of the capital markets will also have
a negative impact on our plans for strategic growth and may limit our options
for raising needed additional capital as described below under the caption
“Liquidity and Capital Resources.”





The third
quarter loss from operations was $3.9 million, which included non-cash expenses
for depreciation and amortization of $1.0 million and for goodwill and
intangible asset impairment of $2.4 million.  We are starting to
realize cost savings from our restructuring efforts as evidenced by the $527,000
reduction in selling, general and administrative expense as compared to the
second quarter of 2009.  More importantly, our ITO operations have
recently signed contracts with new customers with a total contract value
exceeding $5.0 million and have several more opportunities with total contract
value of more than $9.0 million in the contracting or advanced negotiation
stage.





Consolidated
Results of Operations





Legacy
BPOMS began operations in July 26, 2005 and merged with netGuru, Inc. on
December 15, 2006 in a reverse merger.  For accounting purposes, the
acquisition was treated as a recapitalization of Legacy BPOMS with Legacy BPOMS
as the acquirer. The historical statements of operations included in this annual
report for the three and nine months ended September 30, 2008, are those of
Legacy BPOMS.





19




Except as
referenced in footnote (2) below, the following entities of Legacy BPOMS are
included in the consolidated results of operations from the date of their
respective acquisitions:




Company
                
                Segment
                
                Inception/Acquisition
      DateBPO
      Management Services, Inc. (the "Company") or  ("BPOMS")
                
                Corporate
                
                Inception
      date:  July 26, 2005Adapsys
      Document Management LP ("ADM") (2)
                
                (2)
                
                Acquired:  July
      29, 2005Adapsys
      LP ("ADP") (2)
                
                (2)
                
                Acquired:  July
      29, 2005Digica,
      Inc. ("Digica") (1)
                
                ITO
                
                Acquired:  January
      1, 2006Novus
      Imaging Solutions, Inc. ("Novus") (2)
                
                (2)
                
                Acquired:  September
      30, 2006NetGuru
      Systems, Inc. ("NGSI")
                
                ITO
                
                Acquired:  December
      15, 2006Research
      Engineers, GmbH ("GmbH")
                
                ITO
                
                Acquired:  December
      15, 2006DocuCom
      Imaging Solutions, Inc. ("DocuCom") (2)
                
                (2)
                
                Acquired:  June
      21, 2007Human
      Resource Micro-Systems, Inc. ("HRMS")
                
                HRO
                
                Acquired:  June
      29, 2007Blue
      Hill Data Services, Inc. ("Blue Hill")
                
                ITO
                
                Acquired:  October
      10, 2007BPO
      Management Services, Ltd. ("BPOMS Ltd") (2)
                
                (2)
                
                Amalgamation:
      January 1, 2008Healthaxis
      Inc. ("Healthaxis") (3)
                
                Healthcare
                
                Acquired:  December
      30, 2008
  (1)
Effective January 1, 2008, Digica was merged with Blue Hill
 (2) On
January 1, 2008, ADM, ADP, Novus and DocuCom were amalgamated into one
company, BPO Management Services, Ltd.  These operations were sold in
July 2009 as discussed in Note 3.
 (3)
Because the merger of Legacy BPOMS and Legacy Healthaxis took place at the
end of fiscal 2008, the operating results for the three and nine months ended
September 30, 2009 include those of the Healthcare segment, while the operating
results for the three and nine months ended September 30, 2008 do not
include the Healthcare segment.


Operations
Reporting





BPOMS
combines its continuing operating entities into three separate reporting
segments:





●
            IT
      Outsourcing (“ ITO”) comprised of Blue Hill, Digica (which was merged with
      Blue Hill in January 2008), NGSI and GmbH,●
            Healthcare
      comprised of Legacy Healthaxis, and●
            Human
      Resources Outsourcing (“HRO”) comprised of
HRMS.




20




Three Months Ended September
30, 2009 Compared to Three Months Ended September 30, 2008





ITO
Operations




For
      the three months ended September 30,2009
              
              
              2008
              
              
              ChangeRevenues:
              
              $
              2,676,977
              
              
              $
              3,377,155
              
              
              $
              (700,178
              )Operating
      expenses :Cost
      of services provided
              
              
              1,918,628
              
              
              
              1,733,499
              
              
              
              (185,129
              )Selling,
      general and administrative
              
              
              915,114
              
              
              
              1,171,168
              
              
              
              256,054Research
      and development
              
              
              124,429
              
              
              
              81,221
              
              
              
              (43,208
              )Depreciation
      and amortization
              
              
              544,151
              
              
              
              456,406
              
              
              
              (87,745
              )Total
      operating expenses
              
              
              3,502,322
              
              
              
              3,442,294
              
              
              
              (60,028
              )Loss
      from operations beforeinterest and income taxes
              
              $
              (825,345
              )
              
              $
              (65,139
              )
              
              $
              (760,206
              )




Sales for
the three months ended September 30, 2009 of $2,676,977 decreased 21% from
$3,377,155 for the three months ended September 30, 2008 due to a decline in
information technology consulting services provided on a time and materials
basis, reduced sales of collaborative software tools, and the loss of legacy
data center customers that were acquired and consolidated their IT operations
with those of the acquiror.  Cost of services provided of $1,918,628
increased from $1,733,499 primarily due to increased costs for software and
licensing fees of approximately $300,000, offset with reductions of consulting
costs of approximately $130,000.  Much of these expenses related to
securing and related increasing support of additional contracts that are
anticipated to generate greater revenue as they come on stream. Selling, general
and administrative expenses of $915,114 decreased 22% from $1,171,168 primarily
due to a decrease in payroll costs of approximately $48,000 and consulting costs
of approximately $190,000.  Research and development (“R&D”)
expenses for the three months ended September 30, 2009 of $124,429 increased
$43,208 from $81,221 primarily due to increases in software developers’ wages
for development of enhancements to and integrations with the EReview
collaborative software product.  Depreciation and amortization
expenses for the three months ended September 30, 2009 increased $87,745
primarily due to the acquisition of fixed assets throughout 2008 and 2009,
offset by the reduction of amortization expense of approximately $112,500 due to
the impairment loss of $2,765,429 on intangible assets recorded at December 31,
2008.





Healthcare
Operations (1)




September
      30,For
      Three Months Ended
                
                2009
                
                
                %
      of RevenueRevenues:
                
                $
                3,334,816Operating
      expenses :Cost
      of services provided
                
                
                2,515,981
                
                
                75.4%Selling,
      general and administrative
                
                
                261,881
                
                
                7.9%Research
      and development (2)
                
                
                -
                
                
                0.0%Depreciation
      and amortization
                
                
                411,935
                
                
                12.4%Total
      operating expenses
                
                
                3,189,797
                
                
                95.7%Income
      from operations beforenterest and income taxes
                
                $
                145,019
                
                
                4.3%
  (1)
                  Due
      to the merger with Legacy Healthaxis occuring on December 30, 2008,there
      is no comparable 2008 period with which to compare Healthcare'squarterly
      results for the three months ended September 30,
  2009.
  (2)
                    The
      Company capitalized software development costs of
      approximately$118,003
      for the three months ended September 30,
2009.




21




HRO
Operations





For
      the three months ended September 30,2009
              
              
              2008
              
              
              ChangeRevenues
              
              $
              86,139
              
              
              $
              366,157
              
              
              $
              (280,018
              )Operating
      expenses :Cost
      of services provided
              
              
              77,181
              
              
              
              110,457
              
              
              
              33,276Selling,
      general and administrative
              
              
              54,936
              
              
              
              387,094
              
              
              
              332,158Depreciation
      and amortization
              
              
              13,611
              
              
              
              23,289
              
              
              
              9,678Total
      operating expenses
              
              $
              145,728
              
              
              $
              520,840
              
              
              $
              375,112Loss
      from operations before interest and income taxes
              
              $
              (59,589
              )
              
              $
              (154,683
              )
              
              $
              95,094





Sales for
the three months ended September 30, 2009 of $86,139 decreased from $366,157 for
the three months ended September 30, 2008 due to a significant drop in
professional services revenue combined with a reduction in software licensing
fees and lower maintenance renewals as companies have dramatically reduced
spending on less critical administrative applications.  Cost of
services provided of $77,181 decreased from $110,457 primarily due to the
reduction of personnel.  Selling, general and administrative expenses
of $54,936 decreased from $387,094 due to reductions in personnel, consultant
fees and variable sales and marketing costs.  The change in
depreciation and amortization expense between periods was due to a SFAS
revaluation in the second quarter of 2008 which resulted in a reduction to the
values previously assigned to fixed assets and intangible
assets.  Software development costs of approximately $29,600 and
$70,600 were capitalized for the three months ended September 30, 2009 and 2008,
respectively.





Corporate
Operations





For
      the three months ended September 30,2009
              
              
              2008
              
              
              ChangeOperating
      expenses :Selling,
      general and administrative
              
              $
              723,456
              
              
              $
              574,718
              
              
              $
              (148,738
              )Depreciation
      and amortization
              
              
              62,409
              
              
              
              65,086
              
              
              
              2,677Stock
      based compensation
              
              
              -
              
              
              
              207,091
              
              
              
              207,091Restructuring
      costs
              
              
              -
              
              
              
              -
              
              
              
              -Goodwill
      & Intangible asset impairment
              
              
              2,356,452
              
              
              
              -
              
              
              
              (2,356,452
              )Total
      operating expenses beforeinterest and income taxes
              
              $
              3,142,317
              
              
              $
              846,895
              
              
              $
              (2,295,422
              )




Selling,
general and administrative expenses for the three months ended September 30,
2009 of $723,456 increased from $574,718 for the three months ended September
30, 2008, primarily due to the addition of corporate related expenses in the
2009 period from the reverse merger with Legacy Healthaxis of approximately
$157,000 partially offset by broad-based decreases in corporate operating costs
resulting from our restructuring and consolidation efforts. The decrease in
stock-based compensation expense is a result of all Legacy BPOMS stock-based
awards becoming fully vested and completely expensed as of December 31, 2008, a
result of the reverse merger with Legacy Healthaxis on December 30,
2008.  The goodwill and intangible asset impairment charge resulted
from Management’s review of the carrying value of the assets compared to their
fair value during the three months ended September 30, 2009.





22




Interest
Expense




For
      the three months ended September 30,2009
              
              
              2008
              
              
              ChangeInterest
      expense:Related
      parties
              
              $
              18,782
              
              
              $
              27,148
              
              
              
              8,366Other,
      net
              
              
              110,816
              
              
              
              12,953
              
              
              
              (97,863
              )Total
      interest expense
              
              $
              129,598
              
              
              $
              40,101
              
              
              $
              (89,497
              )




Total
interest expense for the three months ended September 30, 2009 of $129,598
increased $89,497 from $40,101 for the three months ended September 30,
2008, primarily due to the increased usage of various loan facilities and the
addition of approximately $57,450 in interest expense associated with the
operations of our new Healthcare segment, partially offset by the reduction in
notes payable to related parties.





Nine Months Ended September
30, 2009 Compared to Nine Months Ended September 30, 2008





ITO
Operations





For
      the nine months ended September 30,2009
              
              
              2008
              
              
              ChangeRevenues:
              
              $
              8,510,841
              
              
              $
              9,827,698
              
              
              $
              (1,316,857
              )Operating
      expenses :Cost
      of services provided
              
              
              5,727,889
              
              
              
              4,820,700
              
              
              
              (907,189
              )Selling,
      general and administrative
              
              
              3,220,228
              
              
              
              3,358,930
              
              
              
              138,702Research
      and development
              
              
              349,189
              
              
              
              228,258
              
              
              
              (120,931
              )Depreciation
      and amortization
              
              
              1,538,490
              
              
              
              1,312,539
              
              
              
              (225,951
              )Total
      operating expenses
              
              
              10,835,796
              
              
              
              9,720,427
              
              
              
              (1,115,369
              )Income
      (loss) from operations beforeinterest and income
    taxes
              
              $
              (2,324,955
              )
              
              $
              107,271
              
              
              $
              (2,432,226
              )


Sales for
the nine months ended September 30, 2009 of $8,510,841 decreased 13% from
$9,827,698 for the nine months ended September 30, 2008 due to a decline in
information technology consulting services provided on a time and materials
basis, reduced sales of collaborative software tools, and the loss of legacy
data center customers that were acquired and consolidated their IT operations
with those of the acquiror.  Cost of services provided of $5,727,889
increased from $4,820,700 primarily due to increased costs for software and
licensing fees of approximately $786,000 and increased wages of approximately
$265,000 offset by reductions is consulting fees of approximately
$143,000.  Much of these expenses related to securing and related
increasing support of additional contracts that are anticipated to generate
greater revenue as they come on stream. Selling, general and administrative
expenses of $3,220,228 decreased from $3,358,930 primarily due to a reduction in
payroll costs of approximately $117,000, reduction in consultant fees of
approximately $147,000, partially offset with an increase in bad debt expense of
approximately $138,000.  Research and development (“R&D”) expenses
for the nine months ended September 30, 2009 of $349,189 increased $120,931 from
$228,258 primarily due to increases in software developers’ wages for
development of enhancements to and integrations with the EReview collaborative
software product.  Depreciation and amortization expenses for the nine
months ended September 30, 2009 increased $225,951 primarily due to the
continued acquisition of fixed assets throughout 2008 and the first nine months
of 2009, offset by the reduction of amortization expense of approximately
$337,500 due to the impairment loss of $2,765,429 on intangible assets recorded
at December 31, 2008.





23




Healthcare
Operations (1)




September
      30,For
      Nine Months Ended
                
                2009
                
                
                %
      of RevenueRevenues:
                
                $
                10,446,628Operating
      expenses :Cost
      of services provided
                
                
                7,984,285
                
                
                76.4%Selling,
      general and administrative
                
                
                791,087
                
                
                7.6%Research
      and development (2)
                
                
                -
                
                
                0.0%Depreciation
      and amortization
                
                
                1,275,045
                
                
                12.2%Total
      operating expenses
                
                
                10,050,417
                
                
                96.2%Income
      from operations beforeinterest and income taxes
                
                $
                396,211
                
                
                3.8%
  (1) Due to
the merger with Legacy Healthaxis occuring on December 30, 2008, there is
no comparable 2008 period with which to compare Healthcare's results
for the nine months ended September 30, 2009.
  (2)  The
Company capitalized software development costs of approximately $339,050
for the nine months ended September 30, 2009.





HRO
Operations




For
      the nine months ended September 30,2009
              
              
              2008
              
              
              ChangeRevenues
              
              $
              614,978
              
              
              $
              1,338,992
              
              
              $
              (724,014
              )Operating
      expenses :Cost
      of services provided
              
              
              295,783
              
              
              
              392,468
              
              
              
              96,685Selling,
      general and administrative
              
              
              538,400
              
              
              
              1,106,658
              
              
              
              568,258Depreciation
      and amortization
              
              
              40,768
              
              
              
              153,868
              
              
              
              113,100Total
      operating expenses
              
              $
              874,951
              
              
              $
              1,652,994
              
              
              $
              778,043Loss
      from operations beforeinterest
      and income taxes
              
              $
              (259,973
              )
              
              $
              (314,002
              )
              
              $
              54,029




Sales for
the nine months ended September 30, 2009 of $614,978 decreased from $1,338,992
for the nine months ended September 30, 2008 primarily due to a significant drop
in professional services revenue combined with a reduction in software licensing
fees and lower maintenance renewals as companies have dramatically reduced
spending on less critical administrative applications.  Cost of
services provided of $295,783 decreased from $392,468 primarily due to the
reduction of personnel.  Selling, general and administrative expenses
of $538,400 decreased from $1,106,658 as reductions in personnel and variable
sales and marketing costs were somewhat offset by an increase in bad debt
expense of approximately $85,000.  Depreciation and amortization
expense for the nine months ended September 30, 2009 decreased $113,100 from
$153,868 for the nine months ended September 30, 2008 primarily due to a SFAS
revaluation in the second quarter of 2008 which resulted in a reduction of
values previously assigned to fixed assets and intangible
assets.  Software development costs of $84,700 and $237,600 were
capitalized for the nine months ended September 30, 2009 and 2008,
respectively.




24


Corporate
Operations




For
      the nine months ended September 30,2009
              
              
              2008
              
              
              ChangeOperating
      expenses :Selling,
      general and administrative
              
              $
              2,230,320
              
              
              $
              1,745,332
              
              
              $
              (484,988
              )Depreciation
      and amortization
              
              
              191,418
              
              
              
              194,265
              
              
              
              2,847Stock
      based compensation
              
              
              18,333
              
              
              
              621,275
              
              
              
              602,942Restructuring
      costs
              
              
              382,207
              
              
              
              -
              
              
              
              (382,207
              )Goodwill
      & Intangible asset impairment
              
              
              2,356,452
              
              
              
              -
              
              
              
              (2,356,452
              )Total
      operating expenses beforeinterest and income taxes
              
              $
              5,178,730
              
              
              $
              2,560,872
              
              
              $
              (2,617,858
              )




Selling,
general and administrative expenses for the nine months ended September 30, 2009
of $2,230,320 increased from $1,745,332 for the nine months ended September 30,
2008. For the nine months ended September 30, 2008, the Company released a
contingent liability of approximately $215,000, and as a result, the prior year
expenses are lower by this amount.  The overall change primarily
results from the release of this liability combined with corporate related
expenses in the 2009 period from the reverse merger with Legacy Healthaxis of
approximately $335,000. These changes were partially offset by a broad
based decrease of overall corporate expenses resulting from our restructuring
and consolidation efforts.  The decrease in stock-based compensation
expense is a result of all Legacy BPOMS stock-based awards became fully vested
and completely expensed as of December 31, 2008, a result of the reverse merger
with Legacy Healthaxis on December 30, 2008.  In the second quarter of
2009, the Company initiated a restructuring program to reduce overhead costs,
which included workforce reduction and consolidation of administrative
activities.  These restructuring charges are generally of a
nonrecurring nature and are excluded from segment financial results, which is
our measure used for evaluating performance and for decision-making
purposes.  For the nine months ended September 30, 2009, we recorded
approximately $150,000 related to employee severance and approximately $232,000
for lease exit costs based on the present value of remaining lease rentals
reduced by estimated sublease rentals that could be reasonably obtained for the
property.  The goodwill and intangible asset impairment charge
resulted from Management’s review of the carrying value of the assets compared
to their fair value during the three months ended September 30,
2009.





Interest
Expense




For
      the nine months ended September 30,2009
              
              
              2008
              
              
              ChangeInterest
      expense:Related
      parties
              
              $
              57,948
              
              
              $
              80,853
              
              
              
              22,905Other,
      net
              
              
              346,840
              
              
              
              54,029
              
              
              
              (292,811
              )Total
      interest expense
              
              $
              404,788
              
              
              $
              134,882
              
              
              $
              (269,906
              )




Total
interest expense for the nine months ended September 30, 2009 of $404,788
increased $269,906 from $134,882 for the nine months ended September 30,
2008, primarily due to the increased usage of various loan facilities and the
addition of approximately $156,055 in interest expense associated with the
operations of our new Healthcare segment, partially offset by the reduction of
notes payable to related parties.





25





Liquidity
and Capital Resources





Overview
of Cash Resources





At
September 30, 2009, our cash and cash equivalents amounted to $1.0 million
compared to $2.9 million at December 31, 2008.  The sources and
uses of cash during 2009 are described more fully in “Analysis of Cash Flows”
below.  The Company’s focus is on becoming profitable and generating
positive cash flow, however in the event that we are unable to generate
sufficient cash from operations or raise additional capital, then our business
would be adversely affected.




On July
22, 2009, certain of the Company’s healthcare subsidiaries entered into an
amended and restated loan and security agreement with Silicon Valley Bank (the
“Amended LSA”).  Under this agreement, the subsidiaries may borrow up
to the lesser of (i) $1.6 million or (ii) 80% of eligible accounts receivable
subject to certain adjustments.  Advances under the Amended LSA bear
interest at SVB’s prime rate (4.0% at September 30, 2009) plus 3.5% plus a
collateral handling fee of 0.35% per month.  The Amended LSA contains
customary affirmative and negative covenants including the maintenance of a
specified EBITDA level.  Advances under the Amended LSA are covered by
a first priority lien on substantially all the assets of the Company’s
healthcare subsidiaries, including intellectual property.  The Amended
LSA matures June 14, 2010.  At September 30, 2009, the Company’s
healthcare subsidiaries had outstanding balances of $1,224,130 and $170,376
under the related revolving line and equipment line, respectively.




Blue Hill
has a credit facility from Comerica Bank which includes a revolving operating
line limited to the lesser of the $1,000,000 maximum availability or 80% of
eligible accounts receivable and carries interest at the daily adjusting LIBOR
rate plus 4.0%, which amounted to 4.25% at September 30, 2009, a $500,000 term
loan amortized over a four year period and bearing interest at the Comerica Bank
prime rate plus 1.25%, which amounted to 4.5% at September 30, 2009, a specific
advance facility for equipment purchases up to a maximum of $500,000 bearing
interest at the Comerica Bank prime rate plus 1.00%, which amounted to 4.25% at
September 30, 2009 and a specific advance facility for equipment purchases up to
a maximum of $700,000 bearing interest at the daily adjusting LIBOR rate plus
6.0%, which amounted to 6.25% at September 30, 2009. The loans are supported by
a general security interest in all the assets of Blue Hill and the operating
facility is also supported by the guaranty of Legacy BPOMS and the subordination
of loans of a minimum of $1,400,000, payable by Blue Hill to Legacy BPOMS, to
Comerica Bank. At September 30, 2009 Blue Hill had an outstanding balance of
$646,485 under the operating line, $291,667 under the term loan, $43,687 under
the equipment loan and $674,000 under the second equipment
loan.  These loan agreements contain covenants pertaining to
maintenance of various ratios.  At September 30, 2009, the Company was
in breach of these covenants.  Under the terms of the agreement, the
bank may call the loans if the Company is in violation of any restrictive
covenant.  The bank has provided a notice of default to the Company
and has not waived the ratio requirement, but has allowed the Company to
continue to borrow on the revolving line and has not demanded immediate
repayment in full of the obligations to the bank.  Accordingly the
entire amount of the loans, $1,655,839, including the long-term portion of
approximately $717,108, has been included in current liabilities.





Analysis
of Cash Flows





Cash provided by operating
activities for the nine months ended September 30, 2009 was approximately
$1.1 million as compared to cash used in operating activities of approximately
$1.4 million for the same period in 2008.  The improvement was
primarily the result of changes in working capital, including generating cash
from the reduction of accounts receivable combined with a higher accounts
payable balance.  These increases to cash flow from operations were
partially offset by the increased net loss from continuing
operations.





Cash used in investing
activities during the nine months ended September 30, 2009 was
approximately $1.6 million as compared to cash used in investing activities of
approximately $263,000 for the same period in 2008.  During the nine
months ended September 30, 2009, the Company’s purchase of equipment and
internally developed capitalized software amounted to approximately $1.6
million.  For the nine months ended September 30, 2008, cash used by
investing activities was due to the purchase of equipment of approximately
$660,000, offset by the release of restricted cash in the amount of
approximately $923,000.





Net cash used in financing
activities during the nine months ended September 30, 2009 was
approximately $1.4 million as compared to net cash provided by financing
activities of approximately $3.6 million for the same period in
2008.  Net cash used in financing activities for the nine months ended
September 30, 2009 is the net result of proceeds from bank loans of
approximately $111,000, payment of notes issued to former shareholders of $1.0
million, repayment of capital lease obligations of approximately $385,000,
repayment of a note payable to a related party in the amount of
$100,000.  Net cash provided by financing activities for the nine
months ended September 30, 2008 is the result of proceeds from the issuance of
preferred stock of $5.2 million plus net bank borrowings of approximately
$491,000 offset by payments to former shareholders of approximately $886,000,
dividend payments of approximately $753,000, repayment of note payable to a
related party in the amount of $200,000 and capital lease obligation payments of
approximately $161,000.




26




During
the next twelve months, the Company anticipates raising capital necessary to
meet the needs of its current business, grow its business and complete
additional acquisitions by issuing its securities and/or debt in one or more
private transactions, merger, or divestiture of certain assets or
operations.





Our
future capital requirements will depend upon many factors. These factors include
but are not limited to sales and marketing efforts, the development of new
products and services, possible future corporate mergers or strategic
acquisitions or divestitures, the progress of research and development efforts,
and the status of competitive products and services. If our anticipated
financing needs are not met or are unreasonably delayed, we may not have
adequate funds to extinguish all our remaining obligations and fund our current
operations going forward.





Although
we plan to meet our operating capital needs through one or more financing
transactions, merger, or divestiture of certain assets or operations, there can
be no assurance that funds required will be available on terms acceptable to us,
if at all. If we are unable to raise sufficient funds on acceptable terms, we
may not be able to complete our business plan. If equity financing is available
to us on acceptable terms, it could result in additional dilution to our
existing stockholders.





This
uncertainty, recurring losses from operations, limited cash resources, and an
accumulated deficit, among other factors, raise doubt about our ability to
continue as a going concern and led our independent registered public accounting
firm to include an explanatory paragraph in their report dated March 31, 2009
contained in the Company's consolidated financial statements as of and for the
year ended December 31, 2008. The report concludes that these matters, among
others, raise substantial doubt about the Company's ability to continue as a
going concern.





Item
3.  Quantitative and Qualitative Disclosures About Market Risk





Not
applicable under smaller reporting company scaled disclosure
requirements





Item
4T.  Controls and Procedures





The
Company maintains "disclosure controls and procedures," as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Act of 1934, as amended (the
"Exchange Act"), that are designed to ensure that information required to be
disclosed by the Company in reports it files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management including the Company's principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.





The
management of the Company has designed and evaluated the Company's disclosure
controls and procedures. Management recognizes that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable assurance of achieving the desired control objectives, and the
Company necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and
procedures.





The
Company's management, including its principal executive officer and principal
financial officer, evaluated the effectiveness of the design and operation of
its disclosure controls and procedures as of September 30, 2009, and concluded
that the disclosure controls and procedures were not effective, because certain
deficiencies involving internal controls constituted a material weakness as
disclosed in the Company's Form 10-K for the year ended December 31, 2008. The
material weaknesses identified did not result in the restatement of any
previously reported consolidated financial statements or any other related
financial disclosure, nor does management believe that it had any effect on the
accuracy of the Company's financial statements for the current reporting
period.





Changes
in Internal Control over Financial Reporting





There has
not been any change in our internal control over financial reporting that
occurred during the quarterly period ended September 30, 2009, that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.





27





PART
II - OTHER INFORMATION





Item
1.  Legal Proceedings





From time
to time we may be involved in claims arising in the ordinary course of business.
However, except as described below, there are no other pending legal proceedings
or claims to which we are a party or of which any of our property is subject
that in the opinion of management, could reasonably be expected to have a
material adverse effect on our business or financial condition. Due to our cash
flow constraints, the number of vendors with past due balances and the aggregate
dollar amount of those past due balances have continued to grow.  We expect
that the number of threatened claims will continue to grow and that some of
these vendors may file lawsuits seeking to collect amounts owed.  The
Company does not believe that current threats of litigation from any single
vendor would materially impact the Company, but the aggregate value of the
claims could have a material negative impact on the Company if a substantial
number of these vendors file lawsuits against us.




BridgePointe
Master Fund Ltd.





The
Company is a defendant along with two of its officers in a lawsuit that
commenced on May 28, 2009 in the Supreme Court of the State of New York, County
of New York, Index No. 601661-2009 entitled BridgePointe Master Fund Ltd. v. BPO
Management Services, Inc., James Cortens, and Patrick Dolan.The
complaint asserts, among other things, claims for (1) breach of certain
provisions of warrants held by BridgePointe; (2) breach of the implied covenant
of good faith and fair dealing related to certain stock agreements to which
Legacy BPOMS and BridgePointe were parties; and (3) breach of fiduciary duty
against two executive officers of BPO Management Services, Inc., Mr. Patrick
Dolan and Mr. James Cortens.  The complaint seeks damages in excess of $3.2
million from the Company and the other defendants.  The Company does not
currently believe that the claims have any merit.  On August 25, 2009, the
Company filed its answer and a motion to dismiss the claims against the two
officers and directors named in the suit. The Company intends to continue to
vigorously defend the lawsuit.





Item
1-A.  Risk Factors





Not
applicable under smaller reporting company scaled disclosure requirements.





Item
2.  Unregistered Sales Of Equity Securities And Use Of
Proceeds





None





Item
3.  Defaults Upon Senior Securities





Blue Hill
bank borrowing agreements contain covenants pertaining to maintenance of various
ratios.  At September 30, 2009, the company was in breach of these
covenants and as of such date, the total amount outstanding under these
agreements was $1,655,839.  The bank has provided a notice of default
to the Company and has not waived the ratio requirementbut
has allowed the Company to continue to borrow on the revolving line and has not
demanded immediate repayment in full of the obligations to the
bank.  See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Liquidity and Capital
Resources.”





Item
4.  Submission Of Matters To A Vote Of Security Holders





None.





Item
5.  Other Information





None.




28


Item
6.  Exhibits





Exhibit
              Number
            
            Description





10.1
            
            Share
      Purchase Agreement dated July 30, 2009 by and between BPOMS, Inc. and
      CriticalControl Solutions Corp. (1)





31.1
            
            Certification
      of Chief Executive Officer required by Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002
  (1)




31.2
            
            Certification
      of Chief Financial Officer required by Rule 13a-14(a) of the Securities
      Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002 (1)




32
            
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (1)





__________________


(1)
            Attached
      as an exhibit to this Form 10-Q.





29




SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto
duly authorized.




Date:
      November 13, 2009
              BPO
      MANAGEMENT SERVICES, INC.By:
              /s/Patrick
      A. DolanChief
      Executive Officer
                (principal
      executive officer)




By:
              /s/Ronald
      K. HerbertChief
      Financial Officer
                (principal
      financial officer)








30





EXHIBITS
ATTACHED TO THIS QUARTERLY REPORT ON FORM 10-Q






Exhibit
              Number
            
            Description




10.1
            
            Share
      Purchase Agreement dated July 30, 2009 by and between BPOMS, Inc. and
      CriticalControl Solutions Corp.




31.1
            
            Certification
      of Chief Executive Officer required by Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of
2002




31.2
            
            Certification
      of Chief Financial Officer required by Rule 13a-14(a) of the Securities
      Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002




32
            
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002











31