UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q





(Mark
One)





[X]  QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008





[  
]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934 FOR THE





TRANSITION
PERIOD FROM __________ to __________





Commission
file number: 0-28560





BPO
MANAGEMENT SERVICES, INC.


(Exact
name of registrant as specified in its charter)




DELAWARE
            22-2356861(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)




1290 N
HANCOCK STREET, ANAHEIM HILLS, CA 92807


(Address
of principal executive offices)




(714)
974-2670


(Issuer's
telephone number, including area code)




NOT
APPLICABLE


(Former
name, former address and former fiscal year,


if
changed since last report)





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.     Yes [X] No [  
]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.





Large
      accelerated filer
              o
              Accelerated
      filer
              oNon-accelerated
      filer
              o(Do not check if a smaller reporting
company)
              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 [   ]   No
[X]








The
number of shares outstanding of the registrant's only class of common stock,
$.01 par value, was 12,671,034 on November 12, 2008.














PART
      IFINANCIAL
      INFORMATIONPageItem
      1.  Financial Statements
              3Condensed
      Consolidated Statements of Operations for the three and nine months endedSeptember 30, 2008 and 2007 (Unaudited)
              3Condensed
      Consolidated Balance Sheets as of  September 30, 2008
      (Unaudited) and December
      31, 2007
              4Condensed
      Consolidated Statements of Cash Flows for the nine months endedSeptember 30, 2008 and 2007 (Unaudited)
              5Notes
      to Condensed Consolidated Financial Statements (Unaudited)
              7Item
      2.  Management's Discussion and Analysis of Financial Condition
      and Results of Operations
              22Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
              36Item
      4T.  Controls and Procedures
              37PART
      IIOTHER
      INFORMATIONItem
      1.  Legal Proceedings
              38Item
      1-A  Risk Factors
              38Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
              38Item
      3.  Defaults Upon Senior Securities
              38Item
      4.  Submission of Matters to a Vote of Security
      Holders
              38Item
      5.  Other Information
              38Item
      6.  Exhibits
              38Signatures
              39Exhibits
      Attached to this Quarterly Report on Form 10-Q
              39




2





PART I -
FINANCIAL INFORMATION




ITEM 1.
FINANCIAL STATEMENTS




BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)




Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenues:Enterprise
      content management
              
              $
              2,529,276
              
              
              $
              3,504,953
              
              
              $
              10,898,926
              
              
              $
              5,866,997IT
      outsourcing services
              
              
              2,997,424
              
              
              
              880,978
              
              
              
              8,758,283
              
              
              
              2,861,891Human
      resource outsourcing servicing
              
              
              366,157
              
              
              
              246,371
              
              
              
              1,338,992
              
              
              
              260,188Total
      revenues
              
              
              5,892,857
              
              
              
              4,632,302
              
              
              
              20,996,201
              
              
              
              8,989,076Operating
      expenses:Cost
      of services provided
              
              
              2,795,573
              
              
              
              2,563,277
              
              
              
              10,392,030
              
              
              
              4,436,764Selling,
      general and administrative
              
              
              3,852,338
              
              
              
              2,912,249
              
              
              
              11,761,666
              
              
              
              6,982,541Research
      and development
              
              
              81,221
              
              
              
              168,371
              
              
              
              228,258
              
              
              
              261,738Depreciation
      and amortization
              
              
              709,320
              
              
              
              142,257
              
              
              
              2,193,495
              
              
              
              224,644Share-based
      compensation
              
              
              207,091
              
              
              
              112,118
              
              
              
              621,275
              
              
              
              258,861Total
      operating expenses
              
              
              7,645,543
              
              
              
              5,898,272
              
              
              
              25,196,724
              
              
              
              12,164,548Loss
      from operations
              
              
              (1,752,686
              )
              
              
              (1,265,970
              )
              
              
              (4,200,523
              )
              
              
              (3,175,472
              )Interest
      expense (income)Related
      parties
              
              
              27,148
              
              
              
              27,222
              
              
              
              80,853
              
              
              
              89,819Amortization
      of related party debt discount
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              594,029Other
      (net)
              
              
              64,447
              
              
              
              (11,300
              )
              
              
              173,583
              
              
              
              76,045Other
      Expense
              
              
              -
              
              
              
              (3,115
              )
              
              
              -
              
              
              
              (3,102
              )Total
      interest and other expense
              
              
              91,595
              
              
              
              12,807
              
              
              
              254,436
              
              
              
              756,791Loss
      before taxes
              
              
              (1,844,281
              )
              
              
              (1,278,777
              )
              
              
              (4,454,959
              )
              
              
              (3,932,263
              )Income
      tax expense
              
              
              18,125
              
              
              
              -
              
              
              
              110,852
              
              
              
              -Net
      loss
              
              
              (1,862,406
              )
              
              
              (1,278,777
              )
              
              
              (4,565,811
              )
              
              
              (3,932,263
              )Foreign
      currency translation gain (loss)
              
              
              (8,372
              )
              
              
              (40,623
              )
              
              
              (188,566
              )
              
              
              (331,180
              )Comprehensive
      loss
              
              $
              (1,870,778
              )
              
              $
              (1,319,400
              )
              
              $
              (4,754,377
              )
              
              $
              (4,263,443
              )Basic
      and diluted net loss per share
              
              $
              (0.15
              )
              
              $
              (0.14
              )
              
              $
              (0.36
              )
              
              $
              (0.45
              )Basic
      and diluted weighted average common
              
              
              12,671,034
              
              
              
              9,004,368
              
              
              
              12,529,216
              
              
              
              8,750,543


See
accompanying notes to condensed consolidated financial
statements.


3




BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 AS OF
SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
  2008
                
                
                2007(Unaudited)
                
                
                (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                2,911,367
                
                
                $
                888,043Restricted
      cash
                
                
                -
                
                
                
                922,888Accounts
      receivable, net of allowance for doubtful accounts of $312,693 and
      $347,797, respectively
                
                
                4,951,677
                
                
                
                4,768,618Inventory
      consisting of finished goods
                
                
                199,537
                
                
                
                268,160Prepaid
      expenses and other current assets
                
                
                656,878
                
                
                
                417,041Total
      current assets
                
                
                8,719,459
                
                
                
                7,264,750Equipment,
      net of accumulated depreciation of $1,211,807 and $718,913,
      respectively
                
                
                4,904,576
                
                
                
                4,834,941Goodwill
                
                
                10,391,940
                
                
                
                9,029,142Intangible
      assets, net of accumulated amortization of $2,101,785 and $931,268,
      respectively
                
                
                7,589,249
                
                
                
                9,898,219Other
      assets
                
                
                443,193
                
                
                
                38,449$
                32,048,417
                
                
                $
                31,065,501LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Current
      portion of long-term debt, net of discount of $3,219 and $3,405,
      respectively
                
                $
                1,569,575
                
                
                $
                812,156Current
      portion of capital lease obligations
                
                
                288,622
                
                
                
                149,653Accounts
      payable
                
                
                2,661,326
                
                
                
                3,540,827Accrued
      expenses
                
                
                2,431,074
                
                
                
                1,927,451Accrued
      interest-related party
                
                
                9,366
                
                
                
                36,672Accrued
      dividend payable
                
                
                840,458
                
                
                
                379,222Accrued
      dividend payable-related party
                
                
                503,562
                
                
                
                67,242Amount
      due former shareholders of acquired companies
                
                
                1,000,000
                
                
                
                2,101,771Income
      taxes payable
                
                
                172,815
                
                
                
                257,091Deferred
      revenues
                
                
                2,733,347
                
                
                
                2,509,885Related
      party notes payable
                
                
                1,000,000
                
                
                
                1,200,000Severence
      obligations payable
                
                
                -
                
                
                
                72,199Other
      current liabilities
                
                
                290,805
                
                
                
                -Total
      current liabilities
                
                
                13,500,950
                
                
                
                13,054,169Long-term
      debt, net of current portion and net of discount of $2,146 and $4,825,
      respectively
                
                
                302,395
                
                
                
                24,117Capital
      lease obligations, net of current portion
                
                
                527,083
                
                
                
                392,942Purchase
      price payable-long term
                
                
                -
                
                
                
                -Other
      long-term liabilities
                
                
                33,115
                
                
                
                33,115Total
      liabilities
                
                
                14,363,543
                
                
                
                13,504,343Commitments
      and contingencies (Note 7)Stockholders
      equity:Convertible
      preferred stock, Series A, par value $.01; authorized1,608,612
      shares; 1,608,612 shares issued and outstanding,
    respectively
                
                
                16,086
                
                
                
                16,086Convertible
      preferred stock, Series B, par value $.01; authorized1,449,204
      shares;1,449,204 shares issued and outstanding
                
                
                14,492
                
                
                
                14,492Non-convertible
      preferred stock, Series C, par value $.01; authorized21,378,000
      shares; 916,667 shares issued and outstanding
                
                
                9,167
                
                
                
                9,167Convertible
      preferred stock, Series D, par value $.01; authorized1,500,000
      shares; 1,427,084 and 1,458,334 shares issued and outstanding,
      respectively
                
                
                14,271
                
                
                
                14,583Convertible
      preferred stock, Series D-2, par value $.01; authorized1,500,000
      shares; 1,312,500 and 729,167 shares issued and outstanding,
      respectively
                
                
                13,125
                
                
                
                7,292Convertible
      preferred stock, Series F, par value $.01; authorized1,300,000
      shares; 894,942 shares issued and outstanding
                
                
                8,949
                
                
                
                -Common
      stock, par value $.01; authorized 150,000,000 shares;12,671,034
      and 12,171,034 shares issued and outstanding, respectively
                
                
                126,711
                
                
                
                121,711Additional
      paid-in capital
                
                
                32,359,100
                
                
                
                27,500,477Accumulated
      deficit
                
                
                (15,134,726
                )
                
                
                (10,568,915
                )Accumulated
      other comprehensive income foreign currency translation
      adjustments
                
                
                257,699
                
                
                
                446,265Total
      stockholders ' equity
                
                
                17,684,874
                
                
                
                17,561,158$
                32,048,417
                
                
                $
                31,065,501


See
accompanying notes to condensed consolidated financial
statements.


4




BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW
 FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (UNAUDITED)


2008
              
              
              2007Cash
      flows from operating activities:Net
      loss
              
              $
              (4,565,811
              )
              
              $
              (3,932,263
              )Adjustment
      to reconcile loss from continuing operationsto
      net cash provided by (used in) operating activities:
              
              
              -Depreciation
              
              
              1,004,527
              
              
              
              175,248Amortization
      of intangible assets
              
              
              1,188,968
              
              
              
              153,947Non-cash
      compensation expense recognized on issuance of stock
    options
              
              
              621,275
              
              
              
              258,861Amortization
      of loan discount
              
              
              -
              
              
              
              594,031Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (183,058
              )
              
              
              (1,097,353
              )Inventory
              
              
              68,623
              
              
              
              (25,238
              )Income
      tax receivable
              
              
              -
              
              
              
              250,000Prepaid
      expenses and other current assets
              
              
              (268,743
              )
              
              
              (103,721
              )Other
      assets
              
              
              (375,838
              )
              
              
              113,568Accounts
      payable
              
              
              (879,501
              )
              
              
              (1,027,744
              )Accrued
      expenses
              
              
              503,623
              
              
              
              614,748Accrued
      interest-related parties
              
              
              (27,306
              )
              
              
              90,119Accrued
      dividends-related parties
              
              
              436,320
              
              
              
              (69,870
              )Accrued
      dividends
              
              
              461,236
              
              
              
              -Amount
      due former shareholders of acquired companies
              
              
              (215,944
              )
              
              
              179,579Deferred
      revenue
              
              
              223,462
              
              
              
              371,890Income
      taxes payable
              
              
              (84,276
              )
              
              
              7,782Payments
      of severence liability
              
              
              (72,199
              )
              
              
              (500,841
              )Other
      current liabilities
              
              
              290,805
              
              
              
              -Net
      cash used in operating activities
              
              
              (1,873,837
              )
              
              
              (3,947,257
              )Cash
      flows from investing activities:Purchase
      of equipment, net
              
              
              (1,574,162
              )
              
              
              (516,847
              )Purchase
      obligation payment - Novus
              
              
              -
              
              
              
              (962,571
              )Purchase
      obligation payment - DocuCom
              
              
              -
              
              
              
              (917,338
              )Restricted
      deposit of purchase obligation
              
              
              922,888
              
              
              
              (922,888
              )Cash
      paid for acquisitions, net of cash acquired
              
              
              -
              
              
              
              (2,952,429
              )Net
      cash used in investing activities
              
              
              (651,274
              )
              
              
              (6,272,073
              )Cash
      flows from financing activities:Proceeds
      from bank loans, net
              
              
              1,035,697
              
              
              
              -Repayment
      of notes issued to former shareholders
              
              
              (885,827
              )
              
              
              (317,251
              )Repayment
      of capital lease obligations
              
              
              (161,036
              )
              
              
              (68,928
              )Proceeds
      from related party loan
              
              
              -
              
              
              
              400,000Repayment
      of notes payable
              
              
              (200,000
              )
              
              
              -Acquisition
      of capital leases
              
              
              434,146
              
              
              
              435,666Proceeds
      from issuance of preferred stock, net of cash paidfor
      commissions and direct costs
              
              
              5,157,996
              
              
              
              15,737,910Distributions
      to related parties
              
              
              -
              
              
              
              (240,598
              )Dividends
      declared on preferred stock
              
              
              (753,461
              )
              
              
              -Net
      cash provided by financing activities
              
              
              4,627,515
              
              
              
              15,946,799Effect
      of exchange rate changes on cash and csash equivalents
              
              
              (79,080
              )
              
              
              (331,179
              )Net
      increase in cash
              
              
              2,023,324
              
              
              
              5,396,290Cash
      and cash equivalents, beginning of period
              
              
              888,043
              
              
              
              706,197Cash
      and cash equivalents, end of period
              
              $
              2,911,367
              
              
              $
              6,102,487




See
accompanying notes to condensed consolidated financial
statements.


5




BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)


FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007




2008
              
              
              2007Supplemental
      disclosure of cash flow information:Cash
      paid for:Interest
              
              $
              300,050
              
              
              $
              56,023Income
      taxes
              
              $
              70,465
              
              
              $
              -Supplemental
      disclosure of non-cash investing and financing activities:Acquisition
      of equipment under capital leases
              
              $
              434,146
              
              
              $
              360,090Issuance
      of warrants
              
              $
              -
              
              
              $
              185,187Series
      A Preferred Stock dividend
              
              $
              -
              
              
              $
              345Issuance
      of Series F Preferred Stock
              
              $
              8,949
              
              
              $
              -Acquisition
      of a company:Net
      assets acquired
              
              $
              -
              
              
              $
              2,393,691Net
      liabilities assumed
              
              $
              -
              
              
              $
              2,973,910Common
      stock issued as consideration for acquisition
              
              $
              -
              
              
              $
              400,000




6




BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





1. 
Organization and Basis of Presentation





Organization





BPO
Management Services, Inc  (together with its subsidiaries, the
"Company" or “BPOMS”) was incorporated in Delaware in 1981 and was formerly
known as netGuru, Inc. (“netGuru”).  On December 15, 2006,
the Company merged with BPO Management Services, Inc., a Delaware
corporation incorporated on July 26, 2005 (“Former BPOMS”).  In that
transaction, the Company’s name was changed from netGuru to BPO Management
Services, Inc., and the shareholders of Former BPOMS received aggregate netGuru
equity comprised of 7,336,575 shares of common stock, 1,567,095 shares of
Series A preferred stock, 1,449,200 shares of Series B preferred stock, and
916,666 shares of Series C preferred stock, which represented the majority
of the outstanding shares after the merger.  The Company is a
provider of business process outsourcing services offering enterprise
content management ("ECM") services, information technology outsourcing
("ITO") services and human resource outsourcing ("HRO") services to middle
market enterprises located primarily in the United States
and Canada.





For
accounting purposes, the acquisition has been treated as a
recapitalization of Former BPOMS, prior to the merger with netGuru with
Former BPOMS as the acquirer. The historical financial statements prior to
December 15, 2006, are those of the Former BPOMS which began operations on
July 26, 2005. All share-related data has been presented giving effect to
the recapitalization resulting from the reverse merger.





Basis of
Presentation





The
accompanying unaudited condensed consolidated financial statements
are prepared on a consistent basis in accordance with accounting
principles generally accepted in the United States (GAAP) for interim
financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals and
consolidation and elimination entries) considered necessary for a fair
presentation have been included. Operating results for the three and nine
month periods ended September 30, 2008 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2008. The
interim financial statements should be read in conjunction with the
Company's consolidated financial statements and related footnotes included
in our Annual Report on Forms 10-KSB and 10KSB/A for the year
ended December 31, 2007.





2.
 Summary of Significant Accounting Policies





Principles
of Consolidation





The
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
              
              Segment
              
              Inception/Acquisition DateBPO
      Management Services, Inc. (the "Company")
              
              Corporate
              
              Inception
      date:  July 26, 2005Web4
      division of the Company ("Web4")
              
              ECM
              
              Acquired:  December
      15, 2006Adapsys
      Document Management LP ("ADM") (1)
              
              ECM
              
              Acquired:  July
      29, 2005Adapsys
      LP ("ADP") (1)
              
              ECM
              
              Acquired:  July
      29, 2005Digica,
      Inc. ("Digica") (2)
              
              ITO
              
              Acquired:  January
      1, 2006Novus
      Imaging Solutions, Inc. ("Novus") (1)
              
              ECM
              
              Acquired:  September
      30, 2006NetGuru
      Systems, Inc. ("NGSI")
              
              ITO
              
              Acquired:  December
      15, 2006Research
      Engineers, GmbH ("GmbH")
              
              ECM
              
              Acquired:  December
      15, 2006DocuCom
      Imaging Solutions, Inc. ("DocuCom") (1)
              
              ECM
              
              Acquired:  June
      21, 2007Human
      Resource Micro-Systems, Inc. ("HRMS")
              
              HRO
              
              Acquired:  June
      29, 2007Blue
      Hill Data Services, Inc. ("Blue Hill") (2)
              
              ITO
              
              Acquired:  October
      10, 2007BPO
      Management Services, Ltd. ("Ltd") (1)
              
              ECM
              
              Inception
      date: January 1, 2008


(1) On
January 1, 2008, ADM, ADP, Novus, and DocuCom were amalgamated into one company,
BPO Management Services, Ltd.
 (2)
Effective January 1, 2008, Digica was merged with Blue Hill


Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.




The
financial statements include certain amounts that are based on management's best
estimates and judgments. The most significant estimates are: allocation of the
purchase price in a business combination and the related valuation of
identifiable intangible assets and the determination of their useful lives,
valuation of goodwill arising from a business combination, the allowance for
uncollectible accounts receivable, estimation of useful lives of fixed assets,
test for impairment of goodwill, estimation of the severance liability,
valuation of stock options and warrants issued, allocation of equity unit
purchase price between preferred and common share and the determination of the
valuation reserves on the United States and Canadian income tax assets. These
estimates may be adjusted as more current information becomes available, and any
adjustment could be significant.







Fair
Value of Financial Instruments





Statement
of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair
Value Of Financial Instruments," requires management to disclose
the estimated fair value of certain assets and liabilities defined by SFAS
No. 107 as financial instruments. At September 30, 2008, management
believed the carrying amounts of cash and cash equivalents, receivable and
payable amounts, and accrued expenses approximated fair value because of
the short maturity of these financial instruments. The Company also
believed that the carrying amounts of its capital lease obligations and
notes payable approximated their fair value, as the interest rates
approximated a rate that the Company could have obtained under
similar terms at the balance sheet date.





Foreign
Currency Translation





The
financial condition and results of operations of the Company’s foreign
subsidiaries are accounted for using the local currency as the functional
currency. Assets and liabilities of the subsidiaries are translated into U.S.
dollars (the reporting currency) at the exchange rate in effect at
the  year-end. Statements of operations accounts are translated at the
average rate of exchange prevailing during the respective  years.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in accumulated other comprehensive (loss) in the
consolidated statements of stockholders’ equity and comprehensive loss. Gains
and losses resulting from foreign currency transactions are included in
operations and were not material for the nine months ended September 30,
2008 and 2007.


8





Cash and
Cash Equivalents





The
Company considers all liquid investments with maturities of three months or less
at the date of purchase to be cash equivalents.  The Company maintains
its cash balances at financial institutions that management believes possess
high-credit quality.  At September 30, 2008, the Company did not have
deposits that exceeded the United States (FDIC) federal insurance limit of
$250,000 per entity per bank.   At September 30, 2008, the Company had
no accounts on deposit that exceeded the Canadian (CDIC) insurable limit of
Cdn$100,000 per entity per bank.  The Canadian funds insurance is
limited to Canadian currency deposits only and does provide coverage to money
master high interest savings accounts (money market accounts) but all accounts
are considered in the overall limitation per entity per bank.





Inventory




Inventory
consists primarily of finished goods and is stated at the lower of cost or
market.





Property
and Equipment




Property
and equipment is stated at cost. Depreciation is calculated using the
straight-line method over the following useful lives:





Computer
      equipment
            2-5
      yearsComputer
      software
            2-3
      yearsOffice
      equipment and furniture
            3-10
      yearsLeasehold
      improvements
            Shorter
      of the life of the asset or the term of the
  lease





Assets
subject to capital lease agreements and leasehold improvements are amortized
over the lesser of the life of the asset or the term of the lease.




Goodwill




The
Company, upon its inception, adopted the provisions of SFAS No. 142 “Goodwill
and Other Intangible Assets.” SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144. SFAS No. 142 required the Company to
perform an assessment of whether there was an indication that goodwill was
impaired as of the date of adoption.




The
Company is required to perform reviews for impairment annually, or more
frequently when events occur or circumstances change that would more likely than
not reduce the fair value of the net carrying amount. The evaluation of goodwill
impairment involves assumptions about the fair values of assets and liabilities
of each reporting unit. If these assumptions are materially different from
actual outcomes, the carrying value of goodwill will be incorrect. In addition,
the Company’s results of operations could be materially affected by the
write-down of the carrying amount of goodwill to its estimated fair
value.




In
December 2007, the Company assessed the fair value of its three reporting units
by considering their projected cash flows, using risk-adjusted discount rates
and other valuation techniques and determined that there was no impairment to
goodwill. As of September 30, 2008 and 2007, the Company’s goodwill balance was
$10,391,940 and $9,029,142, respectively.  The Company obtained
third-party valuations relating to three acquisitions during 2007, and has
allocated the purchase price in accordance with those valuations.




Impairment
or Disposal of Long-Lived Assets




The
Company accounts for its long-lived assets under SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized in the amount by
which the carrying amount of the asset exceeds the fair value of the asset. SFAS
No. 144 requires companies to separately report discontinued operations and
extends that reporting to a component of an entity that either has been disposed
of (by sale, abandonment, or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.


9


Revenue
Recognition





The
Company recognizes revenue when the following criteria are met: (1) persuasive
evidence of an arrangement, such as agreements, purchase orders or written or
online requests, exists; (2) delivery of the product or service has been
completed and no significant obligations remain; (3) the Company’s price to the
buyer is fixed or determinable; and (4) collection is reasonably assured. The
Company’s revenues arise from the following segments: ECM solutions including
collaborative software products and services, ITO services and HRO
services.





Revenue
from software sales is recognized upon shipment if no significant post-contract
support obligations remain outstanding and collection of the resulting
receivable is reasonably assured. Customers may choose to purchase maintenance
contracts that include telephone, e-mail and other methods of support, and the
right to unspecified upgrades on a when-and-if available basis. Revenue from
these maintenance contracts is deferred and recognized ratably over the life of
the contract, usually twelve months.





In
October 1997, the Accounting Standards Executive Committee (“AcSEC”) of the
AICPA issued Statement of Position (“SOP”) 97-2, “Software Revenue Recognition.”
SOP 97-2 distinguishes between significant and insignificant vendor obligations
as a basis for recording revenue, with a requirement that each element of a
software licensing arrangement be separately identified and accounted for based
on relative fair values of each element. The Company determines the fair value
of each element in multi-element transactions based on vendor-specific objective
evidence (“VSOE”). VSOE for each element is based on the price charged when the
same element is sold separately.




In 1998,
the AICPA issued SOP 98-9, “Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions,” which modifies SOP 97-2 to
allow for use of the residual method of revenue recognition if certain criteria
have been met. If evidence of fair value of all undelivered elements exists but
evidence does not exist for one or more delivered elements, then revenue is
recognized using the residual method. Under the residual method, the fair value
of the undelivered elements is deferred and the remaining portion of the
transaction fee is recognized as revenue.





The
Company sells its collaborative software along with a maintenance package. This
constitutes a multi-element arrangement. The price charged for the maintenance
portion is the same as when the maintenance is sold separately. The fair values
of the maintenance contracts sold in all multi-element arrangements are
recognized over the terms of the maintenance contracts. The collaborative
software portion is recognized when persuasive evidence of an arrangement exits,
price is fixed and determinable, when delivery is complete, collection of the
resulting receivable is reasonably assured and no significant obligations
remain.




Revenues
from providing IT services are recognized primarily on a time and materials
basis, with time at a marked-up rate and materials and other reasonable expenses
at cost, once the services are completed and no significant obligations remain.
Certain IT services contracts are fixed price contracts where progress toward
completion is measured by mutually agreed upon pre-determined milestones for
which the Company recognizes revenue upon achieving such milestones. Fixed price
IT contracts are typically for a short duration of one to twelve months. Service
contracts are also for periods of up to twelve months. The Company did not have
any fixed price contracts at September 30, 2008. Fees for certain services are
variable based on an objectively determinable factor such as usage. Those
factors are included in the written contract such that the customer's fee is
determinable. The customer's fee is negotiated at the onset of the
arrangement.




Allowance
for Doubtful Accounts





The
Company sells to its customers on credit and grants credit to those who are
deemed credit worthy based on its analysis of their credit history. The Company
reviews its accounts receivable balances and the collectibility of these
balances on a periodic basis. Based on the Company’s analysis of the length of
time that the balances have been outstanding, the pattern of customer payments,
the Company’s understanding of the general business conditions of its customers
and its communications with its customers, the Company estimates the
recoverability of these balances. When recoverability is uncertain, the Company
records bad debt expenses and increases the allowance for accounts receivable by
an amount equal to the amount estimated to be unrecoverable. If the historical
data the Company uses to calculate the allowance provided for doubtful accounts
does not reflect its future ability to collect outstanding receivables,
additional provisions for doubtful accounts may be needed and the Company’s
future results of operations could be materially affected.




10


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 nine months ended September 30, 2008 and 2007, no single
customer accounted for 10% of the Company’s consolidated net sales.




DocuCom
purchases the majority of the services it sellsfrom one
vendor.  During the nine months ended September 30, 2008, and 2007, DocuCom
purchased services of approximately $2,893,756 and $2,516,320, respectively,
from that vendor.




Deferred
Revenues





The
Company defers revenues for its maintenance contracts and for its collaborative
software sales that are not considered earned. The Company recognizes revenues
and selling costs when the maintenance contracts are sold, and provides for
contract cancellations based on historical experience. The Company defers its
collaborative software sales revenues if it invoices or receives payment prior
to the completion of a project, and then recognizes these revenues upon
completion of the project when no significant obligations remain.





Research
and Development





The
Company's research and development ("R&D") costs consist mainly of
software developers' salaries. The Company follows the provisions of SFAS
No. 86 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 expenses
development costs when they are related to enhancement of existing software
products. The Company capitalized software development costs of approximately
$142,741 and $0 during the three months ended September 30, 2008 and 2007,
respectively, and approximately $380,341 and $0, during the nine months ended
September 30, 2008 and 2007, respectively.





Income
Taxes





The
Company accounts for income taxes using the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.





Comprehensive
Income (Loss)





The
Company applies the provisions of SFAS No. 130, “Reporting Comprehensive
Income,” which establishes rules for the reporting and display of comprehensive
income (loss) and its components. SFAS No. 130 requires changes in foreign
currency translation adjustments, which are reported separately in stockholders’
equity, to be included in other comprehensive income (loss).




Share-Based
Compensation





The
Company accounts for share-based compensation to employees pursuant to SFAS
No.123(R), “Share Based Payment,” which requires that all share-based
compensation to employees, including grants of employee stock options, be
recognized as expense in the Company’s financial statements based on their
respective grant date fair values. As SFAS No. 123(R) requires that share-based
compensation expense be based on awards that are ultimately expected to vest,
share based compensation has been reduced by estimated forfeitures.




SFAS
123(R) requires the use of a valuation model to calculate the fair value of
share-based awards. The Company has elected to use the Black-Scholes-Merton
option pricing model, which incorporates various assumptions including
volatility, expected life, expected dividend and interest rates. As a private
company, Former BPOMS did not have a history of market prices of its common
stock, and as such, the Company used an estimated volatility in accordance with
SAB No. 107 “Share Based Payment.” The Company used the volatility of the stock
price of netGuru, BPOMS’ predecessor company, adjusted to remove the effects of
divestitures, cash distributions, and the reverse merger which BPOMS deems not
representative of the events that would take place during expected term of the
options that were valued. The expected life of awards was based on the
simplified method as defined in SAB No. 107. The risk-free interest rate
assumption was based on observed interest rates appropriate for the terms of the
awards. The dividend yield assumption was based on the Company’s history and
expectation of not paying any dividends in the foreseeable future. Forfeitures
were estimated at the time of grant and will be revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. The
Company uses the straight line amortization model to record expenses under this
statement and recognized share-based compensation expense for the stock options
granted during the three months ended September 30, 2008 and 2007 in the amounts
of $207,091 and $112,118, respectively, and $621,275 and $258,861 during the
nine months ended September 30, 2008 and 2007, respectively. The Company may be
required to accelerate, increase or cancel any remaining unearned share-based
compensation expense if there are any modifications or cancellation of the
underlying unvested securities. Future share-based compensation expense and
unearned share-based compensation will increase to the extent that we grant
additional equity awards to employees or we assume unvested equity awards in
connection with acquisitions.


11


The fair
value of the Company’s stock options granted to employees was estimated using
the following assumptions:




Expected
      Dividend yield
            —Expected
      volatility
            123%-125%Risk-free
      interest rate
            3.87%-5.03%Expected
      option lives (in years)
            4.0-10.0Estimated
      forfeiture rate
            7.0%






Valuation
of The Company's Common Shares at The Time of Grant




During
2007, the Company issued shares of its common stock as partial consideration for
the acquisition of HRMS in September 2007 and Blue Hill in October
2007.  Prior to the merger of Former BPOMS and netGuru, Former BPOMS
issued shares of its common stock as partial consideration for the acquisition
of Digica in January 2006 and Novus Imaging Solutions, Inc., in October 2006.
The fair values of these grants were determined based on recent sales of Former
BPOMS’ securities at the time of the acquisitions.




Segment
Reporting





The
Company applies the provisions of SFAS No. 131, "Disclosures about
Segments   of an Enterprise and Related Information." SFAS No.
131 requires segments to be determined and reported based on how management
measures performance and makes decisions about allocating resources. See
Note 6 "Segment and Geographic Data" for a description of and disclosures
regarding the Company's significant reportable segments.





Reclassifications





Certain
reclassifications have been made to the three and nine months ended September
30, 2007 condensed consolidated financial statements to conform to the three and
nine months ended September 30, 2008.





Retirement
Plans





The
Company and certain of its United States subsidiaries have qualified cash
or deferred 401(k) retirement savings plans. The plans cover substantially
all United States employees who have attained age 21 and have one year of
service. Employees may contribute up to 15% of their compensation. The
Company does not make matching contributions to the plan, except in one
subsidiary, where it matches 100% of the employee contribution up to a
maximum of 4% of the employee’s salary.  Certain of its Canadian
subsidiaries have defined contribution pension plans whereby after a
qualification period the Company contributes an amount which varies from 2% to
8% of the employees annual earnings.  For the three months ended
September 30, 2008 and 2007, the Company contributions to the plans amounted to
$42,147 and $12,620, respectively, and $135,424 and $33,303 for the nine months
ended September 30, 2008 and 2007, respectively.





Basic and
Diluted Loss Per Share





In
accordance with FASB Statement No. 128, Earnings Per Share, 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, 2008 and 2007, all potentially
dilutive common stock equivalents amounted to 101,679,249 and 133,315,111
shares, respectively.




12


The
following table illustrates the computation of basic and diluted net
loss per share:




Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Numerator:Net
      loss
              
              $
              (1,862,406
              )
              
              $
              (1,278,777
              )
              
              $
              (4,565,811
              )
              
              $
              (3,932,263
              )Less:Preferred
      dividends paid in stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              34,496Loss
      and numerator used in computing basisand
      diluted loss per share
              
              $
              (1,862,406
              )
              
              $
              (1,278,777
              )
              
              $
              (4,565,811
              )
              
              $
              (3,966,759
              )Denominator:Denominator
      for basic and diluted net loss per share-weighted
      average number of common
    shares outstanding
              
              
              12,671,034
              
              
              
              9,004,368
              
              
              
              12,529,216
              
              
              
              8,750,543Basic
      and diluted net loss per share
              
              $
              (0.15
              )
              
              $
              (0.14
              )
              
              $
              (0.36
              )
              
              $
              (0.45
              )


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:





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Options
      to purchase shares of common stock
            
            
            5,002,954
            
            
            
            2,487,002
            
            
            
            5,002,954
            
            
            
            2,487,002Warrants
      to purchase shares of common stock
            
            
            27,411,590
            
            
            
            98,436,953
            
            
            
            27,411,590
            
            
            
            98,436,953Shares
      of convertible preferred stock - Series A
            
            
            1,608,612
            
            
            
            1,608,612
            
            
            
            1,608,612
            
            
            
            1,608,612Shares
      of convertible preferred stock - Series B
            
            
            1,449,204
            
            
            
            1,449,200
            
            
            
            1,449,204
            
            
            
            1,449,200Shares
      of convertible preferred stock - Series D
            
            
            22,833,341
            
            
            
            23,333,344
            
            
            
            22,833,341
            
            
            
            23,333,344Shares
      of convertible preferred stock - Series D-2
            
            
            20,999,998
            
            
            
            6,000,000
            
            
            
            20,999,998
            
            
            
            6,000,000Shares
      of convertible preferred stock - Series F
            
            
            22,373,550
            
            
            
            -
            
            
            
            22,373,550
            
            
            
            -Total
            
            
            101,679,249
            
            
            
            133,315,111
            
            
            
            101,679,249
            
            
            
            133,315,111




Impact of
Recently Issued Accounting Standards





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
which defines fair value, establishes a framework for measuring fair value under
GAAP and expands required disclosures about fair value measurements. SFAS
No. 157 is effective for financial statements issued for  years
beginning after November 15, 2007, and for interim periods within those
years. The Company adopted SFAS No. 157 as of January 1, 2008 and the
adoption did not have a material impact on the consolidated financial statements
or results of operations of the Company.





In
February 2008, the FASB issued FASB Staff Position (“FSP”) 157-1 to exclude SFAS
No. 13, Accounting for Leases, and its related interpretive accounting
pronouncements that address leasing transactions, from the scope of SFAS
No. 157. In February 2008, the FASB issued FSP 157-2, Effective Date of
FASB Statement No. 157, that would permit a one-year deferral period in
applying the measurement provisions of SFAS No. 157 to non-financial assets
and non-financial liabilities (non-financial items) that are not recognized or
disclosed at fair value in an entity’s financial statements on a recurring basis
(at least annually). Therefore, if the change in fair value of a non-financial
item is not required to be recognized or disclosed in the financial statements
on an annual basis or more frequently, the effective date of application of SFAS
No. 157 to that item is deferred until years beginning after
November 15, 2008 and interim periods within those  years. The
Company is currently evaluating the impact, if any, that the adoption of FSP
157-2 will have on the Company’s consolidated financial condition and results of
operations.


13


In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS 159”).  SFAS 159 permits
an entity to irrevocably elect fair value on a contract-by-contract basis as the
initial and subsequent measurement attribute for many financial assets and
liabilities and certain other items including insurance contracts. 
Entities electing the fair value option would be required to recognize changes
in fair value in earnings and to expense upfront cost and fees associated with
the item for which the fair value option is elected.  The adoption of SFAS
159 did not have a material impact on the Company’s statements of financial
position, results of operations or cash flows.




On
March 19, 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities.  SFAS 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements. The application of SFAS 161 is required for
fiscal years and interim periods beginning after November 15, 2008. The
Company does not expect the adoption of SFAS 161 to have a material impact on
its statements of financial position, results of operations or cash
flows.




In
March 2007, the Emerging Issues Task Force (“EITF”) issued a tentative
conclusion on EITF 07-03, “Accounting for Advance Payments for Goods or Services
to Be Used in Future Research and Development “ and the FASB ratified the
tentative conclusion.  EITF 07-03 addresses the diversity which exists with
respect to the accounting for the non-refundable portion of a payment made by a
research and development entity for future research and development activities.
Under this conclusion, an entity would defer and capitalize non-refundable
advance payments made for research and development activities until the related
goods are delivered or the related services are performed. EITF 07-03 is
effective for interim or annual reporting periods in fiscal years beginning
after December 15, 2007. The Company does not expect the adoption of EITF
07-03 to have a material impact on its statements of financial position, results
of operations and cash flows.





3. 
Business Combinations





On June
21, 2007, the Company purchased 100% of the issued and outstanding capital stock
of DocuCom for a total purchase price of Cdn$2,761,097 (approximately US$2.58
million). The DocuCom results of operations have been included in the
consolidated financial statements since the date of acquisition. In addition to
adding the DocuCom data and document management solutions capability with its
long term Canada-based customer relationships, the acquisition enhanced the
Company’s ability to offer high quality, cost-effective service utilizing its
near shore delivery model to its US customers.





The
purchase price consisted of cash in the amount of Cdn$961,097 (approximately
US$910,000), at closing on June 21, 2007. The purchase agreement also provided
that the Company pay the selling shareholders Cdn$900,000 (approximately
US$840,000) three months after closing and Cdn$900,000 (approximately
US$840,000) nine months after closing.  At September 30, 2008, all
such amounts have been paid.





On June
29, 2007, the Company purchased 100% of the issued and outstanding capital stock
of HRMS. The aggregate purchase price was $2,000,000, of which amount the
Company paid the selling shareholders $1,600,000 and issued them 384,968 shares
of the Company’s restricted common stock valued at $400,000 (based upon the
volume-weighted average closing bid price of the common stock during the ten
consecutive trading days immediately preceding the closing).





The HRMS
product delivers customizable software solutions for domestic and global
mid-market organizations seeking to optimize their human resources service
delivery and is being integrated with the Company’s existing human resources
outsourcing services based in San Francisco, California in order to broaden the
Company’s HRO offering to its customers.




Through a
Stock Purchase Agreement, entered into as of October 10, 2007, we purchased the
issued and outstanding capital stock of Blue Hill, a privately-held data center
outsourcing services company, based in Pearl River, New York.  Blue
Hill is a full-service data center outsourcing provider with customers located
throughout the United States representing a wide range of
industries.   The operations of Digica, Inc. have been merged with
those of Blue Hill and it is our intention that our remaining Information
Technology Outsourcing business unit will be combined with Blue Hill’s
operations to create additional capability for both new and existing customers
and generate additional economic efficiencies.  At or about the
closing date, we transferred approximately $11 million of value, as
follows:  (i) cash payments to the selling stockholders of
approximately $6.6 million; (ii) our 15-month promissory note in the initial
principal amount of $1 million, subject to offset in our favor with respect to
any claims for indemnity by us under the terms of the Stock Purchase Agreement;
(iii) cash payment through Blue Hill in the amount of approximately $1.4 million
to its former stockholder; and (iv) 2,666,666 shares of our restricted common
stock valued at approximately $1.8 million (based upon the volume-weighted
average closing bid price of our common stock during the ten consecutive trading
days immediately preceding the closing).  The promissory note bears
interest from and after January 1, 2009, at the rate of 9% per annum and is
“secured” by a document to be held in escrow, styled as a confession of
judgment.  The principal of the note, less any offsets, is, at the
selling stockholders’ option, convertible into restricted shares of our common
stock, the number of which is to be calculated in the same manner as the shares
issued at closing were calculated.


14





The
following table presents the allocation of the acquisition price, including
professional fees and other related acquisition costs, to the assets acquired
and liabilities assumed, based on their fair values as of the date of
acquisition for the three acquisitions during  2007:




DocuCom
              
              
              HRMS
              
              
              Blue
      HillCash
      and cash equivalents
              
              $
              -
              
              
              $
              15,702
              
              
              $
              38,061Accounts
      receivable
              
              
              1,579,611
              
              
              
              252,008
              
              
              
              941,341Acquired
      contracts
              
              
              -
              
              
              
              -
              
              
              
              -Other
      current assets
              
              
              172,888
              
              
              
              8,876
              
              
              
              242,070Property,
      plant and equipment
              
              
              204,419
              
              
              
              302,611
              
              
              
              3,297,991Goodwill
              
              
              1,462,693
              
              
              
              1,558,268
              
              
              
              2,397,891Identifiable
      intangible assets
              
              
              2,300,000
              
              
              
              500,000
              
              
              
              5,800,000Total
      assets acquired
              
              
              5,719,611
              
              
              
              2,637,465
              
              
              
              12,717,354Debt
      payable to bank
              
              
              420,610
              
              
              
              -
              
              
              
              977,715Accounts
      payable and other accrued liabilities
              
              
              2,247,173
              
              
              
              477,525
              
              
              
              2,147,880Estimated
      termination liability
              
              
              -
              
              
              
              -
              
              
              
              -Total
      liabilities assumed
              
              
              2,667,783
              
              
              
              477,525
              
              
              
              3,125,595Net
      assets acquired
              
              $
              3,051,828
              
              
              $
              2,159,940
              
              
              $
              9,591,759




Acquired
identifiable intangible assets of DocuCom, HRMS and Blue Hill in the amount of
$2,300,000, $500,000 and $5,800,000, respectively, were assigned to customer
contracts and non-compete agreements.  The purchase price and costs
associated with the DocuCom, HRMS and Blue Hill acquisitions exceeded the
Company’s allocation of the fair value of net assets acquired by $1,462,693,
$1,558,268 and $2,397,891, respectively, which was assigned to
goodwill.  The Company has obtained third-party valuations of the net
assets and the allocation of the purchase price for these three
acquisitions.  The amount assigned to goodwill is not expected to be
deductible for United States income tax, state income tax or Canadian income tax
purposes.




The
following unaudited pro forma financial information presents the combined
results of operations of the Company, DocuCom, HRMS and Blue Hill for the nine
months ended September 30, 2007 as if the acquisitions had occurred on January
1, 2007.




Unaudited
Pro Forma Statement of Operations For the Nine Months Ended September 30,
2007:





BPOMS
              
              
              DocuCom
              
              
              HRMS
              
              
              Blue
      Hill
              
              
              Pro
      FormaRevenues
              
              $
              6,023,334
              
              
              $
              8,936,243
              
              
              $
              795,930
              
              
              $
              5,744,953
              
              
              $
              21,500,460Net
      Income (Loss)
              
              $
              (3,939,297
              )
              
              $
              115,748
              
              
              $
              (399,250
              )
              
              $
              224,260
              
              
              $
              (3,998,539
              )Basic
      and diluted loss percommon
      share
              
              $
              (0.47
              )
              
              $
              -
              
              
              $
              (1.04
              )
              
              $
              0.08
              
              
              $
              (0.35
              )Basic
      and diluted weighted averagecommon
      shares outstanding
              
              
              8,365,575
              
              
              
              -
              
              
              
              384,968
              
              
              
              2,666,666
              
              
              
              11,417,209


15
 4. 
Debt
 
 Short-Term Related Party
Debt


Short-term
      related party debt consisted of the following at September 30,
      2008and
      December 31, 2007:2008
              
              
              2007Notes
      payable to two officers, who are also significantshareholders,
      secured by all assets of the Company,bearing
      an annual interest rate of 9%
              
              $
              1,000,000
              
              
              $
              1,200,000Long-term
      debt, including capital lease obligations, consisted of the
      followingat
      September 30, 2008 and December 31, 2007:2008
              
              
              2007a.
              
              Credit
      facility from Royal Bank of Canada, stated interest at afloating
      rate plus 1.05%, (totaling 5.55% and 7.05% at September 30, 2008
      andDecember
      31, 2007, respectively) secured by assets of the Company
              
              $
              1,353,858
              
              
              $
              795,132b.
              
              Loan
      from Business Development Bank of Canada, statedinterest
      at a floating rate plus 3.25%, (totaling 10.00% and 11.25%
    atSeptember
      30, 2008 and December 31, 2007, respectively), secured by
      assetsand
      personal guarantees of the Company, expiring May 21, 2010
              
              
              32,185
              
              
              
              49,371c.
              
              Credit
      facility from Comerica Bank, stated interest at theComerica
      Bank prime rate plus 1.00% ranging to 1.25%(totaling
      6.00%, 6.25% and 6.00% for the operating line,term
      loan and equipment loan, respectively, at September30,
      2008), secured by assets and guaranty of the Company
              
              
              491,292
              
              
              
              -d.
              
              Capital
      lease obligations maturing at dates rangingfrom
      November 30, 2009 to December 31, 2011, securedby
      the leased assets
              
              
              934,689
              
              
              
              655,522Total
      long-term debt before unamortized discountand
      inputed interest
              
              
              2,812,024
              
              
              
              1,500,025Less:  Imputed
      interest and unamortized discount
              
              
              (124,349
              )
              
              
              (121,157
              )Long-term
      debtLess:  current
      portion
              
              
              2,687,675
              
              
              
              1,378,8681,858,197
              
              
              
              961,809$
              829,478
              
              
              $
              417,059




Related
Party Notes Payable





In August
2006 the Company entered into an agreement with two individuals who are
officers, directors, and significant shareholders for a bridge loan not to
exceed $3,000,000.  From the inception of that agreement through
January 30, 2007 a total of $2,740,000 was advanced to the
Company.  Under the loan agreement principal and accrued and unpaid
interest were due and payable April 30, 2007.  The loan agreement is
unsecured.  The unpaid principal of $1,000,000 and accrued and unpaid
interest of $9,366 as of September 30, 2008 are due and payable on demand. The
amount due under the loan agreement has both a face and stated value of
$1,000,000 as of September 30, 2008.  The stated fixed interest rate
is 9.00% per annum.





Common
share purchase warrants (collectively the Warrants) to purchase shares of the
Company’s common stock, at an exercise price of $0.035 per share that are
exercisable on issuance were granted in conjunction with the loan agreement. The
total funds borrowed from the related parties amounted to
$2,740,000.  The Warrants are exercisable for 707,704 shares of common
stock. The Warrants, which expire seven years after issuance, were assigned a
value of $834,717, estimated using the Black-Scholes-Merton valuation model. The
following assumptions were used to determine the fair value of the Warrants: a
term of seven years, risk-free rate range of 4.16% - 5.03%, volatility of 125%,
and dividend yield of zero. In accordance with EITF No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, the values assigned to the Warrants was
allocated based on their relative fair values. The discount on the loan
agreement for the Warrants was accreted to interest expense, using the effective
interest method, over the initial term of the loan agreement (original loan
agreement due date was April 30, 2007) Total interest expense relating to the
accretion of the Warrants discount was fully recognized as of April 30,
2007.




16





The loan
agreement provided that if the Company required additional equity in order to
meet certain surplus requirements needed to accomplish the reverse merger with
netGuru, it could offer  the related parties the opportunity to
convert  a  portion of  the outstanding loan
agreement amount then payable at an aggregate conversion price equal to 50% of
the fair value of the common stock at the adjusted closing market price on the
day immediately preceding the conversion of the loan agreement
amounts.  A total of $1,540,000 was converted into 916,667 shares of
the Company’s Series C preferred stock in December 2006 (conversion price of
$1.68 per share of Series C preferred stock is based on an adjusted closing
price of the common stock on the day immediately preceding the conversion of
$3.36).  The Company incurred an $82,200 loan fee of 3% of the total
amount borrowed under the loan agreement which was paid to the related
parties.





Under the
loan agreement, the Company was required to pay an amount equal to not less than
25% of the net proceeds it received from all subsequent debt and equity
financings towards the retirement of the then outstanding principal and accrued
and unpaid interest (Note 5).  Any unwaived failure by the Company to
make any such payment would constitute a material breach of the loan agreement.
In connection with the consummation of the Series D preferred stock equity
financing on June 13, 2007, the two individuals waived this loan agreement
covenant.  The waiver related solely to the Series D preferred stock
financing.





Credit
Facility from the Royal Bank of Canada




BPO
Management Services, Ltd (“Ltd”) has a revolving operating line with the Royal
Bank of Canada with a maximum availability of Cdn $1,750,000 and carries an
annual interest rate equal to the Royal Bank of Canada prime rate plus 1.05%,
which amounted to 5.55% at September 30, 2008.  The credit facility is
secured by a general security agreement signed by Ltd., as well as a
postponement and assignment of claim from the Company. The borrowing limit on
the credit facility is 75% of the eligible accounts receivable of
Ltd.  At September 30, 2008 and December 31, 2007, Ltd had an
outstanding balance of approximately $1,353,858 and $795,132, respectively on
this credit facility.




Term Loan
from Business Development Bank of Canada




Ltd has a
term loan with the Business Development Bank of Canada that expires on May
21, 2010. The interest rate on this loan is bank's floating rate plus
3.25% and monthly principal re-payments are approximately $1,600. At
September 30, 2008, the annual rate of interest on this loan was 10.0% and
the balance outstanding was approximately $32,185. The loan is secured by a
general security agreement from Ltd and joint and personal guarantees in
the amount of approximately $43,000 by two former principals of ADM who
were also the Company's 5% shareholders. The Company issued a 7-year
warrant to purchase 5,435 shares of the Company's common stock at an
exercise price of $0.03 per share to each of these shareholders in return
for their loan guarantees. The warrants, valued at approximately $11,049,
were recorded as a discount to the term loan. The value of the warrants is
being amortized to interest expense over the term of the loan. Unamortized
discount at September 30, 2008 and December 31, 2007 was approximately $5,365
and $8,980, respectively.





Credit
Facility from Comerica Bank





During
the first quarter of 2008, Blue Hill obtained 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 an annual interest rate of the Comerica Bank prime rate plus 1.0%, which
amounted to 6.0% at September 30, 2008, 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 6.25% at September 30, 2008 and a specific advance
facility for equipment purchases to a maximum of $500,000 bearing interest at
the Comerica Bank prime rate plus 1.25%, which amounted to 6.0% at September 30,
2008. 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
BPOMS and the subordination of loans of a minimum of $1,400,000, payable by Blue
Hill to BPOMS, to Comerica Bank. At September 30, 2008 Blue Hill had an
outstanding balance of $23,480 under the operating line, $416,667 under the term
loan, and $51,145 under the equipment loan. Interest expense for the three month
period ended September 30, 2008 and nine month period ended September 30, 2008
amounted to $9,310 and $40,326, respectively.




17


Capital
Leases





Capital
leases consist primarily of equipment leases for the U.S. entities.
The Company added approximately $53,985 and $75,576 for the three months
ended September 30, 2008 and 2007, respectively, and approximately $434,146 and
$435,666 to capital leases during the nine months ended September 30, 2008 and
2007, respectively.




Long-term
debt, excluding unamortized discount, and capital lease obligations mature
in each of the following years ending September 30:





Long-Term
            
            
            Capital
      LeaseDebt
            
            
            Obligations2009
            
            $
            1,569,575
            
            
            $
            354,4242010
            
            
            135,728
            
            
            
            307,3502011
            
            
            125,000
            
            
            
            239,0732012
            
            
            41,667
            
            
            
            33,8422013
            
            
            -
            
            
            
            -Thereafter
            
            
            -
            
            
            
            -Total
      minimum payments
            
            $
            1,871,970
            
            
            $
            934,689Less:  amount
      representing interest
            
            
            
            
            
            
            (118,984
            )Present
      value of minimum capital lease payments
            
            
            
            
            
            $
            815,705




5. 
Capital Stock





In
January 2006 the Company issued 362,300 common shares as part of the purchase
consideration for Digica, Inc.





In
September 2006 the Company issued 144,920 common shares as part of the purchase
consideration for Novus Imaging Solutions, Inc.





In
December 2006 the Company issued 916,666 shares of Series C Preferred Stock to
two individuals that are officers and significant shareholders for
$1,540,000.





In
December 2006 the Company issued 1,282,820 common shares in exchange for the
shares of NetGuru, Inc. in the reverse merger transaction.





In June
2007 the Company issued 384,968 common shares as part of the purchase
consideration for Human Resource Micro-Systems, Inc.





In
October 2007, the Company issued 2,666,666 common shares as part of the purchase
consideration for Blue Hill Data Services, Inc.





In June
2007 the Company privately placed shares of Series D Preferred Stock and various
warrants to purchase shares of common stock and Series D-2 Preferred Stock to a
limited number of institutional investors for gross proceeds of approximately
$14,000,000. The shares of Series D Convertible Preferred Stock are convertible
into approximately 23.3 million shares of our common stock. The three-year
Series A Warrants (initial exercise price of $.90 per share) are exercisable for
the purchase of up to approximately 11.7 million shares of our common stock. The
five-year Series B Warrants (initial exercise price of $1.25 per share) are
exercisable for the purchase of up to approximately 23.3 million shares of
common stock. If exercised in full, the aggregate Series A Warrant and Series B
Warrant proceeds will be approximately $40 million.





The
investors were also granted a one-year option (in the form of Series J Warrants)
to purchase up to $21 million of Series D-2 Preferred Stock, which is
convertible into approximately 23.3 million shares of common stock. At the
closing and in connection with such option, the Company granted the investors
three-year Series C Warrants (initial exercise price of $1.35 per share), which
are exercisable for the purchase of up to approximately 11.7 million shares of
common stock, and five-year Series D Warrants (initial exercise price of $1.87
per share), which are exercisable for the purchase of up to approximately 23.3
million shares of common stock. The Series C Warrants and the Series D Warrants
vest only upon the exercise of the Series J Warrants. If exercised in full at
their initial exercise prices, the aggregate Series C Warrant and Series D
Warrant proceeds would be approximately $60 million.


18





Through
amendments to each of the Series J Warrants issued to the investors who
purchased shares of the Company’s Series D Preferred Stock on June 13, 2007
(which Series J Warrants were issued in connection with such share purchases),
the Company voluntarily reduced the per-share warrant exercise price payable
upon exercise of its Series J Warrant from $14.40 to $9.60, effective only for
exercises thereof during the period between September 28, 2007 and October 10,
2007.  This reduced warrant exercise price only applied for up to
seventy-five percent (75%) of the Series J Warrants then held by each investor
and the original exercise price of $14.40 per share was automatically re-applied
to any Series J Warrants not exercised at the reduced
price.




The
Company also amended each of the Series C Warrants to purchase shares of common
stock and Series D Warrants to purchase shares of common stock, all of which
were also issued in connection with the purchases of the Series D Convertible
Preferred Stock on June 13, 2007, to provide that, in the event that an investor
exercised any portion of the Series J Warrants at the reduced exercise price,
the per-share warrant exercise price payable upon exercise of its Series C
Warrant was reduced from $1.35 to $0.01 and the per-share warrant exercise price
payable upon exercise of its Series D Warrant was reduced from $1.87 to $1.10
for the same percentage of the investor’s Series C Warrants and Series D
Warrants as the percentage of Series J Warrants then exercised by such investor
during the reduced warrant price period.   Any applicable reduced
warrant exercise price for the Series C Warrants and Series D Warrants applies
for the remainder of their respective terms.





In March
2008, an investor converted 31,250 shares of their Series D Preferred Stock into
500,000 shares of the Company’s common stock.





Through
amendments to each of the Series J Warrants issued to the seven institutional
investors who purchased shares of the Series D Preferred Stock on June 13, 2007
(which Series J Warrants were issued in connection with such share purchases),
the Company voluntarily reduced the per-share warrant exercise price payable
upon exercise by any such investor of its Series J Warrant from $14.40 to $9.60,
effective only for exercises thereof during the period between March 24, 2008
and April 18, 2008, which period the board of directors subsequently extended to
April 25, 2008 (the “Reduced Warrant Price Period”). This reduced warrant
exercise price applied for all remaining, unexercised Series J Warrants then
held by each such institutional investor, and the original exercise price of
$14.40 per share automatically re-applies to any Series J Warrants not exercised
at the reduced price during the Reduced Warrant Price Period. These amendments
were made because the Company determined that the Company would provide another
enhanced opportunity to obtain financing from these seven institutional
investors.





The
Company also amended each of the Series C Warrants and Series D Warrants, all of
which were also issued in connection with such purchases of the Series D
Preferred Stock on June 13, 2007 to these seven institutional investors, to
provide that, in the event that such institutional investor exercised any
portion of its Series J Warrant during the Reduced Warrant Price Period, the
per-share warrant exercise price payable upon exercise of its Series C Warrant
would be reduced from $1.35 to $0.01 and the per-share warrant exercise price
payable upon exercise of its Series D Warrant would be reduced from $1.87 to
$0.01 for the same percentage of such investor’s original Series C Warrants and
Series D Warrants as the percentage of Series J Warrants then exercised by such
investor during the Reduced Warrant Price Period. For example, if an investor
exercised one-quarter (1/4) of its Series J Warrants during the Reduced Warrant
Price Period, the per-share exercise price for its Series C Warrant and Series D
Warrant would be so reduced for one-quarter (1/4) of its original Series C
Warrant and Series D Warrant. Any applicable reduced warrant exercise price for
the Series C Warrants and Series D Warrants would apply for the remainder of
their respective terms.





Each of
the Series A Warrants , Series B Warrants, Series J Warrants, Series C Warrants,
and Series D Warrants provides that such warrants may only be amended by written
instruments signed by the Company and the holders of warrants exercisable for a
majority of the shares of the stock underlying all of the then-outstanding
Series A Warrants, Series B Warrants, Series J Warrants, Series C Warrants, and
Series D Warrants, respectively.  By amendments to each of the Series
A Warrants, Series B Warrants, Series J Warrants, Series C Warrants, and Series
D Warrants, the institutional investors have agreed that neither the reductions
to the respective warrant exercise prices of the Series J Warrants, Series C
Warrants, and Series D Warrants nor the possible exchange of certain of the
Series A Warrants, Series B Warrants, and Series D Warrants into a
to-be-designated series of the Company’s preferred stock would trigger the
anti-dilution protections set forth in such warrants.




19




In
addition, the Certificate of Designation of the Relative Rights and Preferences
of the Series D Preferred Stock (the “Series D Certificate of Designation”) and
the Certificate of Designation of the Relative Rights and Preferences of the
Series D-2 Preferred Stock of the Company (the “Series D-2 Certificate of
Designation” and, together with the Series D Certificate of Designation, the
“Certificates of Designation”) provide for certain anti-dilution protections in
favor of the holders of such shares of the preferred stock.  Each of
the Certificates of Designation provides that it may be amended with the consent
of holders of not less than sixty-six percent (66%) of the then-outstanding
shares of Series D Preferred Stock or Series D-2 Preferred Stock, as
applicable.  Holders of not less than sixty-six percent (66%) of such
shares have consented in writing to the amendment to the Certificates of
Designation to provide that neither the reductions to the warrant exercise
prices of the Series J Warrants, Series C Warrants, and Series D Warrants nor
the possible exchange of certain of the Series A Warrants, Series B Warrants,
and Series D Warrants into a to-be-designated series of the preferred stock
would trigger the anti-dilution protections set forth in the Certificates of
Designation.  As a result, on April 25, 2008, the Company filed
amendments to the Certificates of Designation with the Secretary of State of the
State of Delaware.





During
April of 2008, five institutional investors exercised certain of their Series J
Warrants at the reduced exercise price and acquired an aggregate of
approximately 583,333 shares of the Series D-2 Preferred Stock for an aggregate
exercise price of approximately $5.6 million.





On
September 5, 2008, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Healthaxis Inc., a Pennsylvania corporation (“Healthaxis”), and
Outsourcing Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary
of Healthaxis  (“Merger Sub”), providing for the merger of Merger Sub
with and into us.





In
connection with the Merger Agreement, Healthaxis will issue shares of its common
stock and shares of a new series of its preferred stock, designated as
Healthaxis Series B Convertible Preferred Stock, in exchange for the outstanding
stock and certain warrants held by our stockholders.  Based on the
fixed exchange ratios contained in the Merger Agreement, it is expected that
immediately following the closing of the Merger, our current security holders
will own approximately 75% of Healthaxis and current Healthaxis security holders
will own approximately 25% of Healthaxis, on a fully-diluted
basis.  The surviving public company will be re-named “BPO Management
Services, Inc.”





On August
29, 2008, we made certain additional amendments to the terms of the Series D
Convertible Preferred Stock Purchase Agreement to eliminate any and all of our
duties and/or obligations under such Agreement.  We also offered the
institutional investors who purchased shares of our Series D Preferred Stock on
June 13, 2007, the right to exchange all of their outstanding Series A Warrants,
Series B Warrants, and Series D Warrants (if such Series D Warrants have an
exercise price of $1.10 per share) for shares of our Series F Preferred
Stock.  On August 29, 2008, certain of the investors accepted that
offer and, as a result, 40,666,676 shares of our Series A Warrants, Series B
Warrants, and Series D Warrants have been exchanged for 894,942 shares of our
Series F Preferred Stock.




6. 
Segment and Geographic Data





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




o
              Enterprise
      content management (ECM)o
              Information
      Technology services outsourcing (ITO) ando
              Human
      resources outsourcing
(HRO)


The
Company applies the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 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.




20


The
significant components of worldwide operations by reportable
operating segment for the three and nine months ended September 30, 2008
and 2007, respectively, are:


Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      revenuesECM
              
              $
              2,529,276
              
              
              $
              3,504,953
              
              
              $
              10,898,926
              
              
              $
              5,866,997ITO
              
              
              2,997,424
              
              
              
              880,978
              
              
              
              8,758,283
              
              
              
              2,861,891HRO
              
              
              366,157
              
              
              
              246,371
              
              
              
              1,338,992
              
              
              
              260,188Consolidated
              
              $
              5,892,857
              
              
              $
              4,632,302
              
              
              $
              20,996,201
              
              
              $
              8,989,076Operating
      income (loss)ECM
              
              $
              (670,909
              )
              
              $
              (361,629
              )
              
              $
              (1,392,896
              )
              
              $
              (865,350
              )ITO
              
              
              (80,199
              )
              
              
              (1,384
              )
              
              
              67,247
              
              
              
              (187,168
              )HRO
              
              
              (154,683
              )
              
              
              (339,551
              )
              
              
              (314,002
              )
              
              
              (488,061
              )Corporate
              
              
              (846,895
              )
              
              
              (563,406
              )
              
              
              (2,560,872
              )
              
              
              (1,634,893
              )Consolidated
              
              $
              (1,752,686
              )
              
              $
              (1,265,970
              )
              
              $
              (4,200,523
              )
              
              $
              (3,175,472
              )Depreciation
      and amortization expenseECM
              
              $
              169,844
              
              
              $
              45,859
              
              
              $
              550,468
              
              
              $
              39,168ITO
              
              
              451,101
              
              
              
              31,591
              
              
              
              1,294,894
              
              
              
              64,962HRO
              
              
              23,289
              
              
              
              2,580
              
              
              
              153,868
              
              
              
              5,159Corporate
              
              
              65,086
              
              
              
              62,227
              
              
              
              194,265
              
              
              
              115,355Consolidated
              
              $
              709,320
              
              
              $
              142,257
              
              
              $
              2,193,495
              
              
              $
              224,644


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





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      revenuesNorth
      America
            
            $
            5,632,751
            
            
            $
            4,367,847
            
            
            $
            20,390,992
            
            
            $
            8,496,025Europe
            
            
            260,106
            
            
            
            264,455
            
            
            
            605,209
            
            
            
            493,051Consolidated
            
            $
            5,892,857
            
            
            $
            4,632,302
            
            
            $
            20,996,201
            
            
            $
            8,989,076At
            
            
            AtSeptember
      30,
            
            
            December
      31,Long-Lived
      Assets
            
            2008
            
            
            2007North
      America
            
            $
            23,312,510
            
            
            $
            23,777,079Europe
            
            
            16,448
            
            
            
            23,672Consolidated
            
            $
            23,328,958
            
            
            $
            23,800,751




7. 
Commitments and Contingencies





Financial
Results, Liquidity and Management’s Plan Activities





The
Company has incurred losses in the nine months ended September 30, 2008 of
$4,565,811. The Company has been able to obtain operating capital through
private debt funding sources, the sale of shares of its common stock and
through the exercise of warrants to purchase shares of its common stock.
Management's plans include the continued development and implementation of
its business plan.  No assurances can be given that the Company can
obtain sufficient working capital through the sale of the Company's common
stock and borrowing or that the continued implementation of its business
plan will generate sufficient revenues in the future.




21




Amount
Due to Former Shareholders of Acquired Companies





The
purchase agreements pursuant to which the Company acquired certain companies
provides for a cash portion of the purchase price to be paid in
installments usually within a year.





Operating
Leases





The
Company leases certain facilities and equipment under
non-cancelable operating leases. The facility leases include options to
extend the lease terms and provisions for payment of property taxes,
insurance and maintenance expenses.





At
September 30, 2008, future minimum annual rental commitments under these
lease obligations were as follows:





For the
year ending September 30:





2009
            
            $
            1,497,1922010
            
            
            1,387,0532011
            
            
            1,212,8172012
            
            
            331,0722013
            
            
            291,907Thereafter
            
            
            1,134,477$
            5,854,518




For the
three months ended September 30, 2008 and 2007 rent expense was $365,148 and
$266,956, respectively.  For the nine months ended September 30, 2008 and
2007 rent expense was $1,164,219 and $581,121, respectively.





Litigation





The
Company is subject to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business
activities. Management believes that any liability that may ultimately
result from the resolution of these matters will not have a material
adverse effect on the financial condition or results of operations of the
Company.







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") That are based on
our current expectations, beliefs, estimates and projections, as well as
assumptions made by, and information currently available to us.  We
intend that those forward-looking statements be subject to the safe harbors
created by those sections. Statements that are not historical facts, including
statements about beliefs and expectations, are forward-looking
statements.  Forward-looking statements can generally be identified as
such because the context of the statement may include words such as “expect,”
“believe,” “anticipate” or words of similar import.  Similarily,
statements that describe future plans, objectives or goals are also
forward-looking statements.  These statements are not guarantees of
future performance, events or results and generally involve known and unknown
risks, uncertainties and other facts that may cause actual results, performance
or achievements to be materially different from such forward-looking statements.
The forward-looking statements and associated risks may include, relate to,
or be qualified by other important factors, including, without
limitation:


22


o
              Our
      ability to continue as a going concern;o
              Our
      ability to obtain additional debt or equity financing to the extent needed
      for our continued operations or for planned expansion, particularly if we
      are unable to attain and maintain profitable operations in the
      future;o
              Our
      ability to successfully implement our business plans and the possibility
      of strategic acquisitions;o
              Our
      ability to attract and retain strategic partners and
      alliances;o
              Our
      ability to hire and retain qualified personnel;o
              The
      risks of uncertainty of protection of our intellectual
      property;o
              Risks
      associated with existing and future governmental regulation to which we
      are subject; ando
              Uncertainties
      relating to economic conditions in the markets in which we currently
      operate and in which we intend to operate in the
  future.


















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. We do
not undertake to update, revise or correct any forward-looking
statements.





Any of
the factors described above or others  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





BPO
Management Services, Inc (together with its subsidiaries, the "Company" or
“BPOMS”) was incorporated in Delaware in 1981 and was formerly known as
netGuru, Inc. (“netGuru”). On December 15, 2006, the Company merged with BPO
Management Services, Inc., a Delaware corporation incorporated on July 26, 2005
(“Former BPOMS”). In that transaction (the “Merger”), the Company’s name was
changed from netGuru to BPO Management Services, Inc.. Upon the closing of the
Merger, we adopted Former BPOMS’ (as the accounting acquirer) accounting year
end of December 31.





We
provide business process outsourcing (BPO) services to enterprises in
the United States, Canada and Europe. "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 throughout North America and Europe on an
outsourced and/or recurring revenue basis.





Our
primary business offerings are:
 
 o
              Document
      and data management solutions, also known as enterprise content management
      or "ECM";o
              Information
      technology services outsourcing or "ITO"; ando
              Human
      resources outsourcing or "HRO".
 
 Critical
Accounting Policies
 
 We have
identified the following as accounting policies that are the most critical
to aid in understanding and evaluating our financial results:
 
 o
              revenue
      recognition;o
              allowance
      for doubtful accounts receivable; ando
              impairment
      of long-lived assets, including
goodwill.
 
 Revenue
Recognition
 
 We derive
revenues from:
 
 o
              Enterprise
      content management services, including collaborative software products and
      services;o
              IT
      outsourcing services; ando
              uman
      resources outsourcing
services.


23


We
recognize revenues when the following criteria are met:





o
              Persuasive
      evidence of an arrangement, such as agreements, purchase orders or written
      or online requests, exists;o
              Delivery
      has been completed and no significant obligations
  remain;o
              Our
      price to the buyer is fixed or determinable; ando
              Collection
      is reasonably assured.




Persuasive
Evidence of an Arrangement





We
document all terms of an arrangement in a written contract signed by
the customer prior to recognizing revenue.




Delivery
Has Occurred or Services Have Been Performed





We
perform all services or deliver all products prior to recognizing
revenue. Monthly services are considered to be performed ratably over the
term of the arrangement. Professional consulting services are considered to
be performed when the services are complete. Equipment is considered
delivered upon delivery to a customer's designated location.





The Fee
for the Arrangement is Fixed or Determinable





Prior to
recognizing revenue, a customer's fee must either be fixed or
determinable under the terms of the written contract. Fees for most monthly
services, professional consulting services, and equipment sales are fixed
under the terms of the written contract. Fees for certain services are
variable based on an objectively determinable factor such as usage. Those
factors are included in the written contract such that the customer's fee
is determinable. The customer's fee is negotiated at the outset of the
arrangement.





Collectibility
is Reasonably Assured





We
determine that collectibility is reasonably assured prior to
recognizing revenue. We assess collectibility on a customer by customer
basis based on criteria outlined by management. New customers are subject
to a credit review process, which evaluates the customer's financial
position and ultimately its ability to pay. We do not enter into
arrangements unless collectibility is reasonably assured at the outset.
Existing customers are subject to ongoing credit evaluations based on
payment history and other factors. If it is determined during the
arrangement that collectibility is not reasonably assured, revenue will be
recognized on a cash basis.





We
recognize revenues from software that we customize to fit a
customer's requirements based on satisfactory completion of pre-determined
milestones (evidenced by written acceptance from the customer) and delivery
of the product to the customer, provided no significant obligations remain
and collection of the resulting receivable is reasonably assured. Customers
may choose to purchase ongoing maintenance contracts that include
telephone, e-mail and other methods of support, and unspecified upgrades on
a when-and-if available basis. Revenue from the maintenance contracts is
deferred and recognized ratably over the life of the contract, usually
twelve months.





In 1997,
the Accounting Standards Executive Committee ("AcSec") of the
American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP
97-2 distinguishes between significant and insignificant vendor obligations
as a basis for recording revenue and requires that each element of a
software licensing arrangement be separately identified and accounted for
based on relative fair values of each element. We determine the fair value
of each element in multi-element transactions based on vendor-specific
objective evidence ("VSOE"). VSOE for each element is based on the price
charged when the same element is sold separately.





In 1998,
the AICPA issued SOP 98-9, Modification of SOP 97-2, "Software
Revenue Recognition, With Respect to Certain Transactions," which modified
SOP 97-2 to allow for use of the residual method of revenue recognition if
certain criteria are met. If evidence of fair value of all undelivered
elements exists but evidence does not exist for one or more delivered
elements, then we recognize revenue using the residual method. Under the
residual method, the fair value of the undelivered elements is deferred,
and the remaining portion of the transaction fee is recognized as
revenue.





24


We
recognize revenues from our IT services primarily on a time and
materials basis, with time at a marked-up rate and materials and other
reasonable expenses at cost, as we perform IT services. Certain IT services
contracts may be fixed price contracts where we would measure progress
toward completion by mutually agreed upon pre-determined milestones and
recognize revenue upon reaching those milestones. Our fixed price IT
contracts typically are for a short duration of one to nine
months.





Allowance
for Doubtful Accounts Receivable





We sell
to our customers on credit and grant credit to those who are deemed credit
worthy based on our analysis of their credit history. We review
our accounts receivable balances and the collectibility of these balances
on a periodic basis. Based on our analysis of the length of time that the
balances have been outstanding, the pattern of customer payments, our
understanding of the general business conditions of our customers and our
communications with our customers, we estimate the recoverability of these
balances. When recoverability is uncertain, we record bad debt expense and
increase the allowance for accounts receivable by an amount equal to the
amount estimated to be unrecoverable. If the historical data we use to
calculate the allowance provided for doubtful accounts does not reflect our
future ability to collect outstanding receivables, additional provisions
for doubtful accounts may be needed and our future results of operations
could be materially affected. We have
reviewed collectibility in light of the current economic conditions and while
payment times have been generally extended we have not seen a deterioration in
collectibility.




Impairment
of Long-Lived Assets Including Goodwill





At
inception, we adopted the provisions of SFAS No. 142 "Goodwill and
Other Intangible Assets." SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS No. 144.
Pursuant to SFAS No. 142, we were required to perform an assessment of
whether there was an indication that goodwill was impaired as of the date
of adoption.





We are
required to perform reviews for impairment annually, or more
frequently when events occur or circumstances change that would more likely
than not reduce the fair value of the net carrying amount. The evaluation
of goodwill impairment involves assumptions about the fair values of assets
and liabilities of each reporting unit. If these assumptions are materially
different from actual outcomes, the carrying value of goodwill will be
incorrect. In addition, the Company's results of operations could be
materially affected by the write-down of the carrying amount of goodwill to
its estimated fair value.


In
December 2007 we assessed the fair value of our three reporting units by
considering their projected cash flows, using risk-adjusted discount rates and
other valuation techniques. We have reviewed the valuations and concluded that
there have been no events that have occurred to cause impairment to goodwill. As
of September 30, 2008, our goodwill account balance was
$10,391,940.


Consolidated
Results of Operations





The
privately held Former BPOMS began operations in July 26, 2005 and
merged with the then publicly-held netGuru, Inc. on December 15, 2006 in a
reverse merger. For accounting purposes, the acquisition has been treated
as a recapitalization of Former BPOMS with Former BPOMS as the accounting
acquirer.




25




The
following entities are included in the consolidated results of operations
from the date of their respective acquisitions or inception:


Company
                
                Segment
                
                Inception/Acquisition DateBPO
      Management Services, Inc. (the "Company")
                
                Corporate
                
                Inception
      date:  July 26, 2005Web4
      division of the Company ("Web4")
                
                ECM
                
                Acquired:  December
      15, 2006Adapsys
      Document Management LP ("ADM") (1)
                
                ECM
                
                Acquired:  July
      29, 2005Adapsys
      LP ("ADP") (1)
                
                ECM
                
                Acquired:  July
      29, 2005Digica,
      Inc. ("Digica") (2)
                
                ITO
                
                Acquired:  January
      1, 2006Novus
      Imaging Solutions, Inc. ("Novus") (1)
                
                ECM
                
                Acquired:  September
      30, 2006NetGuru
      Systems, Inc. ("NGSI")
                
                ITO
                
                Acquired:  December
      15, 2006Research
      Engineers, GmbH ("GmbH")
                
                ECM
                
                Acquired:  December
      15, 2006DocuCom
      Imaging Solutions, Inc. ("DocuCom") (1)
                
                ECM
                
                Acquired:  June
      21, 2007Human
      Resource Micro-Systems, Inc. ("HRMS")
                
                HRO
                
                Acquired:  June
      29, 2007Blue
      Hill Data Services, Inc. ("Blue Hill") (2)
                
                ITO
                
                Acquired:  October
      10, 2007BPO
      Management Services, Ltd. ("Ltd") (1)
                
                ECM
                
                Inception
      date: January 1, 2008
 (1) On
January 1, 2008, ADM, ADP, Novus, and DocuCom were amalgamated into one company,
BPO Management Services, Ltd.
 (2)
Effective January 1, 2008, Digica was merged with Blue
Hill




HRMS,
DocuCom and Blue Hill (the “New Subsidiaries”) were all acquired in 2007 on the
dates noted above. The three month and nine month period ended September 30,
2007 did not reflect any of the operations of Blue Hill. The three
and nine month periods ended September 30, 2007 included three months’
operations of both DocuCom and HRMS.





The
results for the three and nine month periods ended September 30 2008 are
significantly influenced by the New Subsidiaries which contributed approximately
70% and 72% of the sales and 62% and 61% of the operating expenses for the three
and nine month periods ended September 30, 2008, respectively. During the same
periods in 2007 they accounted for 57% and 33% of sales and 47% and 25% of
operating expenses for the three and nine month periods, respectively. In the
table below the entities existing prior to the acquisition of the New
Subsidiaries, the Company, Web4, ADM, ADP, Digica, Novus, NGSI and GmbH are
referred to as the “Preexisting Entities”.


26





Three
      Months Ended September 302008
              
              
              2007Preexisting
              
              
              New
              
              
              
              
              
              Preexisting
              
              
              NewEntities
              
              
              Subsidiaries
              
              
              Total
              
              
              Entities
              
              
              Subsidiaries
              
              
              TotalRevenues
              
              $
              1,752,559
              
              
              $
              4,140,298
              
              
              $
              5,892,857
              
              
              $
              1,971,725
              
              
              $
              2,660,577
              
              
              $
              4,632,302Operating
      expenses
              
              
              2,882,735
              
              
              
              4,762,808
              
              
              
              7,645,543
              
              
              
              3,129,214
              
              
              
              2,769,058
              
              
              
              5,898,272Interest
      and other expense
              
              
              (11,931
              )
              
              
              103,526
              
              
              
              91,595
              
              
              
              2,606
              
              
              
              10,201
              
              
              
              12,807Income
      tax expense
              
              
              15,272
              
              
              
              2,853
              
              
              
              18,125
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss
              
              $
              (1,133,518
              )
              
              $
              (728,888
              )
              
              $
              (1,862,406
              )
              
              $
              (1,160,095
              )
              
              $
              (118,682
              )
              
              $
              (1,278,777
              )Nine
      Months Ended September 302008
              
              
              2007Preexisting
              
              
              New
              
              
              
              
              
              
              Preexisting
              
              
              NewEntities
              
              
              Subsidiaries
              
              
              Total
              
              
              Entities
              
              
              Subsidiaries
              
              
              TotalRevenues
              
              $
              5,854,018
              
              
              $
              15,142,183
              
              
              $
              20,996,201
              
              
              $
              6,023,334
              
              
              $
              2,965,742
              
              
              $
              8,989,076Operating
      expenses
              
              
              9,816,383
              
              
              
              15,380,341
              
              
              
              25,196,724
              
              
              
              9,099,481
              
              
              
              3,065,067
              
              
              
              12,164,548Interest
      and other expense
              
              
              102,037
              
              
              
              152,399
              
              
              
              254,436
              
              
              
              746,590
              
              
              
              10,201
              
              
              
              756,791Income
      tax expense
              
              
              107,999
              
              
              
              2,853
              
              
              
              110,852
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss
              
              $
              (4,172,402
              )
              
              $
              (393,409
              )
              
              $
              (4,565,811
              )
              
              $
              (3,822,737
              )
              
              $
              (109,526
              )
              
              $
              (3,932,263
              )


27


ThreeMonthsEnded September 30, 2008Compared toThreeMonthsEnded September 30,
2007
  Net
Revenues
 
 The
following table presents our net revenues by operating
segment:


Three
      Months EndedSeptember
      30,2008
              
              
              2007
              
              
              ChangeNet
      revenuesECM
              
              $
              2,529,276
              
              
              $
              3,504,953
              
              
              $
              (975,677
              )%
      of total net
              
              
              42.9%
              
              
              
              75.7%ITO
              
              
              2,997,424
              
              
              
              880,978
              
              
              
              2,116,446%
      of total net revenues
              
              
              50.9%
              
              
              
              19.0%HRO
              
              
              366,157
              
              
              
              246,371
              
              
              
              119,786%
      of total net revenues
              
              
              6.2%
              
              
              
              5.3%Total
      net revenues
              
              $
              5,892,857
              
              
              $
              4,632,302
              
              
              $
              1,260,555


Total net
revenues increased by $1,260,555 or 27% to $5,892,857 during the three
months ended September 30, 2008 from $4,632,302 during the same period in
2007.  The New Subsidiaries contributed approximately $1,500,000 and
partially offset by a reduction in revenue from the preexisting entities of
approximately $239,000.




Enterprise
Content Management ("ECM")





Net
revenue from ECM products and services during the three months
ended September 30, 2008 decreased by $975,677 or 28% to $2,529,276 from
$3,504,953 during the same period in 2007.   The ECM
business experienced a temporary slowdown which occasioned a restructuring of
management in the segment. The decrease is primarily due to reduced sales of
equipment at DocuCom, one of the New Subsidiaries, of approximately $1,110,000
between the periods.  The ECM segment includes, in addition to
DocuCom, our ECM solutions group and our collaborative software products and
related services whose revenues increased approximately $134,000 from the
same period in 2007.  Subsequent to September 30, 2008, equipment
sales at DocuCom have increased.





IT
Outsourcing Services ("ITO")


Net
revenue from ITO during the three months ended September 30, 2008 increased
by $2,116,446 or 240% to $2,997,424 from $880,978 during the three months
ended September 30, 2007, attributable to one of the New Subsidiaries, Blue
Hill, which was acquired in October 2007 and which contributed approximately
$2,500,000 which was offset by decreases in both Digica and NGSI through the
loss of customers.


Human
Resource Outsourcing Services ("HRO")





Net
revenue from HRO products and services during the three months
ended September 30, 2008 increased by $119,786 to $366,157 from
$246,371 during the three months ended September 30, 2007, entirely
attributable to HRMS, one of the New Subsidiaries, which was acquired in June of
2007.





28
 
  Operating
Expenses
  The
following table presents our operating expenses and the percentage of total net
revenues:





September
      30,2008
              
              
              2007
              
              
              ChangeOperating
      ExpensesCost
      of services provided expenses
              
              $
              2,795,573
              
              
              $
              2,563,277
              
              
              $
              (232,296
              )%
      of total net revenues
              
              
              47.4%
              
              
              
              55.3%Selling,
      general and administrative expenses
              
              
              3,852,338
              
              
              
              2,912,249
              
              
              
              (940,089
              )%
      of total net revenues
              
              
              65.4%
              
              
              
              62.9%Research
      and development expenses
              
              
              81,221
              
              
              
              168,371
              
              
              
              87,150%
      of total net revenues
              
              
              1.4%
              
              
              
              3.6%Depreciation
      and amortization expenses
              
              
              709,320
              
              
              
              142,257
              
              
              
              (567,063
              )%
      of total net revenues
              
              
              12.0%
              
              
              
              3.1%Share-based
      compensation expense
              
              
              207,091
              
              
              
              112,118
              
              
              
              (94,973
              )%
      of total net revenues
              
              
              3.5%
              
              
              
              2.4%Total
      operating expenses
              
              $
              7,645,543
              
              
              $
              5,898,272
              
              
              $
              (1,747,271
              )%
      of total net revenues
              
              
              129.7%
              
              
              
              127.3%


Cost of
Services Provided Expenses





Cost of
services provided expenses increased by $232,296 or 9.0% to $2,795,573 during
the three months ended September 30, 2008 from $2,563,277 during the same period
of 2007.  Of the increase, approximately $531,000 was due to the New
Subsidiaries in 2008, offset by a decrease from the preexisting entities of
approximately $299,000, the
result of reduced personnel costs in NGSI resulting from reduced sales, and
economies realized from the merger of Digica with Blue Hill.





Selling,
General and Administrative Expenses





Selling,
general and administrative ("SG&A") expenses increased by $940,089 or
32% to $3,852,338 during the three months ended September 30, 2008 from
$2,912,249 during the same period of 2007.  Of the increase,
approximately $530,000 is  attributable to the New Subsidiaries in
2008 and approximately $410,000 is attributable to the preexisting entities
resulting
from increased salaries, legal, audit and facility expenses.





Research
and Development Expenses





Research
and development ("R&D") expenses consist primarily of
software developers' wages. R&D expenses decreased by $87,150 or
52% to $81,221 during the three months ended September 30, 2008 from $168,371
during the same period of 2007.  The Company capitalized software
development costs relating to the development of our new HRO software of
approximately $147,585 and $0 during the three months ended September 30, 2008
and 2007, respectively.





Depreciation
and Amortization Expenses





Depreciation
and amortization expenses increased by $567,063 or 399% to $709,320 during the
three months ended September 30, 2008, from $142,257 during the same period of
2007.  The increase is almost entirely due to the acquisition of the
New Subsidiaries both for depreciation of their existing assets and the
depreciation and amortization  resulting from valuation and allocation
of the purchase price to fixed assets that are depreciated and to intangible
assets that are amortized over varying periods.




29


Share-Based
Compensation Expense





We
recorded share-based compensation expense of $207,091 in the three months ended
September 30, 2008 compared to $112,118 in the same period in the prior year due
to additional grants of employee stock options.   Grants of
employee stock options are recognized as expense in the Company’s financial
statements based on their respective grant date fair values and are charged to
compensation expense based on awards that are ultimately expected to
vest.





Operating
Loss by Segment





Operating
loss in the ECMsegment increased to
$670,909 in the three months ended September 30, 2008 from $361,629 in the same
period of 2007, primarily due to the temporary decline in equipment sales at
DocuCom, one of the New Subsidiaries. The operating loss in the ITO segment
increased to $80,199 in the three months ended September 30, 2008 from $1,384 in
the same period of 2007, primarily due to increased expenditures at Blue Hill,
one of the New Subsidiaries.  The increased expenditure at Blue Hill
resulted from the migration costs associated with preparing for significant
additional sales whose revenues will not be realized for a period of three to
six months following completion of the migration.  The HRO segment
reported an operating lossof $154,683 in the three months ended
September 30, 2008 compared to an operating loss of $339,551 in the same period
of 2007, primarily due to the acquisition of HRMS, one of the New
Subsidiaries.  Corporate expenses increased to $846,895 in the three
months ended September 30, 2008 from $563,406 in the same period of 2007,
primarily due to increased salaries and wages, increased share-based
compensation and increased legal and professional fees.





The following
table details the operating loss by segment:





Three
      Months Ended September 30,Operating
      loss
              
              2008
              
              
              %
      of Total
              
              
              2007
              
              
              %
      of TotalECM
              
              $
              (670,909
              )
              
              
              38.3%
              
              
              $
              (361,629
              )
              
              
              28.6%ITO
              
              
              (80,199
              )
              
              
              4.6%
              
              
              
              (1,384
              )
              
              
              0.1%HRO
              
              
              (154,683
              )
              
              
              8.8%
              
              
              
              (339,551
              )
              
              
              26.8%Corporate
              
              
              (846,895
              )
              
              
              48.3%
              
              
              
              (563,406
              )
              
              
              44.5%Consolidated
              
              $
              (1,752,686
              )
              
              
              100.0%
              
              
              $
              (1,265,970
              )
              
              
              100.0%


Operating
losses for the periods were significantly influenced by non-cash expenses;
depreciation, amortization, mainly of intangible assets recorded at the time of
acquisition, and share-based compensation expense from the amortization of the
value of stock option awards.




30




Interest
and Other Expense





The
following table presents our interest and other expense and its
percentage of total net revenues:





Three
      Months EndedSeptember
      30,2008
            
            
            2007
            
            
            ChangeOther
      Expense (Income)Related
      parties interest
            
            $
            27,148
            
            
            $
            27,222
            
            
            $
            74%
      of total net revenues
            
            
            0.5%
            
            
            
            0.6%Amortization
      of related party debt discount
            
            
            -
            
            
            
            -
            
            
            
            -%
      of total net revenues
            
            
            0.0%
            
            
            
            0.0%Other
      interest, net
            
            
            64,447
            
            
            
            (11,300
            )
            
            
            (75,747
            )%
      of total net revenues
            
            
            1.1%
            
            
            
            -0.2%Other
      income
            
            
            -
            
            
            
            (3,115
            )
            
            
            (3,115
            )%
      of total net revenues
            
            
            0.0%
            
            
            
            -0.1%Total
      other expense (income)
            
            $
            91,595
            
            
            $
            12,807
            
            
            $
            (78,788
            )%
      of total net revenues
            
            
            1.6%
            
            
            
            0.3%




Total
Interest and Other Expense





Total
interest and other expense increased to $91,595 in the three months ended
September 30, 2008 from $12,807 in the same periodof 2007, due
to increased interest expense from additional debt and capital
leases.





Income
Taxes





In the
three months ended September 30, 2008 and 2007, we recorded income
tax expense of $18,125 and $0, respectively, due to state franchise
tax..






31
 NineMonthsEnded September 30, 2008Compared toNineMonthsEnded September 30,
2007
  Net
Revenues
 
 The
following table presents our net revenues by operating
segment:


Nine
      Months EndedSeptember
      30,2008
              
              
              2007
              
              
              ChangeNet
      revenuesECM
              
              $
              10,898,926
              
              
              $
              5,866,997
              
              
              $
              5,031,929%
      of total net
              
              
              51.9%
              
              
              
              65.3%ITO
              
              
              8,758,283
              
              
              
              2,861,891
              
              
              
              5,896,392%
      of total net revenues
              
              
              41.7%
              
              
              
              31.8%HRO
              
              
              1,338,992
              
              
              
              260,188
              
              
              
              1,078,804%
      of total net revenues
              
              
              6.4%
              
              
              
              2.9%Total
      net revenues
              
              $
              20,996,201
              
              
              $
              8,989,076
              
              
              $
              12,007,125





Total net
revenues increased by $12,007,125 or 134% to $20,996,201 during the nine
months ended September 30, 2008 from $8,989,076 during the same period in
the prior year, primarily as a result of the inclusion of the revenue of
the New Subsidiaries in 2008.  The New Subsidiaries contributed
approximately $12,176,000 of the increase and the preexisting entities revenues
decreased approximately $176,000 during the nine months ended September 30,
2008.




Enterprise
Content Management ("ECM")





Net
revenue from ECM products and services during the nine months
ended September 30, 2008 increased by $5,031,929 or 86% to $10,898,926 from
$5,866,997 during the nine months ended September 30, 2007, primarily due
to DocuCom contributing approximately $4,131,000, one of the New Subsidiaries,
which was acquired in June of 2007, with the preexisting entities contributing
approximately $901,000 in revenue from new
contracts that were completed largely during the first 6 months of
2008.  The ECM segment includes our ECM solutions group
and our collaborative software products and related services. The majority
of our ECM solutions group services and our collaborative software revenue
are generated from service-oriented projects where the revenue is
recognized only upon the completion of specific project deliverables.
The timing of these projects and the completion and recognition of revenue
from various size projects creates variability in our ECM solutions group
services revenues and collaborative software net revenues between quarters
and years.





IT
Outsourcing Services ("ITO")





Net revenue from ITO
during the nine months ended September 30, 2008 increased by $5,896,392 or
206% to $8,758,283 from $2,861,891 during the nine months ended September
30, 2007, primarily due to Blue Hill, one of the New Subsidiaries, which was
acquired in October of 2007 and which contributed approximately $6,952,000,
partially offset with a decrease in revenue by the preexisting entities, Digica
and NGSI, in the amount of approximately $1,056,000 from the loss of
customers.  We experienced significant sales growth in the ITO
segment, approximately a 60% increase compared to the first nine months of
2007.  Typically, the Company begins to recognize revenue following
the migration of services to the Company’s facility, which can take up to
six months.  The Company experiences higher expense levels during
migration, whilea ramp in profit margin is typical once the migration is
completed.




Human
Resource Outsourcing Services ("HRO")





Net
revenue from HRO products and services during the nine months
ended September 30, 2008 increased by $1,078,804 to $1,338,992 from
$260,188 during the nine months ended September 30, 2007, almost entirely
due to the acquisition of HRMS, one of the New Subsidiaries, which was acquired
in June of 2007.




32


Operating
Expenses





The
following table presents our operating expenses and the percentage of total net
revenues:





Nine
      Months EndedSeptember2008
                
                
                2007
                
                
                ChangeOperating
      ExpensesCost
      of services provided expenses
                
                $
                10,392,030
                
                
                $
                4,436,764
                
                
                $
                (5,955,266
                )%
      of total net revenues
                
                
                49.5%
                
                
                
                49.4%Selling,
      general and administrative expenses
                
                
                11,761,666
                
                
                
                6,982,541
                
                
                
                (4,779,125
                )%
      of total net revenues
                
                
                56.0%
                
                
                
                77.7%Research
      and development expenses
                
                
                228,258
                
                
                
                261,738
                
                
                
                33,480%
      of total net revenues
                
                
                1.1%
                
                
                
                2.9%Depreciation
      and amortization expenses
                
                
                2,193,495
                
                
                
                224,644
                
                
                
                (1,968,851
                )%
      of total net revenues
                
                
                10.4%
                
                
                
                2.5%Share-based
      compensation expense
                
                
                621,275
                
                
                
                258,861
                
                
                
                (362,414
                )%
      of total net revenues
                
                
                3.0%
                
                
                
                2.9%Total
      operating expenses
                
                $
                25,196,724
                
                
                $
                12,164,548
                
                
                $
                (13,032,176
                )%
      of total net revenues
                
                
                120.0%
                
                
                
                135.3%


Cost of
Services Provided Expenses





Cost of
services provided expenses increased by $5,995,266 or 135% to $10,392,030 during
the first nine months of 2008 from $4,436,764 during the same period of 2007, of
which the New
Subsidiaries contributed approximately $6,058,000 offset by
small reductions in the cost of services in NGSI where lower sales resulted in
lower personnel costs.





Selling,
General and Administrative Expenses





Selling,
general and administrative ("SG&A") expenses increased by $4,779,125 or
68% to $11,761,666 during the first nine months of 2008, from $6,982,541 during
the same period of 2007, primarily due to approximately $4,257,000 contributed
by the New Subsidiaries in 2008 and approximately $522,000
attributable  to increased corporate expenses for accrued executive
salaries, two new employees and increased professional fees.





Research
and Development Expenses





Research
and development ("R&D") expenses consist primarily of
software developers' wages. R&D expenses decreased by $33,480 or
13% to $228,258 during the first nine months of 2008, from $261,738 during the
same period of 2007.  The Company capitalized software development
costs relating to the development of our new HRO software of approximately
$380,341 and $0 during the nine months ended September 30, 2008 and 2007,
respectively.





Depreciation
and Amortization Expenses





Depreciation
and amortization expenses increased by $1,968,851 or 876% to $2,193,495 during
the first nine months of 2008, from $224,644 during the same period of
2007.  The increase is almost entirely due to
the  acquisition of the New Subsidiaries both for depreciation of
their existing assets and for depreciation and amortization from the resulting
valuation and allocation of the purchase price of the New Subsidiaries to fixed
assets that are depreciated and to intangible assets that are amortized over
varying periods.


33


Share-Based
Compensation Expense





We
recorded share-based compensation expense of $621,275 in the first nine months
of 2008 compared to $258,861 in the same period in the prior year because of
additional grants of employee stock options.   Grants of employee
stock options are recognized as expense in the Company’s financial statements
based on their respective grant date fair values and are charged to compensation
expense based on awards that are ultimately expected to vest.





Operating
Income (Loss) by Segment





Operating
loss in the ECM segment increased to $1,392,896 in the first nine monthsof 2008 from
$865,350 in the first nine monthsof 2007,
primarily due to approximately $598,000 attributable to DocuCom, a New
Subsidiary and approximately $794,900 attributable to the preexisting entities
in the ECM segment.   The operating income in the ITO segment
increased to $67,247 in the first nine monthsof 2008 from
an operating loss of $187,168 in the first nine monthsof 2007,
primarily due to the acquisition of Blue Hill. The operating loss in the HRO
segment decreased to $314,002 in the first nine monthsof 2008 from
$488,061 in the first nine monthsof 2007,
primarily due to the acquisition of HRMS.  Corporate expenses
increased to $2,560,872 in the first nine monthsof 2008 from
$1,634,893 in the first nine monthsof 2007,
primarily due to increased share-based compensation expense, two additional
employees, and increased professional fees, partially offset by the
elimination of an accrual for a contingent payment for the purchase of Novus
that was not earned.





The following
table details the operating income (loss) by segment:




Nine
      Months Ended September 30,2008
              
              
              %
      of Total
              
              
              2007
              
              
              %
      of TotalOperating
      income (loss)ECM
              
              $
              (1,392,896
              )
              
              
              33.2%
              
              
              $
              (865,350
              )
              
              
              27.3%ITO
              
              
              67,247
              
              
              
              -1.6%
              
              
              
              (187,168
              )
              
              
              5.9%HRO
              
              
              (314,002
              )
              
              
              7.5%
              
              
              
              (488,061
              )
              
              
              15.4%Corporate
              
              
              (2,560,872
              )
              
              
              61.0%
              
              
              
              (1,634,893
              )
              
              
              51.5%Consolidated
              
              $
              (4,200,523
              )
              
              
              100.0%
              
              
              $
              (3,175,472
              )
              
              
              100.0%




Operating
losses for the periods were significantly influenced by non-cash expenses;
depreciation, amortization, mainly of intangible assets recorded at the time of
acquisition, and share-based compensation expense from the amortization of the
value of stock option awards.





Interest
and Other Expense





The
following table presents our interest and other expense and its
percentage of total net revenues:





Nine
      Months EndedSeptember
      30,2008
              
              
              2007
              
              
              ChangeOther
      Expense (Income)Related
      parties interest
              
              $
              80,853
              
              
              $
              89,819
              
              
              $
              8,966%
      of total net revenues
              
              
              0.4%
              
              
              
              1.0%Amortization
      of related party debt discount
              
              
              -
              
              
              
              594,029
              
              
              
              594,029%
      of total net revenues
              
              
              0.0%
              
              
              
              6.6%Other
      interest, net
              
              
              173,583
              
              
              
              76,045
              
              
              
              (97,538
              )%
      of total net revenues
              
              
              0.8%
              
              
              
              0.8%Other
      income
              
              
              -
              
              
              
              (3,102
              )
              
              
              (3,102
              )%
      of total net revenues
              
              
              0.0%
              
              
              
              0.0%Total
      other expense (income)
              
              $
              254,436
              
              
              $
              756,791
              
              
              $
              502,355%
      of total net revenues
              
              
              1.2%
              
              
              
              8.4%





34


Total
Interest and Other Expense





Total
interest and other expense decreased to $254,436 in the nine months ended
September 30, 2008 from $756,791 in the same period of 2007, primarily due to
amortization of related party debt discount completed in April of
2007.





Income
Taxes





In the
nine months ended September 30, 2008 and 2007, we recorded income
tax expense of $110,852 and $0, respectively, due to a tax liability
incurred by one Canadian entity prior to amalgamation in the amount of $48,275
and $62,577 due the State of Delaware for corporation tax.




Liquidity
and Capital Resources





Our
principal sources of liquidity at September 30, 2008 consisted of
$2,911,367in cash and
cash equivalents. This represents a decrease in cash and cash equivalents of
$3,191,121from
$6,102,488 at September 30, 2007. We incurred losses from operations of
$4,200,523 and $3,175,472 and used cash in operations of $1,873,837 and
$3,947,258 in the first nine months of 2008 and 2007, respectively.





The
primary reasons for cash used in operations during the first nine months of 2008
were: net loss of $4,565,811 that included non-cash charges related to
depreciation and amortization expense of $2,193,495 and share-based
compensation expense of $621,275.  In addition, the timing
differences in the payment of our current liabilities and collection of our
current assets also contributed to the cash used in
operations.





Net cash
used in investing activities in the first nine months of 2008 was $651,274,
primarily from the acquisition of equipment of approximately $1,574,162, offset
by $922,888 due to the release of restricted cash to pay the purchase price
obligation to a former shareholder from the purchase of DocuCom.





Net cash
used in investing activities in the first nine months of 2007 was
$6,272,073, primarily for acquisitions and purchase of equipment.





Net cash
provided by financing activities during the first nine months of 2008 was
$4,627,515, primarily due to the issuance of  Series D-2
Preferred Stock in the amount of $5,157,996, bank borrowing of $1,035,697, and
borrowing through the acquisition of capital leases in the net amount of
$273,110, partially offset by payment of the final installment of the purchase
price of DocuCom in the amount of $885,827, payment of, preferred stock
dividends in the amount of $753,461, and repayment of notes payable in the
amount of $200,000..  In the first nine monthsof 2007, net
cash provided by financing activities was $15,946,799, primarily due to the
issuance of Series D Preferred Stock in the amount of $15,737,910, borrowing
through acquisition of capital leases in the net amount of $366,738, and receipt
of $400,000 in cash proceeds from bridge loans, partially offset by debt
repayments  in the amount of $317,251 and distributions to related
parties of $240,598. The bridge loan was provided by Mr. Dolan, our Chief
Executive Officer who was also issued a warrant to purchase 133,333 shares
of common stock pursuant to the bridge loan agreement.




We have
funded our operations primarily from the private placement of shares of our
common stock and preferred stock, exercise of warrants, bank loans, and through
the founders bridge loan facility established in August 2006. During the
next twelve months, the Company anticipates that cash flow from operations and
the use of and possible expansion of existing lines of credit will provide the
capital necessary to grow our existing business, and to complete additional
acquisitions we will issue our securities and/or debt in one or more private
transactions.





During
April 2008, as detailed in Note 5 above, five institutional investors exercised
certain of their Series J Warrants at a reduced exercise price and acquired an
aggregate of approximately 583,333 shares of the Series D-2 Preferred Stock for
an aggregate of approximately $5.6 million.





Our
future capital requirements to complete our business plan 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 transactions do not
take place at all and/or are  delayed, we may not have adequate funds 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.




35





The
following table summarizes our contractual obligations and
commercial commitments at September 30, 2008:




Less
      Than
            
            
            
            
            
            
            
            
            AfterTotal
            
            
            1
      Year
            
            
            1-3
      Years
            
            
            4-5
      Years
            
            
            5
      YearsLong-term
      debt
            
            $
            1,871,970
            
            
            $
            1,569,575
            
            
            $
            260,728
            
            
            $
            41,667
            
            
            $
            -Capital
      lease obligations*
            
            
            815,705
            
            
            
            288,622
            
            
            
            493,812
            
            
            
            33,271
            
            
            
            -Operating
      leases
            
            
            5,854,518
            
            
            
            1,497,192
            
            
            
            2,599,870
            
            
            
            622,979
            
            
            
            1,134,477Purchase
      price payable -Due
      former shareholders
            
            
            1,000,000
            
            
            
            1,000,000
            
            
            
            -
            
            
            
            -
            
            
            
            -Related
      party notes payable
            
            
            1,000,000
            
            
            
            1,000,000
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      contractual obligations
            
            $
            10,542,193
            
            
            $
            5,355,389
            
            
            $
            3,354,410
            
            
            $
            697,917
            
            
            $
            1,134,477*Excludes
      imputed interest of $118,984









Item
3.  Quantitative and Qualitative Disclosures About Market Risk





Interest
Rate Risk





We are
exposed to the impact of interest rate changes as they affect our term loans and
operating lines. The interest rate charged on our term loans and operating lines
varies based on prime rate and, consequently, our interest expense could
fluctuate with changes in the prime rate. If the prime increased by one percent
as of September 30, 2008, we would incur an additional $5,133 of interest
expense during the quarter associated with the $1,882,700 in bank loans
outstanding at September 30, 2008.





Foreign
Currency Exchange Rate Risk





For the
nine months ended September 30, 2008, approximately 47% of the Company’s
revenues were generated in Canada and 2.9% in Germany. As a result, our
operating results are subject to fluctuations in the exchange rates of foreign
currencies in relation to the U.S. dollar. Revenues and expenses denominated in
foreign currencies are translated into U.S. dollars at the monthly average
exchange rates prevailing during the period. Thus, as the value of the U.S.
dollar fluctuates relative to the currencies in our non-U.S. based operations,
our reported results may vary.





Assets
and liabilities of our non-U.S. based operations are translated into U.S.
dollars at the exchange rate effective at the end of each monthly reporting
period. Approximately 97% of our balances of cash and cash equivalents as of
September 30, 2008 was denominated in U.S. dollars. The remainder of our cash
and cash equivalents was comprised primarily of cash balances translated from
Canadian dollars and euros. The difference resulting from the translation each
period of assets and liabilities of our non-U.S. based operations is recorded in
stockholders’ equity as a component of “Accumulated Other Comprehensive
Income”.





Although
we intend to monitor our exposure to foreign currency fluctuations, including
the use of financial hedging techniques if and when we may deem it appropriate,
we cannot assure you that exchange rate fluctuations will not adversely affect
our financial results in the future.




36


Item
4T.  Controls and Procedures




As of the
end of the period covered by this quarterly report on Form 10-Q, our Chief
Executive Officer and Chief Financial Officer (the "Certifying Officers"),
evaluated the effectiveness of our disclosure controls and procedures.
Disclosure controls and procedures are controls and procedures designed to
reasonably assure that information required to be disclosed in our reports filed
under the Exchange Act, such as this Form 10-Q, is recorded, processed,
summarized and reported within the time periods specified in the U.S. Securities
and Exchange Commission's ("SEC's") rules and forms. Disclosure controls and
procedures are also designed to reasonably assure that such information is
accumulated and communicated to our management, including the Certifying
Officers, as appropriate to allow timely decisions regarding required
disclosure. Based on these evaluations, our Certifying Officers have concluded,
subject to the limitations noted below, that, as of the end of the period
covered by this quarterly report on Form 10-Q:




(a) our
disclosure controls and procedures were effective to provide reasonable
assurance that material information required to be disclosed by us in the
reports we file or submit under the Securities Exchange Act of 1934 was
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms; and




(b) our
disclosure controls and procedures were effective to provide reasonable
assurance that material information required to be disclosed by us in the
reports we file or submit under the Exchange Act was accumulated and
communicated to our management, including the Certifying Officers, as
appropriate to allow timely decisions regarding required
disclosure.




Inherent
Limitations on Effectiveness of Controls




Our
management, including our Chief Executive Officer and our Chief Financial
Officer, do not expect that our disclosure controls and procedures will prevent
or detect all error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people or by management override of
the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Projections of any evaluation of controls effectiveness to
future periods are subject to risks. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.




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, 2008, that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.




37




PART
II - OTHER INFORMATION





Item
1.  Legal Proceedings





None





Item
1-A.  Risk Factors





Our
company is a Smaller Reporting Company.  A Smaller Reporting Company
is not required to provide the risk factor disclosure required by this
item.





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




None


Item
3.  Defaults Upon Senior Securities





None





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





None.





Item
5.  Other Information





None.





Item
6.  Exhibits





Exhibit
              Number
            Description




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.





38




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 14, 2008
            BPO
      MANAGEMENT SERVICES, INC.By:
      /s/Donald W. Rutherford
              Chief
      Financial Officer
              (principal
      financial officer and duly authorized
officer)









EXHIBITS
ATTACHED TO THIS QUARTERLY REPORT ON FORM 10-Q




Exhibit
              Number
            Description


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








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