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 MARCH 31, 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 small business issuer 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)
 
 Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such  reports), and (2) has
been subject to such filing requirements for the past 90
days.     Yes [X] No [_]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).     Yes [_] No [X]
 
 Large
accelerated filer 
[_]                        Accelerated
filer     [_]
 Non-accelerated
filer    [_]                        Smaller reporting company
[X]
 (Do not check if a smaller reporting
company)
 
 The
number of shares outstanding of the registrant's only class of common stock,
$.01 par value, was 12,671,034 on May 15, 2008.Transitional Small Business
Disclosure Format (Check one).     Yes [_] No
[X]
  
  
 PART
I
 FINANCIAL
INFORMATION
  PageItem
      1.  Financial Statements
              
              
              
              
              
              
              
              
              3Condensed
      Consolidated Statements of Operations for the three months
      endedMarch
      31, 2008 and 2007 (unaudited)
              
              
              
              
              
              
              3Condensed
      Consolidated Balance Sheets as of  March 31,
      2008 (unaudited) and December 31, 2007
              
              
              4Condensed
      Consolidated Statements of Cash Flows for the three months ended March
      31,2008
      and 2007 (unaudited)
              
              
              
              
              
              
              
              5Notes
      to Condensed Consolidated Financial Statements (unaudited)
              
              
              
              7Item
      2.  Management's Discussion and Analysis of Financial Condition
      and Results of Operations
              
              
              
              
              24Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
              32Item
      4T.  Controls and Procedures
              
              
              
              
              
              
              
              32
  PART
II
 OTHER
INFORMATION
  Item
      1.  Legal Proceedings
              
              
              
              
              
              
              
              
              33Item
      1-A  Risk Factors
                
                Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
              
              
              
              
              33
                
                33Item
      3.  Defaults Upon Senior Securities
              
              
              
              
              
              
              
              33Item
      4.  Submission of Matters to a Vote of Security
      Holders
              
              
              
              
              
              33Item
      5.  Other Information
              
              
              
              
              
              
              
              
              33Item
      6.  Exhibits
              
              
              
              
              
              
              
              
              
              33Signatures
              
              
              
              
              
              
              
              
              
              34Exhibits
      Attached to this Quarterly Report on Form 10-Q
              
              
              
              
              
              34
   2
  PART I -
FINANCIAL INFORMATION
  ITEM 1.
FINANCIAL STATEMENTS
 BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 FOR THE
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
 (UNAUDITED)
 2008
                
                
                2007Revenues:Enterprise
      content management
                
                $
                4,024,352
                
                
                $
                1,009,771IT
      outsourcing services
                
                
                2,877,624
                
                
                
                980,305Human
      resource outsourcing servicing
                
                
                380,609
                
                
                
                10,518Total
      revenues
                
                
                7,282,585
                
                
                
                2,000,594Operating
      expenses:Cost
      of services provided
                
                
                3,543,352
                
                
                
                902,473Selling,
      general and administrative
                
                
                4,333,817
                
                
                
                1,736,885Research
      and development
                
                
                69,702
                
                
                
                66,011Depreciation
      and amortization
                
                
                784,429
                
                
                
                106,702Share-based
      compensation
                
                
                207,092
                
                
                
                53,999Total
      operating expenses
                
                
                8,938,392
                
                
                
                2,866,070Loss
      from operations
                
                
                (1,655,807
                )
                
                
                (865,476
                )Interest
      and other expenseRelated
      parties
                
                
                26,852
                
                
                
                35,671Amortization
      of related party debt discount
                
                
                -
                
                
                
                430,089Other,
      net
                
                
                44,961
                
                
                
                38,534Other
      income
                
                
                -
                
                
                
                (12,239
                )Total
      interest and other expense
                
                
                71,813
                
                
                
                492,055Net
      loss
                
                
                (1,727,620
                )
                
                
                (1,357,531
                )Foreign
      currency translation gain (loss)
                
                
                (197,004
                )
                
                
                10,189Comprehensive
      loss
                
                $
                (1,924,624
                )
                
                $
                (1,347,342
                )Basic
      and diluted net loss per share
                
                $
                (0.14
                )
                
                $
                (0.16
                )Basic
      and diluted weighted average common shares
    outstanding
                
                
                12,247,121
                
                
                
                8,619,400
 
 See
accompanying notes to condensed consolidated financial
statements.
 
 3
  BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 AS OF
MARCH 31, 2008 AND DECEMBER 31, 2007
 2008
                
                
                2007(Unaudited)
                
                
                (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                780,823
                
                
                $
                888,043Restricted
      cash
                
                
                -
                
                
                
                922,888Accounts
      receivable, net of allowance for doubtful accounts of $320,404 and
      $347,797, respectively
                
                
                5,085,901
                
                
                
                4,768,618Inventory
      consisting of finished goods
                
                
                189,274
                
                
                
                268,160Prepaid
      expenses and other current assets
                
                
                811,925
                
                
                
                417,041Total
      current assets
                
                
                6,867,923
                
                
                
                7,264,750Equipment,
      net of accumulated depreciation of $1,057,249 and $718,913,
      respectively
                
                
                4,443,784
                
                
                
                4,834,941Goodwill
                
                
                10,078,185
                
                
                
                9,029,142Intangible
      assets, net of accumulated amortization of $1,377,362 and $931,268,
      respectively
                
                
                8,366,971
                
                
                
                9,898,219Other
      assets
                
                
                34,663
                
                
                
                38,449$
                29,791,527
                
                
                $
                31,065,501LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Current
      portion of long-term debt, net of discount of $3,268 and $3,405,
      respectively
                
                $
                1,669,417
                
                
                $
                812,156Current
      portion of capital lease obligations
                
                
                152,717
                
                
                
                149,653Accounts
      payable
                
                
                4,037,068
                
                
                
                3,540,827Accrued
      expenses
                
                
                2,048,422
                
                
                
                1,927,451Accrued
      interest-related party
                
                
                63,524
                
                
                
                36,672Accrued
      dividend payable-related party
                
                
                592,577
                
                
                
                446,464Amount
      due former shareholders of acquired companies
                
                
                1,215,944
                
                
                
                2,101,771Deferred
      revenues
                
                
                2,304,869
                
                
                
                2,509,885Related
      party notes payable
                
                
                1,200,000
                
                
                
                1,200,000Severance
      obligations payable
                
                
                3,896
                
                
                
                72,199Other
      current liabilities
                
                
                244,091
                
                
                
                257,091Total
      current liabilities
                
                
                13,532,524
                
                
                
                13,054,169Long-term
      debt, net of current portion and net of discount of $3,814 and $4,825,
      respectively
                
                
                373,227
                
                
                
                24,117Capital
      lease obligations, net of current portion
                
                
                360,901
                
                
                
                392,942Other
      long-term liabilities
                
                
                33,115
                
                
                
                33,115Total
      liabilities
                
                
                14,299,767
                
                
                
                13,504,343Commitments
      and contingencies  (Note 7)Stockholders'
      equityConvertible
      preferred stock, Series A, par value
      $.01;  authorized2,308,612
      shares;  1,737,951and 1,703,874 shares issued and outstanding,
      respectively
                
                
                17,380
                
                
                
                17,039Convertible
      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;  729,167 shares issued and outstanding
                
                
                7,292
                
                
                
                7,292Common
      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
                
                
                27,349,720
                
                
                
                27,499,524Accumulated
      deficit
                
                
                (12,296,534
                )
                
                
                (10,568,915
                )Accumulated
      other comprehensive income, foreign currency translation
      adjustments
                
                
                249,261
                
                
                
                446,265Total
      stockholders' equity
                
                
                15,491,760
                
                
                
                17,561,158$
                29,791,527
                
                
                $
                31,065,501
 
 See
accompanying notes to condensed consolidated financial
statements.
  4
  BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
 (UNAUDITED)
 2008
                
                
                2007Cash
      flows from operating acitvities:Net
      loss
                
                $
                (1,727,620
                )
                
                $
                (1,357,531
                )Adjustments
      to reconcile loss from continuing operations to
      net cash provided by (used in) operating
activities:Depreciation
                
                
                338,336
                
                
                
                46,130Amortization
      of intangible assets
                
                
                446,093
                
                
                
                60,572Increase
      in the reserve for doubtful accounts (bad debt expense)
                
                
                -
                
                
                
                6,503Non-cash
      compensation expense recognized on issuance of stock
    options
                
                
                207,092
                
                
                
                53,999Amortization
      of loan discount
                
                
                -
                
                
                
                430,802Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                (317,283
                )
                
                
                (371,675
                )Inventory
                
                
                78,886
                
                
                
                -Income
      tax receivable
                
                
                -
                
                
                
                250,000Prepaid
      expenses and other current assets
                
                
                (381,479
                )
                
                
                9,660Pending
      business combination direct costs
                
                
                -
                
                
                
                (182,776
                )Other
      assets
                
                
                (9,619
                )
                
                
                87,815Accounts
      payable
                
                
                496,242
                
                
                
                677,233Accrued
      expenses
                
                
                120,971
                
                
                
                (189,385
                )Accrued
      interest related parties
                
                
                26,852
                
                
                
                -Deferred
      revenues
                
                
                (205,016
                )
                
                
                127,648Income
      tax payable
                
                
                (13,000
                )
                
                
                -Payments
      of severance liability
                
                
                (68,303
                )
                
                
                (57,221
                )Other
      current liabilities
                
                
                -
                
                
                
                (22,898
                )Net
      cash used in operating acitivities
                
                
                (1,007,848
                )
                
                
                (431,124
                )Cash
      flows from investing activities:Purchase
      of equipment, net
                
                
                (447,179
                )
                
                
                (6,713
                )Payments
      for business combinations direct costs
                
                
                -
                
                
                
                (1,102
                )Release
      of restricted cash - DocuCom
                
                
                922,888
                
                
                
                -Net
      cash provided by (used in) investing activities
                
                
                475,709
                
                
                
                (7,815
                )Cash
      flows from financing activities:Proceeds
      from bank loans
                
                
                1,206,371
                
                
                
                -Repayment
      of bank loans
                
                
                -
                
                
                
                (22,507
                )Repayment
      of notes issued to former shareholders
                
                
                (885,827
                )
                
                
                -Proceeds
      (Repayment) of capital lease obligations
                
                
                (28,977
                )
                
                
                (22,545
                )Proceeds
      from related party loans
                
                
                -
                
                
                
                400,000Net
      cash provided by financing activities
                
                
                291,567
                
                
                
                354,948Effect
      of exchange rate changes on cash and cash equivalents
      (cumulative)
                
                
                133,352
                
                
                
                10,189Net
      cash provided by (used in) operations
                
                
                (107,220
                )
                
                
                (73,802
                )Cash
      and cash equivalents, beginning of period
                
                
                888,043
                
                
                
                706,197Cash
      and cash equivalents, end of period
                
                $
                780,823
                
                
                $
                632,395
 See
accompanying notes to condensed consolidated financial
statements.
  5
 BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 FOR THE
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
 (UNAUDITED)
  2008
                
                
                2007Supplemental
      disclosure of cash flow information:Cash
      paid for:Interest
                
                $
                54,303
                
                
                $
                19,562Income
      taxes
                
                $
                -
                
                
                $
                -Supplemental
      disclosure of non-cash investing and financing activities:Acquisition
      of equipment under capital leases
                
                $
                -
                
                
                $
                360,090Issuance
      of warrants
                
                $
                -
                
                
                $
                185,187Issuance
      of preferred A shares as compensation to officers
                
                $
                34,077
                
                
                $
                31,482Issuance
      of preferred A shares stock dividend
                
                $
                341
                
                
                $
                315
  See
accompanying notes to condensed consolidated financial
statements.
  6
 BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2008
 (Unaudited)
 
 1. 
ORGANIZATION AND BASIS OF PRESENTATION
 
 ORGANIZATION
 
 BPO
Management Services, Inc and Subsidiaries (the "Company" or “BPOMS”) was
incorporated in Delaware and commenced operations on July 26, 2005. On
December 15, 2006, the Company entered into a merger agreement with
netGuru, Inc. (“netGuru”). The shareholders of the Company received
aggregate netGuru equity comprised of 7,336,575 shares of common stock
(“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. Therefore, the merger was treated as a "reverse merger"
and the previously outstanding shares of netGuru were treated as an equity
transaction by the Company. 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 BPO Management Services, Inc., prior to the merger with
netGuru (Former BPOMS) 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 and Item 10 of
Regulation SB. 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
month periods ended March 31, 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 the Company's formation or the subsidiary's date of
acquisition.
  7
  Company
                
                Inception/Acquisition
      DateBPO
      Management Services, Inc. (the "Company")
                
                Inception
      date:  July 26, 2005Adapsys
      Document Management LP ("ADM") (1)
                
                Acquired:  July
      29, 2005Adapsys
      LP ("ADP") (1)
                
                Acquired:  July
      29, 2005Digica,
      Inc. ("Digica")
                
                Acquired:  January
      1, 2006Novus
      Imaging Solutions, Inc. ("Novus") (1)
                
                Acquired:  September
      30, 2006NetGuru
      Systems, Inc. ("netGuru")
                
                Acquired:  December
      15, 2006Research
      Engineers, GmbH ("GmbH")
                
                Acquired:  December
      15, 2006DocuCom
      Imaging Solutions, Inc. ("DocuCom") (1)
                
                Acquired:  June
      21, 2007Human
      Resource Micro-Systems, Inc. ("HRMS")
                
                Acquired:  June
      29, 2007Blue
      Hill Data Services, Inc. ("Blue Hill") (2)
                
                Acquired:  October
      10, 2007BPO
      Management Services, Ltd. ("Ltd") (1)
                
                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
 
 GOING
CONCERN
  The
Company incurred net losses from operations of $1,727,620 and $1,357,531 and
used cash in operations of $1,007,848 and $431,124 during the three months ended
March 31, 2008 and 2007, respectively. The Company has funded its operations
from the private placement of shares of its Common Stock and Preferred Stock and
through the founders bridge loan facility established in August 2006. During the
next twelve months, the Company anticipates raising capital necessary to grow
its business and complete additional acquisitions by issuing its securities
and/or debt in one or more private transactions. The Company has retained
Collins Stewart (formerly C. E. Unterberg, Towbin) as its investment banker to
lead this effort.
  In the
event that such transaction(s) do not take place at all and/or are unreasonably
delayed, the Company’s future capital requirements will depend upon many
factors. These factors include but are not limited to sales and marketing
efforts, the development of new products and services, possible future corporate
mergers or strategic acquisitions or divestitures, the progress of research and
development efforts, and the status of competitive products and
services.
  Although
the Company expects to meet its operating capital needs by additional equity
and/or debt transactions, and current economic resources, there can be no
assurance that funds required will be available on terms acceptable to the
Company, if at all. If the Company is unable to raise sufficient funds on
acceptable terms, it may be not be able to complete its business plan. If equity
financing is available to the Company on acceptable terms, it could result in
additional dilution to the Company’s existing stockholders.
   8
 
 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 business combinations and the related valuation of
identifiable intangible assets and the determination of their useful lives,
valuation of goodwill arising from a business combination, 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 March 31, 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 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 fiscal
year-end. Statements of operations accounts are translated at the average rate
of exchange prevailing during the respective fiscal 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 three months ended March 31, 2008
and 2007.
 
 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 March 31, 2008, the Company had $858,028 on
deposit that exceeded the United States (FDIC) federal insurance
limit.  At March 31, 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.
  9
 
 PROPERTY,
PLANT AND EQUIPMENT
  Property,
plant and equipment are 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.
  During
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 March 31, 2008, the Company’s goodwill balance was
$10,078,185.  The Company obtained third-party valuations relating to
three acquisitions during 2007, and has allocated the purchase price in
accordance with that valuation.
  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.
 
 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 and 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.
  10
 
 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 December 31, 2007. 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 their 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.
 
 CONCENTRATION
OF RISK
  The
Company is subject to credit risk primarily through its accounts receivable
balances. The Company does not require collateral for its accounts receivable
balances. For the three months ended March 31, 2008 and 2007, no single customer
accounted for 10% of the Company’s consolidated net sales.
  DocuCom
purchases the majority of the services it provides from one vendor.  During
the three months ended March 31, 2008, DocuCom purchased approximately
$1,058,000 of services from that vendor.
  
 11
 DEFERRED
REVENUES
 
 The
Company defers revenues for its maintenance contracts and for its collaborative
software sales that are not considered earned. The Company defers its
maintenance revenues when the maintenance contracts are sold, and then
recognizes the maintenance revenues over the term of the maintenance contracts.
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
$167,000 and $0, during the three months ended March 31, 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 for 2007 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 March 31, 2008 and 2007 in the
amounts of $207,092 and $53,999, 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.
  12
 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%
  All
share-based compensation expense was recorded in selling, general and
administrative expense.
  VALUATION
OF THE COMPANY'S COMMON SHARES AT THE TIME OF GRANT
  During
2007, the Company granted its Common Stock as partial consideration for the
acquisition of HRMS in June 2007 and Blue Hill in October 2007.  Prior
to Merger, the Company granted 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 the Company’s securities.
  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 8 "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 months ended March 31, 2007
condensed consolidated financial statements to conform to the three months ended
March 31, 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 vary from 2% to 8%
of the employees annual earnings.  For the three months ended March
31, 2008 and 2007, the Company contributions to the plans amounted to $47,648
and $6,465, 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 March 31, 2008 and 2007, all potentially
dilutive Common Stock equivalents amounted to 126,377,323 and 4,775,131
shares, respectively.
  13
  The
following table illustrates the computation of basic and diluted net
loss per share:
 
  Three
      Months Ended March 31,2008
                
                
                2007Numerator:Net
      loss
                
                $
                (1,727,620
                )
                
                $
                (1,357,531
                )Less:Preferred
      dividends paid in stock
                
                
                34,077
                
                
                
                31,797Loss
      and numerator used in computing basis and diluted loss per
      share
                
                $
                (1,761,697
                )
                
                $
                (1,389,328
                )Denominator:Denominator
      for basic and diluted net loss per share-weighted
      average number of common shares outstanding
                
                
                12,247,121
                
                
                
                8,619,400Basic
      and diluted net loss per share
                
                $
                (0.14
                )
                
                $
                (0.16
                )
 
 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 March 31,2008
                
                
                2007Options
      to purchase shares of common stock
                
                
                5,002,954
                
                
                
                783,400Warrants
      to purchase shares of common stock
                
                
                83,221,275
                
                
                
                936,929Shares
      of convertible preferred stock - Series A
                
                
                1,703,874
                
                
                
                1,605,598Shares
      of convertible preferred stock - Series B
                
                
                1,449,204
                
                
                
                1,449,204Shares
      of convertible preferred stock - Series D
                
                
                23,333,344
                
                
                
                -Shares
      of convertible preferred stock - Series D-2
                
                
                11,666,672
                
                
                
                -Total
                
                
                126,377,323
                
                
                
                4,775,131
 IMPACT OF
RECENTLY ISSUED ACCOUNTING STANDARDS
 
 In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“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 fiscal years beginning after November 15, 2007, and for interim
periods within those fiscal 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 fiscal years beginning after
November 15, 2008 and interim periods within those fiscal 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.
 
 
 14
 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 and cash flows.
  On
March 19, 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”). 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 and 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. The Company secured the subsequent
payments through a bank-issued irrevocable standby letter of credit in favor of
the selling shareholders in the aggregate amount of Cdn$1,800,000 (approximately
US$1.68 million).
 
 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 $1,100,000 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 Stock Purchase
Agreement provided that the selling shareholders be paid the remaining $500,000
twelve months after closing through an escrow account, subject to offset with
respect to any claims for indemnity by the Company under the terms of the Stock
Purchase Agreement.
 
 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.
  15
  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.  We intend to consolidate the operations of our existing
Information Technology Outsourcing business unit 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 current 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.
 
 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 fiscal 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 preliminary 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.  Preliminary allocations as of December 31, 2007
resulted in adjustments to goodwill during the three months ended March 31, 2008
in the amounts of $800,000 and $700,000 to HRMS and Blue Hill,
respectively.  The amount assigned to goodwill is not expected to be
deductible for United States income tax, state income tax or Canadian income tax
purposes.
   16
 The
following unaudited pro forma financial information presents the combined
results of operations of the Company, DocuCom, HRMS and Blue Hill for the
quarter ended March 31, 2007 as if the acquisitions had occurred on January 1,
2007.
  Unaudited
Pro Forma Statement of Operations For the Three Months Ended March 31,
2007:
  BPOMS
                
                
                DocuCom
                
                
                HRMS
                
                
                Blue
      Hill
                
                
                Pro
      FormaRevenues
                
                $
                2,000,594
                
                
                $
                3,703,854
                
                
                $
                366,819
                
                
                $
                2,075,963
                
                
                $
                6,071,267Net
      Income (Loss)
                
                $
                (1,357,531
                )
                
                $
                (199,729
                )
                
                $
                22,348
                
                
                $
                264,604
                
                
                $
                (1,534,912
                )Basic
      and diluted loss per common share
                
                $
                (0.16
                )
                
                $
                -
                
                
                $
                0.06
                
                
                $
                0.10
                
                
                $
                (0.17
                )Basic
      and diluted weighted average common shares
    outstanding
                
                
                8,619,400
                
                
                
                -
                
                
                
                384,968
                
                
                
                2,666,666
                
                
                
                9,004,368
 4. 
DEBT
 
 SHORT-TERM
RELATED PARTY DEBT
 
 Short-term
related party debt consisted of the following at March 31, 2008 and 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%
                
                $
                1,200,000
                
                
                $
                1,200,000Long-term
      debt, including capital lease obligations, consisted of the
      followingat
      March 31, 2008 and December 31, 2007:2008
                
                
                2007a.
                
                Credit
      facility from Royal Bank of Canada, stated interest at afloating
      rate plus 1.05%, (totaling 6.30% and 7.05% at March 31, 2008
      andDecember
      31, 2007, respectively) secured by assets of the Company
                
                $
                1,164,177
                
                
                $
                795,132b.
                
                Loan
      from Business Development Bank of Canada, statedinterest
      at a floating rate plus 3.25%, (totaling 10.50% and 11.25%
    atMarch
      31, 2008 and December 31, 2007, respectively), secured by
      assetsand
      personal guarantees of the Company, expiring May 21, 2010
                
                
                42,480
                
                
                
                49,371c.
                
                Credit
      facility from Comerica Bank, stated interest at theComerica
      Bank prime rate plus 1.00% ranging to 1.25%(totaling
      6.50%, 6.75% and 6.75% for the operating line,term
      loan and equipment loan, respectively, at March31,
      2008), secured by assets and guaranty of the Company
                
                
                843,069
                
                
                
                -d.
                
                Capital
      lease obligations maturing at dates rangingfrom
      November 30, 2009 to December 31, 2011, securedby
      the leased assets
                
                
                612,325
                
                
                
                655,522Total
      long-term debt before unamortized discount and imputed
      interest
                
                
                2,662,051
                
                
                
                1,500,025Less:  Imputed
      interest and unamortized discount
                
                
                (105,788
                )
                
                
                (121,157
                )Long-term
      debt
                
                
                2,556,263
                
                
                
                1,378,868Less:  current
      portion
                
                
                1,822,134
                
                
                
                961,809$
                734,128
                
                
                $
                417,059
  17
 
 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.  The loan agreement provided for principal and accrued and
unpaid interest were due and payable April 30, 2007.  The loan
agreement is unsecured.  The unpaid principal of $1,200,000 and
accrued and unpaid interest of $63,010 as of March 31, 2008 are due and payable
on demand. The amount due under the loan agreement has both a face and stated
value of $1,200,000 as of March 31, 2008.  The stated fixed interest
rate is 9.00% per annum for the three month period ended March 31,
2008.
 
 Common
share purchase warrants (collectively the Warrants) to purchase one share of the
Company’s Common Stock, par value $0.01 per share 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
$2,740,000.  The associated 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 using the Black-Scholes-Merton valuation model: 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 recognized
relating to the accretion of the Warrants discount for the three month periods
ending March 31, 2008 and 2007 was $0 and $430,802,
respectively.
  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 closed 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 an amount 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.
 
 a.  Credit
Facility From The Royal Bank of Canada
  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 of the
Royal Bank of Canada prime rate plus 1.05%, which amounted to 6.30% at March 31,
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 good accounts
receivable of Ltd.  At March 31, 2008 and December 31, 2007, Ltd had
an outstanding balance of approximately $1,164,177 and $795,132,
respectively.
  b.  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 March
31, 2008, the annual rate of interest on this loan was 10.5% and the
balance outstanding was approximately $42,480. 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 March 31, 2008 and December 31, 2007 was approximately
$7,082 and $8,980, respectively.
 
 c.  Credit
Facility From Comerica Bank
 
 During
the first quarter of fiscal 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 6.5% at March 31, 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 6.75% at March 31, 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 6.75% at March 31, 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 March 31, 2008  Blue Hill had an
outstanding balance of $312,757 under the operating line, $479,167 of the term
loan, and $51,145 under the equipment loan. Interest expense for the three month
period ended March 31, 2008 amounted to $18,069.
  18
 
 d.  Capital
Leases
 
 Capital
leases consist primarily of equipment leases for the U.S. entities.
The Company added approximately $0 and $360,090 to capital leases in the
first quarter of fiscal 2008 and 2007, respectively.
  Long-term
debt, excluding unamortized discount, and capital lease obligations mature
in each of the following years ending March 31:
 
 Long-Term
                
                
                Capital
      LeaseDebt
                
                
                Obligations2009
                
                $
                1,669,417
                
                
                $
                199,5172010
                
                
                141,337
                
                
                
                173,0312011
                
                
                127,724
                
                
                
                139,0852012
                
                
                104,167
                
                
                
                100,6922013
                
                
                -
                
                
                
                -Thereafter
                
                
                -
                
                
                
                -Total
      minimum payments
                
                $
                2,042,645
                
                
                $
                612,325Less:  amount
      representing interest
                
                
                
                
                
                
                (98,707
                )Present
      value of minimum capital lease payments
                
                
                
                
                
                $
                513,618
  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 Series C Convertible 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 Convertible Preferred Stock
(“Series D Convertible Preferred Stock”) and various Common Stock and Series D-2
Convertible Preferred Stock purchase warrants 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.
  19
 
 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 Convertible 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, the
aggregate Series C Warrant and Series D Warrant proceeds will be approximately
$60 million.
 
 Through
amendments to each of the Series J Warrants to Purchase Shares of Preferred
Stock issued to the investors who purchased shares of the Company’s Series D
Convertible 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, a certain investor converted 31,250 shares their Preferred Series D
Convertible Preferred Stock into 500,000 shares of the Company’s Common
Stock.
 
 6. 
SEGMENT AND GEOGRAPHIC DATA
 
 The
Company is a business process outsourcing services provider. The
Company's operating segments are:
  ·
                Enterprise
      content management (ECM)
 ·
                Information
      Technology services outsourcing (ITO)
and
 ·
                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 are:
  For
      the three months endedMarch
      31,2008
                
                
                2007Net
      revenuesECM
                
                $
                4,024,352
                
                
                $
                1,009,771ITO
                
                
                2,877,624
                
                
                
                980,305HRO
                
                
                380,609
                
                
                
                10,518Consolidated
                
                $
                7,282,585
                
                
                $
                2,000,594Operating
      lossECM
                
                $
                (399,346
                )
                
                $
                (365,573
                )ITO
                
                
                (49,589
                )
                
                
                (16,644
                )HRO
                
                
                (194,037
                )
                
                
                (70,816
                )Corporate
                
                
                (1,012,835
                )
                
                
                (412,443
                )Consolidated
                
                $
                (1,655,807
                )
                
                $
                (865,476
                )Depreciation
      and amortization expenseECM
                
                $
                193,025
                
                
                $
                21,832ITO
                
                
                419,876
                
                
                
                29,139HRO
                
                
                107,290
                
                
                
                2,598Corporate
                
                
                64,238
                
                
                
                53,133Consolidated
                
                $
                784,429
                
                
                $
                106,702
  The
Company's operations are based in foreign and domestic subsidiaries
and branch offices in the U.S., Canada and Germany. The following are
significant components of worldwide operations by geographic
location:
  For
      the three months endedMarch
      31,2008
                
                
                2007Net
      revenuesNorth
      America
                
                $
                7,134,488
                
                
                $
                1,884,311Europe
                
                
                148,098
                
                
                
                116,283Consolidated
                
                $
                7,282,585
                
                
                $
                2,000,594At
                
                
                AtMarch
      31,
                
                
                December
      31,Long-Lived
      Assets
                
                2008
                
                
                2007North
      America
                
                $
                22,901,068
                
                
                $
                23,777,079Europe
                
                
                22,536
                
                
                
                23,672Consolidated
                
                $
                22,923,603
                
                
                $
                23,800,751
 21
   7. 
COMMITMENTS AND CONTINGENCIES
 
 FINANCIAL
RESULTS, LIQUIDITY AND MANAGEMENT’S PLAN ACTIVITIES
 
 The
Company has incurred losses in the three months ended March 31, 2008 of
$1,727,620. 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 to implement its business
plan.
 
 AMOUNT
DUE 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 March
2008, future minimum annual rental commitments under these
lease obligations were as follows:
 
 For the
year ending March 31:
  2009
                
                $
                1,529,7382010
                
                
                1,386,1102011
                
                
                1,238,6312012
                
                
                698,8712013
                
                
                316,659Thereafter
                
                
                1,183,378
  For the
three months ended March 31, 2008 and 2007 rent expense was $458,321 and
$150,218, 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.
 
 8. 
SUBSEQUENT EVENT
 
 Through
amendments to each of the Series J Warrants to Purchase Shares of Preferred
Stock (“Series J Warrants”) issued to the seven institutional investors who
purchased shares of the Series D Convertible 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.
  22
 
 The
Company also amended each of the Series C Warrants to Purchase Shares of Common
Stock (“Series C Warrants”) and Series D Warrants to Purchase Shares of Common
Stock (“Series D Warrants”), all of which were also issued in connection with
such purchases of the Series D Convertible 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 institutional 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 to Purchase Shares of Common Stock (“Series A Warrants”),
Series B Warrants to Purchase Shares of Common Stock (“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 preferred stock would trigger the anti-dilution protections set
forth in such warrants.
 
 In
addition, the Certificate of Designation of the Relative Rights and Preferences
of the Series D Convertible Preferred Stock (the “Series D Certificate of
Designation”) and the Certificate of Designation of the Relative Rights and
Preferences of the Series D-2 Convertible 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 Convertible Preferred
Stock or Series D-2 Convertible Preferred Stock (“Series D-2 Convertible
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.
 
 As of the
date of this Current Report, five institutional investors have 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 Convertible
Preferred Stock for an aggregate of approximately $5.6 million.
 
 23
  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"). We intend that
those forward-looking statements be subject to the safe harbors created by
those sections. These forward-looking statements generally include the
plans and objectives of management for future operations, including plans
and objectives relating to our future economic performance, and can
generally be identified by the use of the words "believe," "intend,"
"plan," "expect," "forecast," "project," "may," "should," "could," "seek,"
"pro forma," "goal," "estimates," "continues," "anticipate" and similar
words. The forward-looking statements and associated risks may include,
relate to, or be qualified by other important factors, including, without
limitation:
  ·
                Our
      ability to continue as a going
concern;
 ·
                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;
 ·
                Our
      ability to successfully implement our business plans and the possibility
      of strategic acquisitions;
 ·
                Our
      ability to attract and retain strategic partners and
      alliances;
 ·
                Our
      ability to hire and retain qualified
personnel;
 ·
                The
      risks of uncertainty of protection of our intellectual
      property;
 ·
                Risks
      associated with existing and future governmental regulation to which we
      are subject; and
 ·
                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 in the "Risk Factors" section of this report
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
 
 The
Company was incorporated in Delaware and commenced operations on July 26,
2005.  On December 15, 2006, the Company acquired all of
the outstanding common stock of publicly-held NetGuru, Inc. in a reverse
merger ("Merger"). Upon the closing of the Merger, we adopted Former BPOMS’ (as
the accounting acquirer) the 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:
  ·
                Document
      and data management solutions, also known as enterprise content management
      or "ECM" including Finance and Accounting Services Outsourcing or
      "FAO";
 ·
                Information
      technology services outsourcing or "ITO";
and
 ·
                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:
  ·
                revenue
      recognition;
 ·
                allowance
      for doubtful accounts receivable;
and
 ·
                impairment
      of long-lived assets, including
goodwill.
  24
 REVENUE
RECOGNITION
 
 We derive
revenues from:
 
 ·
                Enterprise
      content management services, including collaborative software products and
      services;
 ·
                IT
      outsourcing services; and
 ·
                Human
      resources outsourcing
services.
 We
recognize revenues when the following criteria are met:
 
 ·
                Persuasive
      evidence of an arrangement, such as agreements, purchase orders or written
      or online requests, exists;
 ·
                Delivery
      has been completed and no significant obligations
  remain;
 ·
                Our
      price to the buyer is fixed or determinable;
and
 ·
                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 is either 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.
  25
 
 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.
 
 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.
  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.
 
 We
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 March 31, 2008, our goodwill account balance was
$10,078,185.
  26
 
 CONSOLIDATED
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2008 VS. THREE MONTHS ENDED
MARCH 31, 2007
 
 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. The historical financial statements prior to December 15, 2006,
are those of the Former BPOMS.
 
 The
following entities of BPOMS are included in the consolidated results
of operations from the date of their respective acquisitions:
  Company
                  
                  Inception/Acquisition
      DateBPO
      Management Services, Inc. (the "Company")
                  
                  Inception
      date:  July 26, 2005Adapsys
      Document Management LP ("ADM") (1)
                  
                  Acquired:  July
      29, 2005Adapsys
      LP ("ADP") (1)
                  
                  Acquired:  July
      29, 2005Digica,
      Inc. ("Digica")
                  
                  Acquired:  January
      1, 2006Novus
      Imaging Solutions, Inc. ("Novus") (1)
                  
                  Acquired:  September
      30, 2006NetGuru
      Systems, Inc. ("netGuru")
                  
                  Acquired:  December
      15, 2006Research
      Engineers, GmbH ("GmbH")
                  
                  Acquired:  December
      15, 2006DocuCom
      Imaging Solutions, Inc. ("DocuCom") (1)
                  
                  Acquired:  June
      21, 2007Human
      Resource Micro-Systems, Inc. ("HRMS")
                  
                  Acquired:  June
      29, 2007Blue
      Hill Data Services, Inc. ("Blue Hill") (2)
                  
                  Acquired:  October
      10, 2007BPO
      Management Services, Ltd. ("Ltd") (1)
                  
                  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 amd Blue Hill (“New Subsidiaries”) were all acquired subsequent to March
31, 2007. The following discussion compares the first three months of 2007
without the New Subsidiaries with the first three months of 2008 including the
results of the New Subsidiaries.
  NET
REVENUES
 
 The
following table presents our net revenues by operating segment:
  For
      the three months endedMarch
      31,Net
      revenues
                
                2008
                
                
                2007ECM
                
                $
                4,024,352
                
                
                $
                1,009,771%
      of total net revenues
                
                
                55.3
                %
                
                
                50.5
                %ITO
                
                
                2,877,624
                
                
                
                980,305%
      of total net revenues
                
                
                39.5
                %
                
                
                49.0
                %HRO
                
                
                380,609
                
                
                
                10,518%
      of total net revenues
                
                
                5.2
                %
                
                
                0.5
                %Total
      net revenues
                
                $
                7,282,585
                
                
                $
                2,000,594
  Total net
revenues increased by $5,281,991 or 264% to $7,282,585 during the three
months ended March 31, 2008 from $2,000,594 during the same period in
the prior year. Of the increase, $5,359,320 was contributed by the New
Subsidiaries. Our total net revenues primarily consisted of net revenues from
(1) enterprise content management, (2) IT
Outsourcing services and (3) human resource outsourcing
services.
  27
  ENTERPRISE
CONTENT MANAGEMENT ("ECM")
 
 Net
revenue from ECM products and services during the three months ended March
31, 2008 increased by $3,014,581 or 299% to $4,024,352 from $1,009,771
during the three months ended March 31, 2007. Net revenue in the ECM
business segment in fiscal 2008 includes $2,919,327 of net revenue from DocuCom,
one of the New Subsidiaries, which was acquired in June of 2007.  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
fiscal years.
 
 IT
OUTSOURCING SERVICES ("ITO")
 
 Net
revenue from ITO during the three months ended March 31, 2008 increased by
$1,897,319 or 194% to $2,877,624 from $980,305 during the three months
ended March 31, 2007. Net revenue in the ITO business segment in fiscal 2008
includes $2,059,384 of net revenue from Blue Hill, one of the New Subsidiaries,
which was acquired in October of 2007.
  HUMAN
RESOURCE OUTSOURCING SERVICES ("HRO")
 
 Net
revenue from HRO products and services during the three months ended March
31, 2008 increased by $370,091 or3519% to
$380,609 from $10,518 during the three months ended March 31, 2007. Net
revenue in the HRO business segment in fiscal 2008 includes $380,609 of net
revenue from HRMS, one of the New Subsidiaries, which was acquired in June of
2007.
 
 OPERATING
EXPENSES
 
 The
following table presents our operating expenses and the percentage of total net
revenues:
  For
      the three months endedMarch
      31,Operating
      Expenses
                  
                  2008
                  
                  
                  2007Cost
      of services provided expenses
                  
                  $
                  3,543,352
                  
                  
                  $
                  902,473%
      of total net revenues
                  
                  
                  48.7%
                  
                  
                  
                  45.1%Selling,
      general and administrative expenses
                  
                  $
                  4,333,817
                  
                  
                  $
                  1,736,885%
      of total net revenues
                  
                  
                  59.5%
                  
                  
                  
                  86.8%Research
      and development expenses
                  
                  $
                  69,702
                  
                  
                  $
                  66,011%
      of total net revenues
                  
                  
                  1.0%
                  
                  
                  
                  3.3%Depreciation
      and amortization expenses
                  
                  $
                  784,429
                  
                  
                  $
                  106,702%
      of total net revenues
                  
                  
                  10.8%
                  
                  
                  
                  5.3%Share-based
      compensation expense
                  
                  $
                  207,092
                  
                  
                  $
                  53,999%
      of total net revenues
                  
                  
                  2.8%
                  
                  
                  
                  2.7%Total
      operating expenses
                  
                  $
                  8,938,392
                  
                  
                  $
                  2,866,070%
      of total net revenues
                  
                  
                  122.7%
                  
                  
                  
                  143.3%
  28
 
 COST OF
SERVICES PROVIDED EXPENSES
 
 Cost of
services provided expenses increased by $2,640,879 or 293% to $3,543,352 during
the first quarter of fiscal 2008 from $902,473 during the first quarter of
fiscal 2007.  Of the increase, $3,178,825 was attributable to the New
Subsidiaries in 2008. primarily due to acquisitions of Novus, DocuCom, HRMS and
of entities acquired from NetGuru subsequent to the third quarter of fiscal
2006.
 
 SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
 
 Selling,
general and administrative ("SG&A") expenses increased by $2,596,932 or
150% to $4,333,817 during the first quarter of fiscal 2008, from $1,736,885
during the first quarter of fiscal 2007.  Of the increase, $2,185,976
was attributable to the New Subsidiaries in 2008. The remainder of the
increase,  $410,956, arose primarily from increased non-cash
stock-based compensation expense, corporate salaries, and accounting
fees.
 
 RESEARCH
AND DEVELOPMENT EXPENSES
 
 Research
and development ("R&D") expenses consist primarily of
software developers' wages. R&D expenses increased by $3,691 or 6%
to $69,702 during the first quarter of fiscal 2008, from $66,011 during the
first quarter of fiscal 2007.  The Company capitalized software
development costs of approximately $167,000 and $0 during the three months ended
March 31, 2008 and 2007, respectively.
 
 DEPRECIATION
AND AMORTIZATION EXPENSES
 
 Depreciation
and amortization expenses increased by $677,727 or 635% to $784,429 during the
first quarter of fiscal 2008, from $106,702 during the first quarter of fiscal
2007, primarily due to the valuation allocations of fixed assets and intangible
assets acquired by the New Subsidiaries.
 
 SHARE-BASED
COMPENSATION EXPENSE
 
 We
recorded share-based compensation expense of $207,092 in the first quarter of
fiscal 2008 compared to $53,999 in the same period in the prior
year.   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 ECM segment increased to $399,346 in the first three monthsof fiscal
2008 from $365,573 in the first three monthsof fiscal
2007, primarily due the New Subsidiaries. The operating loss in the ITO segment
increased to $49,589 in the first three monthsof fiscal
2008 from $16,644 in the first three monthsof fiscal
2007, primarily due to the acquisition of Blue Hill. The operating loss in the
HRO segment increased to $194,037 in the first three monthsof fiscal
2008 from $70,816 in the first three monthsof fiscal
2007, primarily due to the acquisition of HRMS.  Corporate expenses
increased to $1,012,835 in the first three monthsof fiscal
2008 from $412,443 in the first three monthsof fiscal
2007, primarily due to the acquisition of the New Subsidiaries and additional
employees and increased professional fees.  The following table
details the operating loss by segment:
  For
      the three months ended March 31,Operating
      loss
              
              2008
              
              
              %
      of Total
              
              2007
              
              
              %
      of TotalECM
              
              $
              (399,346
              )
              
              
              24.1
              %
              
              $
              (365,573
              )
              
              
              42.2
              %ITO
              
              
              (49,589
              )
              
              
              3.0
              %
              
              
              (16,644
              )
              
              
              1.9
              %HRO
              
              
              (194,037
              )
              
              
              11.7
              %
              
              
              (70,816
              )
              
              
              8.2
              %Corporate
              
              
              (1,012,835
              )
              
              
              61.2
              %
              
              
              (412,443
              )
              
              
              47.7
              %Consolidated
              
              $
              (1,655,807
              )
              
              
              100.0
              %
              
              $
              (865,476
              )
              
              
              100.0
              %






29


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. The following table compares operating loss prior
to the deduction of these non-cash expenses. This comparison displays operating
improvements for the three months ended March 31, 2008 over those of the same
period in the preceding year in both the ECM and ITO segments with a minor
deterioration in the HRO segment which went through a major transition in later
2007 in the purchase of HRMS.
 
 Operating
      loss excluding
                
                For
      the three months ended March 31,non-cash
      expenses (1)
                
                2008
                
                
                %
      of Total
                
                2007
                
                
                %
      of TotalECM
                
                $
                (206,320
                )
                
                
                31.1
                %
                
                $
                (343,741
                )
                
                
                48.8
                %ITO
                
                
                370,287
                
                
                
                -55.7
                %
                
                
                12,495
                
                
                
                -1.8
                %HRO
                
                
                (86,747
                )
                
                
                13.1
                %
                
                
                (68,218
                )
                
                
                9.7
                %Corporate
                
                
                (741,505
                )
                
                
                111.6
                %
                
                
                (305,312
                )
                (2)
                
                43.3
                %Consolidated
                
                $
                (664,285
                )
                
                
                100.0
                %
                
                $
                (704,776
                )
                
                
                100.0
                %
  (1)
Operating loss before the deuction of depreciation, amortization and share-based
compensation expense
 
  INTEREST
AND OTHER EXPENSE
 
 The
following table presents our interest and other expense and its
percentage of total net revenues:
 
 For
      the three months endedMarch
      31,2008
                
                
                2007Other
      Expense (Income)Related
      parties interest
                
                $
                26,852
                
                
                $
                35,671%
      of total net revenues
                
                
                0.4%
                
                
                
                1.8%Amortization
      of relatedparty debt discount
                
                $
                -
                
                
                $
                430,089%
      of total net revenues
                
                
                0.0%
                
                
                
                21.5%Other
      interest, net
                
                $
                44,961
                
                
                $
                38,534%
      of total net revenues
                
                
                0.6%
                
                
                
                1.9%Other
      income
                
                $
                -
                
                
                $
                (12,239
                )%
      of total net revenues
                
                
                0.0%
                
                
                
                -0.6%Total
      other expense
                
                $
                71,813
                
                
                $
                492,055%
      of total net revenues
                
                
                1.0%
                
                
                
                24.6%
  TOTAL
INTEREST AND OTHER EXPENSE
 
 Total
interest and other expense decreased to $71,813 in the first three monthsof fiscal
2008 from $492,055 in the first three monthsof fiscal
2007, primarily due to amortization of related party debt discount expiring in
fiscal 2007.
 
 INCOME
TAXES
 
 In the
first three months of fiscal 2008 and fiscal 2007, we recorded no income
tax expense since we had incurred net losses from operations.
  30
  LIQUIDITY
AND CAPITAL RESOURCES
 
 Our
principal sources of liquidity at March 31, 2008 consisted of $780,823in cash and
cash equivalents. Cash and cash equivalents increased by $168,806in the first
three months of fiscal 2008 from $612,017 in the first three months of fiscal
2007. We incurred net losses from operations of $1,727,620 and $1,357,531
and used cash in operations of $1,007,848 and $431,124 in the first three
months of 2008 and 2007, respectively.
 
 The
primary reasons for cash used in operations during the first three months of
fiscal 2008 were: net loss of $1,727,619 that included non-cash
charges related to depreciation and amortization expense of $784,429 and
share-based compensation expense of $207,092.  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
provided by investing activities in the first three months of fiscal 2008 was
$475,709, primarily from 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 three months of fiscal 2007 was
$7,815, primarily for purchase of property and equipment.
 
 Net cash
provided by financing activities during the first three months of 2008 was
$291,567 of which $1,206,371 came from bank borrowings and $914,804 was used to
pay down debt.  In the first three monthsof fiscal
2007, we received $400,000 in cash proceeds from bridge loans and repaid
debt in the amount of $45,052. The bridge loan was provided by Mr. Dolan,
our chief executive officer and we 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, bank loans, and through the founders
bridge loan facility established in August 2006. During the next twelve
months, we anticipate raising the additional capital necessary to grow our
business and complete additional acquisitions by issuing our equity
securities and/or debt in one or more private transactions. We have
retained Collins Stewart (previously C. E. Unterberg, Towbin) as
our investment banker to spearhead this effort.
 
 Subsequent
to March 31, 2008, as detailed in Note 8 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
Convertible Preferred Stock for an aggregate of approximately $5.6 million which
amount is estimated to provide for the Company’s working capital needs for more
than 12 months.
 
 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 unreasonably 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.
 
 The
uncertainty as to our ability to secure funds to support our working capital
needs, recurring losses from operations, limited cash resources, and an
accumulated deficit, among other factors, raised doubt about our ability to
continue as a going concern.  This may make it difficult for us to
raise 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.
Consequently, future losses may adversely affect our business, prospects,
financial condition, results of operations and cash flows.
  The
following table summarizes our contractual obligations and
commercial commitments at March 31, 2008:
  Less
      Than
                
                
                
                
                
                
                
                
                AfterTotal
                
                
                1
      Year
                
                
                1-3
      Years
                
                
                4-5
      Years
                
                
                5
      YearsLong-term
      debt
                
                $
                2,042,645
                
                
                $
                1,669,417
                
                
                $
                269,061
                
                
                $
                104,167
                
                
                $
                -Capital
      lease obligations*
                
                
                513,618
                
                
                
                152,717
                
                
                
                264,417
                
                
                
                96,484
                
                
                
                -Operating
      leases
                
                
                6,353,387
                
                
                
                1,529,738
                
                
                
                2,624,741
                
                
                
                1,015,530
                
                
                
                1,183,378Purchase
      price payable -former
      shareholders
                
                
                1,215,944
                
                
                
                1,215,944
                
                
                
                -
                
                
                
                -
                
                
                
                -Bridge
      loan payable
                
                
                1,200,000
                
                
                
                1,200,000
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      contractual obligations
                
                $
                11,325,594
                
                
                $
                5,767,816
                
                
                $
                3,158,219
                
                
                $
                1,216,181
                
                
                $
                1,183,378
 *
Excludes imputed interest of $98,707
 31
 ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 We do not
have operations subject to material risks of foreign currency fluctuations, nor
do we use derivative financial instruments.
 
 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 March 31, 2008, we would incur an additional $5,124 of
interest expense during the quarter associated with the $2,049,726 in bank loans
outstanding at March 31, 2008.
 
 Foreign
Currency Exchange Rate Risk.     For the quarter ended
March 31, 2008, approximately 51.6% of the Company’s revenues were generated in
Canada and 2.0% 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 81% of our balances of cash and cash equivalents as of
March 31, 2008 was denominated in U.S. dollars. The remainder of our cash
was comprised primarily of cash and cash equivalents 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 are 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.
 
 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 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 March 31, 2008, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
  32
  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.
 
 33
 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:
      May 20, 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
    34