bpom_10q-093008.htm

10-Q 1 bpom_10q-093008.htm BPO MANAGEMENT SERVICES FORM 10-Q bpom_10q-093008.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

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

TRANSITION PERIOD FROM __________ to __________

Commission file number: 0-28560

BPO MANAGEMENT SERVICES, INC.

(Exact name of registrant as specified in its charter)

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

1290 N HANCOCK STREET, ANAHEIM HILLS, CA 92807

(Address of principal executive offices)

(714) 974-2670

(Issuer's telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year,

if changed since last report)

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

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

Large accelerated filer	o	Accelerated filer	o

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	[X]

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

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

PART I
FINANCIAL INFORMATION
		Page

Item 1. Financial Statements		3

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 (Unaudited)	3

	Condensed Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (Unaudited)	5

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		22

Item 3. Quantitative and Qualitative Disclosures About Market Risk		36

Item 4T. Controls and Procedures		37
PART II
OTHER INFORMATION
Item 1. Legal Proceedings		38

Item 1-A Risk Factors		38

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		38

Item 3. Defaults Upon Senior Securities		38

Item 4. Submission of Matters to a Vote of Security Holders		38

Item 5. Other Information		38

Item 6. Exhibits		38

Signatures		39

Exhibits Attached to this Quarterly Report on Form 10-Q		39

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues:
Enterprise content management	$	2,529,276		$	3,504,953		$	10,898,926		$	5,866,997
IT outsourcing services		2,997,424			880,978			8,758,283			2,861,891
Human resource outsourcing servicing		366,157			246,371			1,338,992			260,188

Total revenues		5,892,857			4,632,302			20,996,201			8,989,076

Operating expenses:
Cost of services provided		2,795,573			2,563,277			10,392,030			4,436,764
Selling, general and administrative		3,852,338			2,912,249			11,761,666			6,982,541
Research and development		81,221			168,371			228,258			261,738
Depreciation and amortization		709,320			142,257			2,193,495			224,644
Share-based compensation		207,091			112,118			621,275			258,861
Total operating expenses		7,645,543			5,898,272			25,196,724			12,164,548

Loss from operations		(1,752,686	)		(1,265,970	)		(4,200,523	)		(3,175,472	)

Interest expense (income)
Related parties		27,148			27,222			80,853			89,819
Amortization of related party debt discount		-						-			594,029
Other (net)		64,447			(11,300	)		173,583			76,045
Other Expense		-			(3,115	)		-			(3,102	)

Total interest and other expense		91,595			12,807			254,436			756,791

Loss before taxes		(1,844,281	)		(1,278,777	)		(4,454,959	)		(3,932,263	)

Income tax expense		18,125			-			110,852			-

Net loss		(1,862,406	)		(1,278,777	)		(4,565,811	)		(3,932,263	)

Foreign currency translation gain (loss)		(8,372	)		(40,623	)		(188,566	)		(331,180	)

Comprehensive loss	$	(1,870,778	)	$	(1,319,400	)	$	(4,754,377	)	$	(4,263,443	)


Basic and diluted net loss per share	$	(0.15	)	$	(0.14	)	$	(0.36	)	$	(0.45	)


Basic and diluted weighted average common		12,671,034			9,004,368			12,529,216			8,750,543

See accompanying notes to condensed consolidated financial statements.

BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

	2008			2007
	(Unaudited)			(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,911,367		$	888,043
Restricted cash		-			922,888
Accounts receivable, net of allowance for doubtful accounts of $312,693 and $347,797, respectively		4,951,677			4,768,618
Inventory consisting of finished goods		199,537			268,160
Prepaid expenses and other current assets		656,878			417,041
Total current assets		8,719,459			7,264,750

Equipment, net of accumulated depreciation of $1,211,807 and $718,913, respectively		4,904,576			4,834,941
Goodwill		10,391,940			9,029,142
Intangible assets, net of accumulated amortization of $2,101,785 and $931,268, respectively		7,589,249			9,898,219
Other assets		443,193			38,449
	$	32,048,417		$	31,065,501

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, net of discount of $3,219 and $3,405, respectively	$	1,569,575		$	812,156
Current portion of capital lease obligations		288,622			149,653
Accounts payable		2,661,326			3,540,827
Accrued expenses		2,431,074			1,927,451
Accrued interest-related party		9,366			36,672
Accrued dividend payable		840,458			379,222
Accrued dividend payable-related party		503,562			67,242
Amount due former shareholders of acquired companies		1,000,000			2,101,771
Income taxes payable		172,815			257,091
Deferred revenues		2,733,347			2,509,885
Related party notes payable		1,000,000			1,200,000
Severence obligations payable		-			72,199
Other current liabilities		290,805			-
Total current liabilities		13,500,950			13,054,169

Long-term debt, net of current portion and net of discount of $2,146 and $4,825, respectively		302,395			24,117
Capital lease obligations, net of current portion		527,083			392,942
Purchase price payable-long term		-			-
Other long-term liabilities		33,115			33,115
Total liabilities		14,363,543			13,504,343

Commitments and contingencies (Note 7)
Stockholders equity:
Convertible preferred stock, Series A, par value $.01; authorized
1,608,612 shares; 1,608,612 shares issued and outstanding, respectively		16,086			16,086
Convertible preferred stock, Series B, par value $.01; authorized
1,449,204 shares;1,449,204 shares issued and outstanding		14,492			14,492
Non-convertible preferred stock, Series C, par value $.01; authorized
21,378,000 shares; 916,667 shares issued and outstanding		9,167			9,167
Convertible preferred stock, Series D, par value $.01; authorized
1,500,000 shares; 1,427,084 and 1,458,334 shares issued and outstanding, respectively		14,271			14,583
Convertible preferred stock, Series D-2, par value $.01; authorized
1,500,000 shares; 1,312,500 and 729,167 shares issued and outstanding, respectively		13,125			7,292
Convertible preferred stock, Series F, par value $.01; authorized
1,300,000 shares; 894,942 shares issued and outstanding		8,949			-
Common stock, par value $.01; authorized 150,000,000 shares;
12,671,034 and 12,171,034 shares issued and outstanding, respectively		126,711			121,711
Additional paid-in capital		32,359,100			27,500,477
Accumulated deficit		(15,134,726	)		(10,568,915	)
Accumulated other comprehensive income foreign currency translation adjustments		257,699			446,265
Total stockholders ' equity		17,684,874			17,561,158
	$	32,048,417		$	31,065,501

See accompanying notes to condensed consolidated financial statements.

BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(UNAUDITED)

	2008			2007
Cash flows from operating activities:
Net loss	$	(4,565,811	)	$	(3,932,263	)
Adjustment to reconcile loss from continuing operations
to net cash provided by (used in) operating activities:		-
Depreciation		1,004,527			175,248
Amortization of intangible assets		1,188,968			153,947
Non-cash compensation expense recognized on issuance of stock options		621,275			258,861
Amortization of loan discount		-			594,031
Changes in operating assets and liabilities:
Accounts receivable		(183,058	)		(1,097,353	)
Inventory		68,623			(25,238	)
Income tax receivable		-			250,000
Prepaid expenses and other current assets		(268,743	)		(103,721	)
Other assets		(375,838	)		113,568
Accounts payable		(879,501	)		(1,027,744	)
Accrued expenses		503,623			614,748
Accrued interest-related parties		(27,306	)		90,119
Accrued dividends-related parties		436,320			(69,870	)
Accrued dividends		461,236			-
Amount due former shareholders of acquired companies		(215,944	)		179,579
Deferred revenue		223,462			371,890
Income taxes payable		(84,276	)		7,782
Payments of severence liability		(72,199	)		(500,841	)
Other current liabilities		290,805			-
Net cash used in operating activities		(1,873,837	)		(3,947,257	)
Cash flows from investing activities:
Purchase of equipment, net		(1,574,162	)		(516,847	)
Purchase obligation payment - Novus		-			(962,571	)
Purchase obligation payment - DocuCom		-			(917,338	)
Restricted deposit of purchase obligation		922,888			(922,888	)
Cash paid for acquisitions, net of cash acquired		-			(2,952,429	)
Net cash used in investing activities		(651,274	)		(6,272,073	)

Cash flows from financing activities:
Proceeds from bank loans, net		1,035,697			-
Repayment of notes issued to former shareholders		(885,827	)		(317,251	)
Repayment of capital lease obligations		(161,036	)		(68,928	)
Proceeds from related party loan		-			400,000
Repayment of notes payable		(200,000	)		-
Acquisition of capital leases		434,146			435,666
Proceeds from issuance of preferred stock, net of cash paid
for commissions and direct costs		5,157,996			15,737,910
Distributions to related parties		-			(240,598	)
Dividends declared on preferred stock		(753,461	)		-
Net cash provided by financing activities		4,627,515			15,946,799

Effect of exchange rate changes on cash and csash equivalents		(79,080	)		(331,179	)

Net increase in cash		2,023,324			5,396,290

Cash and cash equivalents, beginning of period		888,043			706,197

Cash and cash equivalents, end of period	$	2,911,367		$	6,102,487

See accompanying notes to condensed consolidated financial statements.

BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

	2008		2007

Supplemental disclosure of cash flow information:
Cash paid for:
Interest	$	300,050	$	56,023

Income taxes	$	70,465	$	-

Supplemental disclosure of non-cash investing and financing activities:
Acquisition of equipment under capital leases	$	434,146	$	360,090
Issuance of warrants	$	-	$	185,187
Series A Preferred Stock dividend	$	-	$	345
Issuance of Series F Preferred Stock	$	8,949	$	-
Acquisition of a company:
Net assets acquired	$	-	$	2,393,691
Net liabilities assumed	$	-	$	2,973,910
Common stock issued as consideration for acquisition	$	-	$	400,000

BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

1. Organization and Basis of Presentation

Organization

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

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

Basis of Presentation

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

2. Summary of Significant Accounting Policies

Principles of Consolidation

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

Company	Segment	Inception/Acquisition Date

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

(1) On January 1, 2008, ADM, ADP, Novus, and DocuCom were amalgamated into one company, BPO Management Services, Ltd.

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

Use of Estimates

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

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

Fair Value of Financial Instruments

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

Foreign Currency Translation

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

Cash and Cash Equivalents

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

Inventory

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

Property and Equipment

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

	Computer equipment	2-5 years
	Computer software	2-3 years
	Office equipment and furniture	3-10 years
	Leasehold improvements	Shorter of the life of the asset or the term of the lease

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

Goodwill

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

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

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

Impairment or Disposal of Long-Lived Assets

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

Revenue Recognition

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

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

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

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

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

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

Allowance for Doubtful Accounts

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

Concentration of Risk

The Company is subject to credit risk primarily through its accounts receivable balances. The Company does not require collateral for its accounts receivable balances. For the nine months ended September 30, 2008 and 2007, no single customer accounted for 10% of the Company’s consolidated net sales.

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

Deferred Revenues

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

Research and Development

The Company's research and development ("R&D") costs consist mainly of software developers' salaries. The Company follows the provisions of SFAS No. 86 to capitalize software development costs when technological feasibility has been established and to stop capitalization when the product is available for general release to customers. The Company expenses development costs when they are related to enhancement of existing software products. The Company capitalized software development costs of approximately $142,741 and $0 during the three months ended September 30, 2008 and 2007, respectively, and approximately $380,341 and $0, during the nine months ended September 30, 2008 and 2007, respectively.

Income Taxes

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

Comprehensive Income (Loss)

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

Share-Based Compensation

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

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

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)	4.0-10.0
Estimated forfeiture rate	7.0%

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

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

Segment Reporting

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

Reclassifications

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

Retirement Plans

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

Basic and Diluted Loss Per Share

In accordance with FASB Statement No. 128, Earnings Per Share, we calculate basic and diluted net loss per share using the weighted average number of common shares outstanding during the periods presented and adjust the amount of net loss, used in this calculation, for preferred stock dividends declared during the period.

We incurred a net loss in each period presented, and as such, did not include the effect of potentially dilutive common stock equivalents in the diluted net loss per share calculation, as their effect would be anti-dilutive for all periods. Potentially dilutive common stock equivalents would include the common stock issuable upon the conversion of preferred stock and the exercise of warrants and stock options that have conversion or exercise prices below the market value of our common stock at the measurement date. As of September 30, 2008 and 2007, all potentially dilutive common stock equivalents amounted to 101,679,249 and 133,315,111 shares, respectively.

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

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

Basic and diluted net loss per share	$	(0.15	)	$	(0.14	)	$	(0.36	)	$	(0.45	)

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007

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

Impact of Recently Issued Accounting Standards

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

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

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

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

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

3. Business Combinations

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

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

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

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

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

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

	DocuCom		HRMS		Blue Hill

Cash and cash equivalents	$	-	$	15,702	$	38,061
Accounts receivable		1,579,611		252,008		941,341
Acquired contracts		-		-		-
Other current assets		172,888		8,876		242,070
Property, plant and equipment		204,419		302,611		3,297,991
Goodwill		1,462,693		1,558,268		2,397,891
Identifiable intangible assets		2,300,000		500,000		5,800,000
Total assets acquired		5,719,611		2,637,465		12,717,354

Debt payable to bank		420,610		-		977,715
Accounts payable and other accrued liabilities		2,247,173		477,525		2,147,880
Estimated termination liability		-		-		-
Total liabilities assumed		2,667,783		477,525		3,125,595

Net assets acquired	$	3,051,828	$	2,159,940	$	9,591,759

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

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

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

	BPOMS			DocuCom		HRMS			Blue Hill		Pro Forma

Revenues	$	6,023,334		$	8,936,243	$	795,930		$	5,744,953	$	21,500,460

Net Income (Loss)	$	(3,939,297	)	$	115,748	$	(399,250	)	$	224,260	$	(3,998,539	)

Basic and diluted loss per common share	$	(0.47	)	$	-	$	(1.04	)	$	0.08	$	(0.35	)

Basic and diluted weighted average
common shares outstanding		8,365,575			-		384,968			2,666,666		11,417,209

4. Debt

Short-Term Related Party Debt

Short-term related party debt consisted of the following at September 30, 2008
and December 31, 2007:
		2008			2007
Notes payable to two officers, who are also significant
shareholders, secured by all assets of the Company,
bearing an annual interest rate of 9%		$	1,000,000		$	1,200,000

Long-term debt, including capital lease obligations, consisted of the following
at September 30, 2008 and December 31, 2007:
		2008			2007
a.	Credit facility from Royal Bank of Canada, stated interest at a
	floating rate plus 1.05%, (totaling 5.55% and 7.05% at September 30, 2008 and
	December 31, 2007, respectively) secured by assets of the Company	$	1,353,858		$	795,132
b.	Loan from Business Development Bank of Canada, stated
	interest at a floating rate plus 3.25%, (totaling 10.00% and 11.25% at
	September 30, 2008 and December 31, 2007, respectively), secured by assets
	and personal guarantees of the Company, expiring May 21, 2010		32,185			49,371
c.	Credit facility from Comerica Bank, stated interest at the
	Comerica Bank prime rate plus 1.00% ranging to 1.25%
	(totaling 6.00%, 6.25% and 6.00% for the operating line,
	term loan and equipment loan, respectively, at September
	30, 2008), secured by assets and guaranty of the Company		491,292			-
d.	Capital lease obligations maturing at dates ranging
	from November 30, 2009 to December 31, 2011, secured
	by the leased assets		934,689			655,522

	Total long-term debt before unamortized discount
	and inputed interest		2,812,024			1,500,025
	Less: Imputed interest and unamortized discount		(124,349	)		(121,157	)
	Long-term debt
	Less: current portion		2,687,675			1,378,868
			1,858,197			961,809

		$	829,478		$	417,059

Related Party Notes Payable

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

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

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

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

Credit Facility from the Royal Bank of Canada

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

Term Loan from Business Development Bank of Canada

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

Credit Facility from Comerica Bank

During the first quarter of 2008, Blue Hill obtained a credit facility from Comerica Bank which includes a revolving operating line limited to the lesser of the $1,000,000 maximum availability or 80% of eligible accounts receivable and carries an annual interest rate of the Comerica Bank prime rate plus 1.0%, which amounted to 6.0% at September 30, 2008, a $500,000 term loan amortized over a four year period and bearing interest at the Comerica Bank prime rate plus 1.25%, which amounted to 6.25% at September 30, 2008 and a specific advance facility for equipment purchases to a maximum of $500,000 bearing interest at the Comerica Bank prime rate plus 1.25%, which amounted to 6.0% at September 30, 2008. The loans are supported by a general security interest in all the assets of Blue Hill and the operating facility is also supported by the guaranty of BPOMS and the subordination of loans of a minimum of $1,400,000, payable by Blue Hill to BPOMS, to Comerica Bank. At September 30, 2008 Blue Hill had an outstanding balance of $23,480 under the operating line, $416,667 under the term loan, and $51,145 under the equipment loan. Interest expense for the three month period ended September 30, 2008 and nine month period ended September 30, 2008 amounted to $9,310 and $40,326, respectively.

Capital Leases

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

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

	Long-Term		Capital Lease
	Debt		Obligations

2009	$	1,569,575	$	354,424
2010		135,728		307,350
2011		125,000		239,073
2012		41,667		33,842
2013		-		-
Thereafter		-		-
Total minimum payments	$	1,871,970	$	934,689
Less: amount representing interest				(118,984	)

Present value of minimum capital lease payments			$	815,705

5. Capital Stock

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

6. Segment and Geographic Data

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

o	Enterprise content management (ECM)
o	Information Technology services outsourcing (ITO) and
o	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.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Net revenues
ECM	$	2,529,276		$	3,504,953		$	10,898,926		$	5,866,997
ITO		2,997,424			880,978			8,758,283			2,861,891
HRO		366,157			246,371			1,338,992			260,188
Consolidated	$	5,892,857		$	4,632,302		$	20,996,201		$	8,989,076


Operating income (loss)
ECM	$	(670,909	)	$	(361,629	)	$	(1,392,896	)	$	(865,350	)
ITO		(80,199	)		(1,384	)		67,247			(187,168	)
HRO		(154,683	)		(339,551	)		(314,002	)		(488,061	)
Corporate		(846,895	)		(563,406	)		(2,560,872	)		(1,634,893	)
Consolidated	$	(1,752,686	)	$	(1,265,970	)	$	(4,200,523	)	$	(3,175,472	)


Depreciation and amortization expense
ECM	$	169,844		$	45,859		$	550,468		$	39,168
ITO		451,101			31,591			1,294,894			64,962
HRO		23,289			2,580			153,868			5,159
Corporate		65,086			62,227			194,265			115,355
Consolidated	$	709,320		$	142,257		$	2,193,495		$	224,644

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Net revenues
North America	$	5,632,751	$	4,367,847	$	20,390,992	$	8,496,025
Europe		260,106		264,455		605,209		493,051
Consolidated	$	5,892,857	$	4,632,302	$	20,996,201	$	8,989,076


	At		At
	September 30,		December 31,
Long-Lived Assets	2008		2007

North America	$	23,312,510	$	23,777,079
Europe		16,448		23,672
Consolidated	$	23,328,958	$	23,800,751

7. Commitments and Contingencies

Financial Results, Liquidity and Management’s Plan Activities

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

Amount Due to Former Shareholders of Acquired Companies

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

Operating Leases

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

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

For the year ending September 30:

2009	$	1,497,192
2010		1,387,053
2011		1,212,817
2012		331,072
2013		291,907
Thereafter		1,134,477

	$	5,854,518

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

Litigation

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

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

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") That are based on our current expectations, beliefs, estimates and projections, as well as assumptions made by, and information currently available to us. We intend that those forward-looking statements be subject to the safe harbors created by those sections. Statements that are not historical facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements can generally be identified as such because the context of the statement may include words such as “expect,” “believe,” “anticipate” or words of similar import. Similarily, statements that describe future plans, objectives or goals are also forward-looking statements. These statements are not guarantees of future performance, events or results and generally involve known and unknown risks, uncertainties and other facts that may cause actual results, performance or achievements to be materially different from such forward-looking statements. The forward-looking statements and associated risks may include, relate to, or be qualified by other important factors, including, without limitation:

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

These forward-looking statements necessarily depend upon assumptions and estimates that may prove to be incorrect. Although we believe that the assumptions and estimates reflected in the forward-looking statements are reasonable, we cannot guarantee that we will achieve our plans, intentions or expectations. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ in significant ways from any future results expressed or implied by the forward-looking statements. We do not undertake to update, revise or correct any forward-looking statements.

Any of the factors described above or others could cause our future financial results, including our net income (loss) or growth in net income (loss) to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially.

Overview

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

Our primary business offerings are:

o	Document and data management solutions, also known as enterprise content management or "ECM";
o	Information technology services outsourcing or "ITO"; and
o	Human resources outsourcing or "HRO".

Critical Accounting Policies

We have identified the following as accounting policies that are the most critical to aid in understanding and evaluating our financial results:

o	revenue recognition;
o	allowance for doubtful accounts receivable; and
o	impairment of long-lived assets, including goodwill.

Revenue Recognition

We derive revenues from:

o	Enterprise content management services, including collaborative software products and services;
o	IT outsourcing services; and
o	uman resources outsourcing services.

We recognize revenues when the following criteria are met:

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

Persuasive Evidence of an Arrangement

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

Delivery Has Occurred or Services Have Been Performed

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

The Fee for the Arrangement is Fixed or Determinable

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

Collectibility is Reasonably Assured

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

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

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

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

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

Allowance for Doubtful Accounts Receivable

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

Impairment of Long-Lived Assets Including Goodwill

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

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

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

Consolidated Results of Operations

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

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

Company	Segment	Inception/Acquisition Date

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

(1) On January 1, 2008, ADM, ADP, Novus, and DocuCom were amalgamated into one company, BPO Management Services, Ltd.

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

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

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

	Three Months Ended September 30
	2008									2007
	Preexisting			New						Preexisting			New
	Entities			Subsidiaries			Total			Entities			Subsidiaries			Total

Revenues	$	1,752,559		$	4,140,298		$	5,892,857		$	1,971,725		$	2,660,577		$	4,632,302

Operating expenses		2,882,735			4,762,808			7,645,543			3,129,214			2,769,058			5,898,272

Interest and other expense		(11,931	)		103,526			91,595			2,606			10,201			12,807

Income tax expense		15,272			2,853			18,125			-			-			-

Net loss	$	(1,133,518	)	$	(728,888	)	$	(1,862,406	)	$	(1,160,095	)	$	(118,682	)	$	(1,278,777	)


	Nine Months Ended September 30
	2008									2007
	Preexisting			New						Preexisting			New
	Entities			Subsidiaries			Total			Entities			Subsidiaries			Total

Revenues	$	5,854,018		$	15,142,183		$	20,996,201		$	6,023,334		$	2,965,742		$	8,989,076

Operating expenses		9,816,383			15,380,341			25,196,724			9,099,481			3,065,067			12,164,548

Interest and other expense		102,037			152,399			254,436			746,590			10,201			756,791

Income tax expense		107,999			2,853			110,852			-			-			-

Net loss	$	(4,172,402	)	$	(393,409	)	$	(4,565,811	)	$	(3,822,737	)	$	(109,526	)	$	(3,932,263	)

Three Months Ended September 30, 2008 Compared to Three MonthsEnded September 30, 2007

Net Revenues

The following table presents our net revenues by operating segment:

	Three Months Ended
	September 30,
	2008		2007		Change
Net revenues

ECM	$	2,529,276	$	3,504,953	$	(975,677	)
% of total net		42.9%		75.7%


ITO		2,997,424		880,978		2,116,446
% of total net revenues		50.9%		19.0%


HRO		366,157		246,371		119,786
% of total net revenues		6.2%		5.3%

Total net revenues	$	5,892,857	$	4,632,302	$	1,260,555

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

Enterprise Content Management ("ECM")

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

IT Outsourcing Services ("ITO")

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

Human Resource Outsourcing Services ("HRO")

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

Operating Expenses

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

	September 30,
	2008		2007		Change
Operating Expenses

Cost of services provided expenses	$	2,795,573	$	2,563,277	$	(232,296	)
% of total net revenues		47.4%		55.3%

Selling, general and administrative expenses		3,852,338		2,912,249		(940,089	)
% of total net revenues		65.4%		62.9%

Research and development expenses		81,221		168,371		87,150
% of total net revenues		1.4%		3.6%

Depreciation and amortization expenses		709,320		142,257		(567,063	)
% of total net revenues		12.0%		3.1%

Share-based compensation expense		207,091		112,118		(94,973	)
% of total net revenues		3.5%		2.4%

Total operating expenses	$	7,645,543	$	5,898,272	$	(1,747,271	)
% of total net revenues		129.7%		127.3%

Cost of Services Provided Expenses

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

Selling, General and Administrative Expenses

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

Research and Development Expenses

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

Depreciation and Amortization Expenses

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

Share-Based Compensation Expense

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

Operating Loss by Segment

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

The following table details the operating loss by segment:

	Three Months Ended September 30,
Operating loss	2008			% of Total		2007			% of Total

ECM	$	(670,909	)		38.3%	$	(361,629	)		28.6%
ITO		(80,199	)		4.6%		(1,384	)		0.1%
HRO		(154,683	)		8.8%		(339,551	)		26.8%
Corporate		(846,895	)		48.3%		(563,406	)		44.5%
Consolidated	$	(1,752,686	)		100.0%	$	(1,265,970	)		100.0%

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

Interest and Other Expense

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

	Three Months Ended
	September 30,
	2008		2007			Change
Other Expense (Income)

Related parties interest	$	27,148	$	27,222		$	74
% of total net revenues		0.5%		0.6%

Amortization of related party debt discount		-		-			-
% of total net revenues		0.0%		0.0%

Other interest, net		64,447		(11,300	)		(75,747	)
% of total net revenues		1.1%		-0.2%

Other income		-		(3,115	)		(3,115	)
% of total net revenues		0.0%		-0.1%

Total other expense (income)	$	91,595	$	12,807		$	(78,788	)
% of total net revenues		1.6%		0.3%

Total Interest and Other Expense

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

Income Taxes

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

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Net Revenues

The following table presents our net revenues by operating segment:

	Nine Months Ended
	September 30,
	2008		2007		Change
Net revenues

ECM	$	10,898,926	$	5,866,997	$	5,031,929
% of total net		51.9%		65.3%


ITO		8,758,283		2,861,891		5,896,392
% of total net revenues		41.7%		31.8%


HRO		1,338,992		260,188		1,078,804
% of total net revenues		6.4%		2.9%

Total net revenues	$	20,996,201	$	8,989,076	$	12,007,125

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

Enterprise Content Management ("ECM")

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

IT Outsourcing Services ("ITO")

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

Human Resource Outsourcing Services ("HRO")

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

Operating Expenses

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

	Nine Months Ended
	September
	2008		2007		Change
Operating Expenses

Cost of services provided expenses	$	10,392,030	$	4,436,764	$	(5,955,266	)
% of total net revenues		49.5%		49.4%

Selling, general and administrative expenses		11,761,666		6,982,541		(4,779,125	)
% of total net revenues		56.0%		77.7%

Research and development expenses		228,258		261,738		33,480
% of total net revenues		1.1%		2.9%

Depreciation and amortization expenses		2,193,495		224,644		(1,968,851	)
% of total net revenues		10.4%		2.5%

Share-based compensation expense		621,275		258,861		(362,414	)
% of total net revenues		3.0%		2.9%

Total operating expenses	$	25,196,724	$	12,164,548	$	(13,032,176	)
% of total net revenues		120.0%		135.3%

Cost of Services Provided Expenses

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

Selling, General and Administrative Expenses

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

Research and Development Expenses

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

Depreciation and Amortization Expenses

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

Share-Based Compensation Expense

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

Operating Income (Loss) by Segment

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

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

	Nine Months Ended September 30,
	2008			% of Total		2007			% of Total
Operating income (loss)

ECM	$	(1,392,896	)		33.2%	$	(865,350	)		27.3%
ITO		67,247			-1.6%		(187,168	)		5.9%
HRO		(314,002	)		7.5%		(488,061	)		15.4%
Corporate		(2,560,872	)		61.0%		(1,634,893	)		51.5%
Consolidated	$	(4,200,523	)		100.0%	$	(3,175,472	)		100.0%

Interest and Other Expense

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

	Nine Months Ended
	September 30,
	2008		2007			Change
Other Expense (Income)

Related parties interest	$	80,853	$	89,819		$	8,966
% of total net revenues		0.4%		1.0%

Amortization of related party debt discount		-		594,029			594,029
% of total net revenues		0.0%		6.6%

Other interest, net		173,583		76,045			(97,538	)
% of total net revenues		0.8%		0.8%

Other income		-		(3,102	)		(3,102	)
% of total net revenues		0.0%		0.0%

Total other expense (income)	$	254,436	$	756,791		$	502,355
% of total net revenues		1.2%		8.4%

Total Interest and Other Expense

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

Income Taxes

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

Our future capital requirements to complete our business plan will depend upon many factors. These factors include but are not limited to sales and marketing efforts, the development of new products and services, possible future corporate mergers or strategic acquisitions or divestitures, the progress of research and development efforts, and the status of competitive products and services. If our anticipated financing transactions do not take place at all and/or are delayed, we may not have adequate funds to complete our business plan. If equity financing is available to us on acceptable terms, it could result in additional dilution to our existing stockholders.

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

			Less Than						After
	Total		1 Year		1-3 Years		4-5 Years		5 Years

Long-term debt	$	1,871,970	$	1,569,575	$	260,728	$	41,667	$	-

Capital lease obligations*		815,705		288,622		493,812		33,271		-

Operating leases		5,854,518		1,497,192		2,599,870		622,979		1,134,477

Purchase price payable -
Due former shareholders		1,000,000		1,000,000		-		-		-

Related party notes payable		1,000,000		1,000,000		-		-		-

Total contractual obligations	$	10,542,193	$	5,355,389	$	3,354,410	$	697,917	$	1,134,477

*Excludes imputed interest of $118,984

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

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

Foreign Currency Exchange Rate Risk

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

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

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

Item 4T. Controls and Procedures

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

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

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

Inherent Limitations on Effectiveness of Controls

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

Changes in Internal Control over Financial Reporting

There has not been any change in our internal control over financial reporting that occurred during the quarterly period ended September 30, 2008, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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.

SIGNATURES

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

Date: November 14, 2008	BPO MANAGEMENT SERVICES, INC.

	By: /s/ Donald W. Rutherford Chief Financial Officer (principal financial officer and duly authorized officer)

EXHIBITS ATTACHED TO THIS QUARTERLY REPORT ON FORM 10-Q

Exhibit

Number

Description


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


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


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