10QSB/A 1 a05-21850_210qsba.htm AMEND QUARTERLY AND TRANSITION REPORTS OF SMALL BUSINESS ISSUERS

Form 10-QSB/A

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

For the quarterly period ended June 30, 2004

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

For the transition period from to

For Quarter Ended

Commission File Number 001-32442

CGI Holding Corporation

(Exact name of registrant as specified in its charter)

Nevada		87-0450450
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

5 Revere Drive, Suite 510, Northbrook, Illinois		60062
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (847) 562-0177

(Former name, former address and former fiscal year, if changed since last report.)

Check whether the registrant (1) filed all reports required to be filed by Section 13 of 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

Number of shares outstanding of the issuer’s common stock, as of July 23, 2004 was 22,991,186 shares.

Transitional Small Business Disclosure Format

Yes o No ý

CGI HOLDING CORPORATION AND SUBSIDIARIES

Table of Contents

EXPLANATORY NOTE
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements
	Item 2.	Management Discussion and Analysis or Plan of Operation
	Item 3.	Control and Procedures
Part II. OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3.	Defaults Upon Senior Securities
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits
SIGNATURES

EXPLANATORY NOTE

On October 27, 2005, we concluded that we would need to amend and restate our previously issued unaudited consolidated financial statements and other financial information for the quarter ended June 30, 2004, as well as other periods. The restatement results from a change to the manner in which we now believe we must recognize revenue generated by our search engine enhancement (SEE) business segment. As previously disclosed, we recognized revenues from the SEE business segment in the period that they are deemed to be earned and collectible under the accrual method of accounting using the proportional performance model. In the proportional performance model, revenue is recognized using the pattern in which value is provided to the customer over the term of the contract. Subsequently based on comments we received from the Staff of the Securities and Exchange Commission, we determined that the manner in which we applied the proportional performance revenue recognition model: (1) did not adequately rely on objective evidence of the value of services performed, and (2) did not provide sufficient evidence to prove the collectibility of the accelerated revenue stream. As a result, we have restated portions of our quarterly report on Form 10-QSB for the quarter ended June 30, 2004 by recognizing revenue for each deliverable under our SEE business segment on a straight-line basis over the term of the contract. We believe it is appropriate to use straight-line if there is not adequate objective evidence of the value of services performed. Additionally, using straight-line allows us to more closely match cash receipts with revenue recognition. As a result, collection of amounts recognized as revenue is reasonably assured.

This Form 10-QSB/A does not update any other information set forth in the original filing of our Quarterly Report on Form 10-QSB for the period ended June 30, 2004. This Form 10-QSB/A does not reflect any events or developments occurring subsequent to July 23, 2004.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CGI HOLDING CORPORATION

CONSOLIDATED BALANCE SHEET, As amended

JUNE 30, 2004

Assets
Current Assets
Cash and Cash Equivalents	$	1,269,539
Accounts Receivable	980,489
Allowance for Doubtful Accounts	(56,759		)
Notes Receivable – Related Party	325,075
Deferred Tax Asset	403,200
Other Current Assets	188,610
Total Current Assets	3,110,153
Property and Equipment, net	538,363
Other Assets
Deferred Tax Asset	1,848,691
Goodwill	175,000
Intangible Assets	87,500
Other Assets	44,250
Total Other Assets	2,155,441
Total Assets	$	5,803,957

Liabilities and Shareholders’ Equity
Current Liabilities
Accounts Payable	$	29,471
Deferred Revenue	1,482,319
Accrued Expenses and Other Current Liabilities	712,291
Total Current Liabilities	2,224,081

Long-Term Liabilities	81,038
Shareholders’ Equity
Preferred Stock, $.001 par value:
Authorized Shares – 5,000,000 – none issued or outstanding	—
Common Stock, $.001 par value:
Authorized Shares – 100,000,000
Issued Shares –25,490,936
Outstanding Shares – 22,990,936	25,490
Additional Paid in Capital	8,709,287
Accumulated Deficit	(4,695,938		)
Treasury Stock	(540,000		)
Total Shareholders’ Equity	3,498,838
Total Liabilities and Shareholders’ Equity	$	5,803,957

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

CGI HOLDING CORPORATION

CONSOLIDATED STATEMENT OF INCOME, as amended

SIX AND THREE MONTHS ENDED JUNE 30, 2004 AND 2003

	Six Months Ended						Three Months Ended
	2004			2003			2004			2003
Net Revenue	$	6,303,113		1,904,518			3,563,090			1,096,780
Cost of Revenue	1,343,137			395,656			778,269			184,695
Gross Profit	4,959,976			1,508,862			2,784,821			912,085
Operating Expenses
Selling, General and Administrative	4,364,406			1,827,474			2,318,974			1,065,359
Amortization of Purchased Intangibles	—						—
Income (Loss) from Operations	595,570			(318,612		)	465,847			(153,274		)
Other Income (Expenses)
Interest Income	256			6,224			256			6,159
Interest Expense	(28,100		)	(38,322		)	—			(15,748		)
Other Income(Expense)	62,905						(25,000		)
Income (Loss) before Income Taxes	630,631			(350,711		)	441,102			(162,863		)
Provision for Income Taxes	236,186						162,991
Net Income (Loss)	$	394,445		$	(350,711	)	$	278,111		$	(162,863	)

Net Income (Loss) Per Share
Basic	$	0.02		$	(0.02	)	$	0.01		$	(0.01	)
Fully Diluted	$	0.01		$	(0.02	)	$	0.01		$	(0.01	)

Weighted Average Shares(Basic)	22,037,010			17,092,236			22,764,287			17,589,474
Weighted Average Shares(Fully Diluted)	27,659,103			17,471,631			28,386,380			17,968,869

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

CGI HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHODLERS’ EQUITY, As amended

	Shares	Amount		Paid In Capital		Deficit			Treasury Stock			Shareholders’ Equity

Balance at January 1, 2004	20,889,458	$	23,389	$	5,655,760	$	(5,090,383	)	$	(540,000	)	$	48,766

Exercise of Stock Options, Net	282,728	282		42,845								43,127

Purchase Transactions, Net	1,818,750	1,819		3,010,682								3,012,501

Net Profit, June 30, 2004						394,445						394,445

Balance at June 30, 2004	22,990,936	$	25,490	$	8,709,287	$	(4,695,938	)	$	(540,000	)	$	3,498,838

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

CGI HOLDING CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS, As Amended

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

	2004			2003

Operating Activities
Net Income (Loss)	$	394,445		(350,711		)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and Amortization	37,885			9,572
Provision for Doubtful Accounts	247,641			176,949
Deferred Taxes	187,255			—
Loss on Deposit	50,000			—
Change in operating assets and liabilities:
Accounts Receivable	(757,481		)	(159,614		)
Prepaid Expenses and Other Assets	(147,158		)	11,000
Accounts Payable	(387,958		)	(139,975		)
Deferred Revenue	344,809			306,109
Other Accrued Liabilities	708,830			190,708
Net cash provided by operating activities	678,268			44,038

Investing Activities
Purchases of property and equipment	(495,358		)	(3,475		)
Other Investing Activities	(6,205		)	(11,051		)
Net cash used in investing activities	(501,563		)	(14,526		)

Financing Activities
Principal Payments Made	(2,152,143		)	(138,963		)
Proceeds from Notes Payable	140,000			24,515
Net proceeds from issuance of common stock	2,793,127			100,769
Net cash provided by (used in)financing activities	780,984			(13,679		)
Net Cash Change	957,690			15,832
Cash Balance, January 1	311,849			68,945
Cash Balance, June 30	$	1,269,539		$	84,777

Supplemental Information
Interest Paid	$	28,100		$	38,322
Income Taxes Paid	$	24,827		—

Non Cash Investing and Financing Activities

On June 4, 2004, the Company entered into an asset purchase agreement in which it issued 100,000 shares of the Company’s common stock valued at $262,500.

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

CGI HOLDING CORPORATION

FOOTNOTES TO FINANCIAL STATEMENTS

JUNE 30, 2004 AND 2003

Basis of Presentation

The consolidated statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements are unaudited. These financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements and the notes hereto should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB/A for the year ended December 31, 2004 which was originally filed June 23, 2005, to be reissued concurrently with this filing, including the Company’s amended 2003 consolidated financial statements, and reflecting the matters described under the following section “Correction of Error”. In the opinion of the Company’s management, the condensed consolidated financial statements for the unaudited interim periods presented include all adjustments, including normal recurring adjustments necessary to fairly present the results of such interim periods and the financial position as of the end of said period. The results of operations for the interim period are not necessarily indicative of the results for the full year.

Correction of Error

As disclosed by press release on November 1, 2005, the Company began a review of its accounting for revenue recognition for its search engine enhancement services at its Websourced, Inc. subsidiary. This review was completed and the Company determined that the manner in which we applied the proportional performance revenue recognition model: (1) did not adequately rely on objective evidence of the value of services performed, and (2) did not have enough evidence to be reasonably assured of the collectibility of the accelerated revenue recognition provided for when utilizing the proportional performance model.

The cumulative effect as of January 1, 2004 of the correction of the error would have decreased retained earning as of that date by $1.3 million, net of tax. The effect of the error was material to the year ended December 31, 2003 and respective quarters.

2004

	Previously Reported								As Amended
	Six Months					Three Months			Six Months		Three Months
	Ended June 30, 2004								Ended June 30, 2004
Revenue	$				8,399,436	$	4,574,005		$	6,303,113	$	3,563,090
Cost of Sales	3,524,562					2,064,037			1,343,137		778,269
Gross Profit	4,874,874					2,509,968			4,959,976		2,784,821
Selling, General and Administrative	2,776,853					1,311,613			4,364,406		2,318,974
Other Income(Expense)	35,061					(24,744		)	35,061		(24,744		)
Income Before Taxes	2,133,082					1,173,611			630,631		441,102
Income Tax Provision	707,611					386,833			236,186		162,991
Net Income	$			1,425,471		$	786,778		$	394,445	$	278,111

Earnings Per Share
Basic	$		0.05			$	0.03		$	0.02	$	0.01
Fully Diluted	$	0.04				$	0.03		$	0.01	$	0.01

2003

	Previously Reported									As Amended
	Six Months						Three Months			Six Months			Three Months
	Ended June 30, 2003									Ended June 30, 2003
Revenue	$				2,320,398		$	1,135,037		$	1,904,518		$	1,096,780
Cost of Sales	1,173,995						677,165			395,656			184,695
Gross Profit	1,146,403						457,872			1,508,862			912,085
Selling, General and Administrative	1,092,607						427,172			1,827,474			1,065,359
Other Income (Expense)	(32,098					)	(9,588		)	(32,098		)	(9,589		)
Income Before Taxes	21,698						21,112			(350,711		)	(162,863		)
Income Tax Provision	—						—			—			—
Net Income (Loss)	$			21,698			$	21,112		$	(350,711	)	$	(162,863	)

(Loss) Per Share
Basic	$		0.00				$	0.00		$	(0.02	)	$	(0.01	)
Fully Diluted	$	0.00					$	0.00		$	(0.02	)	$	(0.01	)

June 30, 2004

	As Reported		Adjustment			As Restated
Summarized Consolidated Balance Sheet
Total Current Assets	$	8,784,909	$	(5,674,756	)	$	3,110,153
Total Other Assets	1,712,824		980,980			2,693,804
Total Assets	$	10,497,733	$	(4,693,776	)	$	5,803,957

Total Current Liabilities	$	4,680,528	$	(2,456,447	)	$	2,224,081
Total Long-Term Liabilities	0		81,038			81,038
Shareholders’ Equity	5,817,205		(2,318,367		)	3,498,838
Total Liabilities and Shareholders’ Equity	$	10,497,733	$	(4,693,776	)	$	5,803,957

Reclassification

For comparability, the 2003 financial statements reflect reclassifications where appropriate to conform to the financial statement presentation used in 2004.

Use of Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles 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 net revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to allowances for doubtful accounts, goodwill and purchased intangible asset valuations and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Revenue Recognition

Websourced, Inc.

Revenue is recognized in the period that they are deemed to be earned and collectible under the accrual method of accounting using the straight-line basis over the term of the contract.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. Depreciation and amortization are expensed using the straight-line method over each asset’s estimated remaining useful life, ranging from four to seven years. Depreciation of leasehold improvements is computed using the shorter of the lease term or the economic life using the straight line method. The carrying value of property and equipment at June 30, 2004 was:

Furniture & Fixtures	$	173,755
Equipment	278,730
Software	161,385
Subtotal	$	613,870
Accumulated Depreciation	75,507
Net Property & Equipment	$	538,363

Goodwill and Purchased Intangible Assets

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), the Company tests goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in the fourth quarter or more frequently if the Company believes indicators of impairment exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying value, including goodwill. The Company generally determines the fair value of its reporting units using the income approach methodology of

valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill.

We amortize our identifiable intangible assets, which result from our acquisitions accounted for under the purchase method of accounting, using the straight-line method over their estimated useful lives.

Stock-Based Compensation

The Company has granted non-qualified incentive stock options to employees and non-qualified stock options to employees, non-employee members of the board of directors and other persons not employed by the Company or its subsidiaries. The Company currently has no formal plan and no authorized shares. The vesting periods range from immediate to a period of three years. The maximum term of the various outstanding options is ten years. The Company accounts for stock-based awards granted to employees in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations, and has adopted the disclosure-only alternative of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) and SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.

In accordance with APB 25, stock-based compensation expense is not recorded in connection with stock options granted with exercise prices equal to or greater than the fair market value of the Company’s common stock on the date of grant, unless certain modifications are subsequently made. No compensation expense was recorded under the Company’s option arrangements with employees in 2004 and 2003.

In accordance with the requirements of the disclosure-only alternative of SFAS 123, set forth below are the assumptions used and a pro forma illustration of the effect on net income and net income per share computed as if the Company had valued stock-based awards to employees using the Black-Scholes option pricing model instead of applying the guidelines provided by APB 25.

	Six Months Ended June 30, 2004				Six Months Ended June 30, 2003
	Options		Weighted Average Exercise Price		Options	Weighted Average Exercise Price
Outstanding at beginning of year	4,138,026		$	0.23	690,519	$	0.34
Granted	58,225		2.86		432,433	0.45
Forfeited	0		N/A		0	N/A
Exercised	(15,400	)	0.73		0	N/A
Outstanding at end of year	4,180,851		$	0.39	1,122,952	$	0.38

The weighted average grant date fair value of options granted during the second quarter of 2004 was $0.65.

The following table summarizes information about stock options outstanding at June 30, 2004.

Options Outstanding

Range of Exercise Prices	Options Outstanding	Weighted Average remaining contractual life	Weighted Average Exercise Price
$0.13 - $0.13	2,830,000	9.08	$	0.13
$0.14 - $0.20	400,853	4.65	$	0.17
$0.21 - $0.50	491,089	2.98	$	0.31
$0.51 - $3.80	458,909	5.00	$	2.30
Total	4,180,851	7.49	$	.39

The following table summarizes the options exercisable on June 30, 2004.

Options Exercisable

Range of Exercise Prices	Options Exercisable	Weighted Average Exercise Price
$0.13 - $0.13	2,830,000	$	0.13
$0.14 - $0.20	400,853	0.17
$0.21 - $0.50	408,227	0.28
$0.51 - $3.80	187,488	1.17
Total Options Exercisable at June 30, 2004	3,826,568	$	0.20

The per share fair values of stock awards granted in connection with stock incentive plans and rights granted in connection with the employee stock purchase plan have been estimated with the following weighted average assumptions:

	June 30, 2004		December 31, 2003
Expected Life(in years)	3.40		2.90
Volatility	61.0	%	61.00	%
Risk Free Interest Rate	2.48	%	3.33	%
Dividend Yield	0.00	%	0.00	%

The following table compares net income and earnings per share as reported to the pro forma amounts that would be reported had compensation expense been recognized for our stock-based compensation plans on a fair value basis for the three and six months ended June 30, 2004 and June 30, 2003:

	Three Months Ended			Six Months Ended			Three Months Ended			Six Months Ended
	June 30, 2004						June 30, 2003
Net Income (Loss), as reported	$	278,111		$	394,445		$	(162,863	)	$	(350,711	)
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of tax	(5,387		)	(9,570		)	(2,959		)	(4,958		)
Pro forma net income (loss)	$	272,724		$	384,875		$	(165,822	)	$	(355,669	)
Earnings (loss) per share, as reported:
Basic	$	0.01		$	0.02		$	(0.01	)	$	(0.02	)
Fully Diluted	$	0.01		$	0.01		$	(0.01	)	$	(0.02	)
Pro forma earnings (loss) per share:
Basic	$	0.01		$	0.02		$	(0.01	)	$	(0.02	)
Fully Diluted	$	0.01		$	0.01		$	(0.01	)	$	(0.02	)

For purposes of this illustration, the value of each stock award has been estimated as of the date of grant using the Black-Scholes model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other factors, the expected life of the option and the expected volatility of the Company’s stock price. Because it does not consider other factors important to stock-based awards, such as continued employment and periodic vesting requirements and limited transferability, the fair value generated by the Black-Scholes option pricing model may not be indicative of the actual fair value of the Company’s stock-based awards. For pro forma illustration purposes, the Black-Scholes value of the Company’s stock-based awards is assumed to be amortized on a straight-line basis over their respective vesting periods.

Net Income (Loss) Per Share

Net income per share (basic) is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the year. Net income per share (diluted) is calculated by adjusting outstanding shares, assuming any dilutive effects of options and warrants using the treasury stock method.

The following reconciles the denominators of basic and fully diluted earnings per share:

	Three months	Six Months	Three Months	Six Months
	Ended June 30, 2004		Ended June 30, 2003

Denominator – Shares
Basic weighted-average shares	22,764,287	22,037,010	17,589,474	17,092,236
Effect of dilutive securities	5,622,093	5,622,093	379,395	379,395
Fully Diluted weighted-average shares	28,386,380	27,659,103	17,968,869	17,471,631

Intangible Assets and Goodwill

The following is a schedule of the Company’s intangible assets, by segment, as of June 30, 2004:

Search Engine Optimization

	Term	Initial Value		Accumulated Amortization		Net Carrying Value
Web Application Tools	5 Years	$	87,500	$	0	$	87,500
Goodwill		175,000		0		175,000
Totals		$	262,500	$	0	$	262,500

The Company’s amortization expense over the next five years is as follows:

2004	$	17,500
2005	35,000
2006	35,000
2007	35,000
2008	35,000
Thereafter	17,500
Total	$	87,500

Long Term Liabilities

The long term liabilities consisted of the following as of June 30, 2004:

Deferred Rent

81,038

Segment Analysis

The Company’s operations are divided into operating segments using individual products or services or groups of related products and services. Each segment has separate management that

reports to a person that makes decisions about performance assessment and resource allocation for all segments. The Company had one operating segment at June 30, 2004, search engine enhancement. The Company evaluates the performance of each segment using pre-tax income or loss from continuing operations

Listed below is a presentation of sales, operating profit and total assets for all reportable segments. The “other” category in the “Total Assets By Industry Segment” table consists of assets that the Company owns that are not otherwise allocated to a particular segment.

NET SALES BY INDUSTRY SEGMENT

	Six Months Ended June 30
	2004				2003
	Amount			Percent	Amount		Percent
Search engine enhancement	$	6,303,113		100.00	$	1,904,518	100.00
Total	$		6,303,113	100.00	$	1,904,518	100.00

NET SALES BY INDUSTRY SEGMENT

	Three Months Ended June 30
	2004				2003
	Amount			Percent	Amount		Percent
Search engine enhancement	$		3,563,090	100.00	$	1,096,780	100.00
Total	$	3,563,090		100.00	$	1,096,780	100.00

PRE TAX PROFIT (LOSS) FROM CONTINUING OPERATIONS

	Six Months Ended June 30
	2004			2003
Search engine enhancement	$	780,712		$		(258,768	)
Other	(150,081		)	(91,943			)
Total	$	630,631		$	(350,711		)

PRE TAX PROFIT (LOSS) FROM CONTINUING OPERATIONS

	Three Months Ended June 30
	2004			2003
Search engine enhancement	$	517,000		$		(127,738	)
Other	(75,898		)	(35,125			)
Total	$	441,102		$	(162,863		)

TOTAL ASSETS BY INDUSTRY SEGMENT

	Amount		Percent
Search engine enhancement	$	3,747,058	64.56
Other	2,056,899		35.54
Total	$	5,803,957	100.00

Item 2. Management Discussion and Analysis or Plan of Operation

Certain statements in this “Management’s Discussion and Analysis or Plan of Operation” and elsewhere in this quarterly report on Form 10-QSB constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical, including statements regarding management’s intentions, beliefs, expectations, representations, plans or predictions of the future and are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “will,” “should” and “could.” These forward-looking statements involve numerous risks and uncertainties that could cause our actual results to be materially different from those set forth in the forward-looking statements including, without limitation, our lack of profitable operating history, changes in our business, need for additional capital and the other additional risks and uncertainties identified under the caption “Risk Factors,” beginning on page 19 and elsewhere in this quarterly report or in any amendment we may file. The following discussion should also be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this quarterly report on Form 10-QSB.

Change in Accounting

In the third quarter of 2005, we changed our method for recognizing revenues for our WebSourced, Inc. subsidiary relating to our Search Engine Enhancement services. Effective with this change, retroactively applied to all periods that we performed such services, we recognize revenue on the straight line basis over the term of the contract.

Overview

We were incorporated in the State of Nevada in October 1987. From 1993 until 1997 we essentially had no operations. In 1997, we acquired two private companies that we subsequently divested. In March 2001, we acquired WorldMall.com which was reincorporated in June 2002 as WebSourced, Inc.

Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate estimates, including those related to bad debts, intangibles and income taxes, on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies, among others, involve the more significant judgments and estimates used in the preparation of our financial statements:

• We recognize revenues in accordance with the following principles with respect to our different business services:

Search Engine Enhancement Services. We recognize revenues in the period that they are deemed to be earned and collectible under the accrual method of accounting using the straight-line basis over the term of the contract.

• Pay Per Click Management Fees. We recognize revenue on pay per click management services in the month the services are performed.

• In connection with our Search Engine Enhancement services we enter into contracts with customers, and give those customers two payment options. The customer can make one payment in advance of services, or installment over four, six or twelve month periods.

• If payment is received when a contract is signed, we record the receipt of the payment along with an offsetting liability recorded as deferred revenue for the entire amount of the contract. Each month, revenue is recognized straight line over the term of the contract by debiting deferred revenue and crediting revenue.

• If a customer elects to pay in installments, the total amount of the contract is recorded as a debit to installment contracts receivable and a credit to deferred revenue. We then debit accounts receivable when we send an invoice and credit installment contracts receivable. Each month, revenue is recognized straight line over the term of the contract by debiting deferred revenue and crediting revenue. For financial statement purposes, installment contracts receivable is netted with deferred revenue and the amount is listed under deferred revenue on our balance sheet.

• All assets are depreciated over their estimated useful life using the straight line method. Intangible assets are amortized over their estimated lives using the straight line method. Goodwill is tested for impairment annually per FAS 142.

• We reserve for federal and state income taxes on items included in the Consolidated Statements of Operations regardless of the period when the taxes are payable. Deferred taxes are recognized for temporary differences between financial and income tax.

• We have granted incentive stock options to employees and non-qualified stock options have been granted to employees, non-employee members of the board of directors and other persons. We account for stock-based awards to employees in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations, and have adopted the disclosure-only alternative of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. The fair value of options granted to non-employees, as defined under SFAS 123, has been expensed in accordance with SFAS 123. In accordance with APB 25, stock-based compensation expense is not recorded in connection with stock options granted with exercise prices equal to or greater than the fair market value of our common stock on the date of grant, unless certain modifications are subsequently made. We record

deferred compensation in connection with stock options granted with exercise prices less than the fair market value of our common stock on the date of grant. The amount of such deferred compensation per share is equal to the excess of such fair market value over the exercise price.

Comparison of Financial Condition at June 30, 2004 and December 31, 2003

Our total assets as of June 30, 2004 were approximately $5.8 million compared to approximately $3.7 million as of December 31, 2003. This increase was attributable to many factors. During the first six months of 2004 our accounts receivable increased approximately $500,000, from approximately $450,000 on December 31, 2003 to $980,000 of June 30, 2004. Our cash and cash equivalents increased from approximately $300,000 on December 31, 2003 to $1.3 million on June 30, 2004. The increase in total cash is resulted from the sale of stock in the first six months of 2004 and the Company generating positive cash flow from operations during this time period. Also, the Company invested approximately $500,000 in additional equipment associated with the Company’s relocation and expansion in March 2004.

Our total liabilities as of June 30, 2004 were approximately $2.3 million compared to approximately $3.65 million as of December 31, 2003. Total debt at June 30, 2004 was $0, compared to $2.0 million on December 31, 2003. Our accounts payable decreased from approximately $420,000 on December 31, 2003 to approximately $30,000 on June 30, 2004. This decrease was caused by the Company paying down its vendor balances utilizing the proceeds from the sale of its common stock and its positive cash flow from operations.

Shareholders’ Equity was approximately $3.5 million at June 30, 2004 compared to approximately $50,000 at December 31, 2003. This increase resulted primarily from our issuing an aggregate of 2,101,478 shares of our common stock for a total of $3.05 million and generating a net profit of approximately $400,000.

Comparison of Operating Results for Six Months ended June 30, 2004 and June 30, 2003

Sales for the six months ended June 30, 2004 increased 231% to approximately $6.3 million from the same period in the prior fiscal year. This increase was due to the addition of new customers over the past year primarily as a result of the continued increase in our sales force.

The gross profits for the six months ended June 30, 2004 were approximately $5.0 million (79% of sales). In contrast the gross profits for the equivalent period in 2003 were approximately $1.5 million (79% of sales).

General and administrative expenses were approximately $4.4 million (69% of sales) for the six months ended June 30, 2004. For the same period last year, the expenses totaled approximately $1.8 million (96% of sales). The percentage decrease in relation to sales is due to our increased sales covering our fixed operating and overhead costs. We expect to continue this trend as we further integrate our acquisitions and continue increasing our revenue in advance of our fixed operating costs.

Our net income for the six months ended June 30, 2004 was approximately $400,000 compared to a net loss of approximately $350,000 for the six months ended June 30, 2003. Basic earnings per common share for the six months ended June 30, 2004 were $0.02 and ($0.02) for the six months ended June 30, 2003. Fully diluted earnings per share for six months ended June 30, 2004 was $0.01 versus ($0.02) for the six months ended June 30, 2003.

Comparison of Operating Results for Three Months Ended June 30, 2004 and June 30, 2003

Sales for the quarter ended June 30, 2004 increased 225% to approximately $3.6 million from the same period in the prior fiscal year.

The gross profits for the quarter ended June 30, 2004 were approximately $2.8 million (78% of sales). In contrast the gross profits for the equivalent period in 2003 were approximately $900,000 (83% of sales). The decrease in our gross profit as a percentage of revenues was in part due to the increase in our operations, engineering and production department to better serve our client base in our search engine enhancement segment.

General and administrative expenses were approximately $2.3 million (65% of sales) for the quarter ended June 30, 2004. For the same period last year, the expenses totaled approximately $1.1 million (97% of sales). We expect our general and administrative expenses to decrease as a percentage of sales as we further integrate our acquisitions and continue increasing our revenue in advance of our fixed operating costs.

Our net income for the quarter ended June 30, 2004 was approximately $280,000 compared to a net loss of approximately $160,000 for the quarter ended June 30, 2003. Basic earnings per common share for the quarter ended June 30, 2004 were $0.01 versus ($0.01) for the quarter ended June 30, 2003. Fully diluted earnings per share for the quarter ended June 30, 2004 was $0.01 versus ($0.01) for the quarter ended June 30, 2003.

Liquidity and Capital Resources

This section describes our balance sheet and liquidity and capital commitments. Our most liquid asset is cash and cash equivalents, which consists of cash and short-term investments. Cash and cash equivalents at June 30, 2004 and December 31, 2004 were approximately $1.3 million and $300,000, respectively. The increase in total cash is resulted from the sale of stock in the first six months of 2004 and the Company generating positive cash flow from operations during this time period.

Cash and cash equivalents consist of cash and short-term investments with original maturities of 90 days or less. Our cash deposits exceeded FDIC-insured limits by approximately $650,000 at various financial institutions. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on cash.

Cash Flows from Operating Activities

We produced, on a net basis, approximately $675,000 in cash from operating activities during the six months ended June 30, 2004, as compared to generating approximately $44,000

during the same period for the fiscal year ended December 31, 2003. This increase in cash from operating activities is primarily a result of the profit generated.

Cash Flows from Investing Activities

We used, on a net basis, approximately $500,000 cash in investing activities during the first six months of 2004 as compared to using approximately $15,000 during the first six months of 2003. This decrease was due primarily to the addition of fixed assets relating to the relocation and expansion of our Websourced division.

We expect to continue our growth in 2004 by expanding our current operations and through acquisitions. We expect that we will incur future capital expenditures relating to this growth. If usage of our websites substantially increases, we may need to purchase additional servers and networking equipment to maintain adequate data transmission speeds, the availability of which may be limited or the cost of which may be significant.

Cash Flows from Financing Activities

We generated approximately $780,000 cash in financing activities during the six months ended June 30, 2004, as compared to utilizing approximately $14,000 during the same period in 2003. The primary source of cash generated from financing activities during the six months ended June 30, 2004, was proceeds, totaling approximately $2.8 million, from the sale of our common stock. The primary use of cash from financing activities during the six months ended June 30, 2004 was to repay principal on outstanding installment debt. During the six months ended June 30, 2004 we repaid principal on this debt totaling $2.15 million. The primary source of cash generated from financing activities during the six months of 2003 was proceeds, totaling approximately $100,000, from the sale of common stock. These proceeds were offset by cash used to repay principal on outstanding debt totaling approximately $140,000.

Segment Analysis

The Company’s operations are divided into operating segments using individual products or services or groups of related products and services. Each segment has separate management that reports to a person that makes decisions about performance assessment and resource allocation for all segments. The Company had one operating segment at June 30, 2004, search engine enhancement. The Company evaluates the performance of each segment using pre-tax income or loss from continuing operations

NET SALES BY INDUSTRY SEGMENT

	Six Months Ended June 30
	2004				2003
	Amount			Percent	Amount		Percent
Search engine enhancement	$	6,303,113		100.00	$	1,904,518	100.00
Total	$		6,303,113	100.00	$	1,904,518	100.00

NET SALES BY INDUSTRY SEGMENT

	Three Months Ended June 30
	2004				2003
	Amount			Percent	Amount		Percent
Search engine enhancement	$		3,563,090	100.00	$	1,096,780	100.00
Total	$	3,563,090		100.00	$	1,096,780	100.00

PRE TAX PROFIT (LOSS) FROM CONTINUING OPERATIONS

	Six Months Ended June 30
	2004			2003
Search engine enhancement	$	780,712		$		(258,768	)
Other	(150,081		)	(91,943			)
Total	$	630,631		$	(350,711		)

PRE TAX PROFIT (LOSS) FROM CONTINUING OPERATIONS

	Three Months Ended June 30
	2004			2003
Search engine enhancement	$	517,000		$		(127,738	)
Other	(75,898		)	(35,125			)
Total	$	441,102		$	(162,863		)

TOTAL ASSETS BY INDUSTRY SEGMENT

	Amount		Percent
Search engine enhancement	$	3,747,058	64.56
Other	2,056,899		35.54
Total	$	5,803,957	100.00

Subsequent Events

The Company has enterd into a letter of intent to acquire privately-held WebCapades, Inc. WebCapades is in the online dating business.

Risk Factors

You should carefully consider the risks described below before purchasing our common stock. Some of our most significant risks and uncertainties are described below; however, they are not the only risks we face. If any of the following risks actually occur, our business,

financial condition, or results or operations could be materially adversely affected, the trading of our common stock could decline, and you may lose all or part of your investment therein.

We may be subject to litigation in regard to the activities of our former subsidiaries. Our former subsidiaries were involved in a wide variety of activities, including general contracting, asbestos abatement, and demolition activities. These activities may result in litigation of some nature against us. We have previously been sued and have settled a lawsuit by paying $1,000,000 in regard to an indemnity agreement signed by us in connection with a construction project in O’Fallon, Missouri, the general contractor of which was originally one of our former subsidiaries. We have signed an indemnity agreement in regard to performance and payment bonds issued by a surety covering a construction project in St. Ann, Missouri, the general contractor of which is one of our former subsidiaries. Although our management does not currently anticipate litigation in regard to the St. Ann construction project, we cannot guarantee that litigation of some type will not occur. In addition, during October 2003, we were threatened with a lawsuit by the St. Louis Construction Laborers Benefit Funds (the “Funds”). The Funds are attempting to collect employee fringe benefit contributions in regard to employees of Safe Environment Corporation of Missouri. We have denied having any obligation in regard to such employee fringe benefit contributions. The Funds have filed a lawsuit entitled Greater St. Louis Construction Laborers Welfare Fund, et al., Plaintiffs, v. Barry Ash, et al., Defendants, Case No. 4:02CV01180 ERW in the United States District Court for the Eastern District of Missouri. One of the defendants in the lawsuit is John Giura, our Vice Chairman and Vice President and our former President and Chief Executive Officer. It is our understanding that this lawsuit has been settled by John Giura, so we do not expect to be added to this lawsuit as an additional defendant. If we are added to this lawsuit as an additional defendant, we intend to vigorously defend the lawsuit. In light of this threatened litigation, we and John Giura have entered into an Indemnification Agreement dated October 22, 2003, pursuant to which John Giura has agreed to indemnify and hold harmless us in regard to any losses arising in connection with this lawsuit. Other litigation relating to our former subsidiaries is possible.

We have lost money historically. We had net losses for the years ended December 31, 2002 and 2001. Our future operations may not be profitable. If we are not profitable in the future, the value of our common stock may fall and we could have difficulty obtaining funds to continue our operations.

We are unlikely to collect all of the money owed to us by GMP, LLC. On August 31, 2002, we sold the stock of Safe Environment Corporation of Indiana (“SECO”) and our interest in Acadian Builders, LLC to GMP, LLC (“GMP”), a limited liability company of which John Giura, our Vice Chairman and Vice President, is a member. In consideration for this sale: (1) GMP was obligated to pay us an aggregate of $175,000 by November 30, 2002, plus certain additional amounts (collectively, the “GMP Contract Payments”); and (2) GMP signed and delivered to us a promissory note for $470,000, which note was payable in the amount of $35,000 per quarter beginning on December 31, 2002 (the “GMP Note”). As security for the obligations of GMP to pay us the GMP Contract Payments and the GMP Note, GMP pledged to us all of the common stock of SECO. Although GMP made partial payments to us on the GMP Contract Payments, GMP defaulted on the remaining GMP Contract Payments owed to us and on the entire GMP Note owed to us. On April 1, 2003 we entered into an agreement (the “GMP Note Restructuring Agreement”) with GMP, SECO and John Giura. Pursuant to the GMP Note Restructuring Agreement, among other things: (1) GMP and SECO agreed to use their best

efforts to cause certain parties to sign agreements pursuant to which an aggregate of $300,000 will be paid to us out of a certain escrow account established in regard to a SECO construction project located in St. Ann, Missouri (the “$300,000 From St. Ann Escrow Agreement”); (2) GMP and SECO agreed to use their best efforts to cause certain parties to sign agreements pursuant to which an aggregate of up to $200,000 will be paid to us in regard to a certain housing development in St. Charles, Missouri (the “$200,000 From St. Charles Housing Development Agreement”); (3) GMP agreed that the remaining GMP Contract Payments would be paid by GMP to us as soon as practicable but in any event no later than July 31, 2003; and (4) we agreed that if GMP and SECO were to deliver the fully signed $300,000 From St. Ann Escrow Agreement and the fully signed $200,000 From St. Charles Housing Development Agreements, and if GMP were to timely make the remaining GMP Contract Payments, and if GMP and John Giura were not in default of any of certain other obligations to us, then the principal amount of the GMP Note to us would be reduced from $470,000 down to $337,495.09, of which $37,495.09 would be paid by GMP to us as soon as practicable but in any event no later than July 31, 2003. To date, the following events have occurred in regard to the GMP Note Restructuring Agreement: (1) On May 7, 2003, we received a fully signed $300,000 From St. Ann Escrow Agreement; (2) On May 5, 2003, we received all but one of the $200,000 From St. Charles Housing Development Agreements; (3) As of March 31, 2004, the remaining unpaid GMP Contract Payments equal $75,074.73; and (4) GMP has failed to make any payments on the GMP Note. We have become aware that GMP and SECO have had severe financial difficulties, including but not limited to restricted access to credit, liquidity problems in regard to non-collection of various receivables, delays in completion of certain projects, delays in the awarding of certain projects, and generally weak conditions within their industry. It is the opinion of our management that GMP does not have the resources to pay all of the remaining unpaid GMP Contract Payments and the GMP Note. Moreover, an insolvency or bankruptcy of either GMP and/or SECO, or a delay or failure by SECO in the completion of the SECO construction project in St. Ann, Missouri, might significantly adversely affect our ability to collect the $300,000 payable to us under the $300,000 From St. Ann Escrow Agreements, the $200,000 payable to us under the $200,000 From St. Charles Housing Development Agreements, the remaining unpaid GMP Contract Payments, or payments due from GMP to us under the GMP Note and, in addition, such an insolvency or bankruptcy could subject us to liability under an indemnity agreement which we signed in regard to the surety bonds issued in regard to the SECO construction project in St. Ann, Missouri. We are currently attempting to negotiate a comprehensive settlement with GMP and John Giura regarding all of the foregoing and certain other matters.

We may not be able to collect all of the money owed to us by The Voice and Data Group, Inc. We terminated our merger agreement with The Voice and Data Group, Inc., among other things, because certain conditions to the consummation of the merger could not be met. There is no guarantee that The Voice and Data Group, Inc. will be able to repay the $100,000 unsecured loan made by us to The Voice and Data Group, Inc. in connection with the merger agreement. As of June 30, 2004, we have written off $50,000 of that $100,000 unsecured loan to The Voice and Data Group, Inc.

The market price of our common stock is highly volatile. The market price of our common stock has been and is expected to continue to be highly volatile. Many factors beyond our control — including announcements of changes in search engine algorithms; technological innovations by other companies; government regulations; marketing, pricing or other actions by

competitors; emergence of new competitors; new products or procedures; concerns about our financial position or operating results; litigation; disputes relating to agreements, patents or proprietary rights; loss of key employees; and many other factors — may have a significant negative impact on the market price of our stock. In addition, the potential dilutive effects of future sales of shares of common stock by stockholders and by us, and the exercise of outstanding warrants and options and subsequent sales of our common stock, could have a material adverse effect on the price of our common stock.

We may not be able to identify, negotiate, finance or close acquisitions. We intend to pursue one or more acquisitions of companies engaged in businesses that may or may not be similar to our WebSourced, Inc. subsidiary. We may not be able to identify or negotiate such acquisitions on acceptable terms or at all. If such acquisitions are successfully identified and negotiated, the terms thereof may require us to incur additional indebtedness or issue equity. We may not be able to obtain such financing on acceptable terms or at all.

The terms and conditions of acquiring businesses could adversely affect the price of our common stock. In order to consummate acquisitions, we may be required to take action that could adversely affect the price of our stock, such as issuing common stock, convertible preferred stock, convertible subordinated debt, or other equity-linked securities, potentially resulting in the dilution of existing shareholders or having other adverse effects upon existing shareholders; undertaking a reverse stock split; changing the name, Board of Directors, or officers of our company; entering into new lines of business; forming business combinations or strategic alliances with potential business partners; or taking other actions. Any one or more of these actions may adversely affect our company and our common stock. Also, our shareholders and other potential investors may not like the management or businesses of the companies we acquire, or the terms of such acquisitions, which may adversely affect our company, the price of our stock, and our ability to raise capital and close acquisitions in the future.

We may be unable to successfully integrate acquired businesses. We may acquire other businesses in the future, which may significantly complicate the management of our company. We may need to integrate widely dispersed operations with different corporate cultures, operating margins, competitive environments, computer systems, compensation schemes, business plans and growth potential. Such integration efforts may not succeed, or may distract our management from servicing our existing clients. Any failure to manage acquisitions successfully could seriously harm our operating results. Also, the acquisition costs could cause our quarterly operating results to vary significantly.

We may experience difficulty in handling growth. We expect to grow both by hiring new employees and by servicing new business and geographic markets. Our growth will place a significant strain on our management and on our operating and financial systems. Our personnel may be inadequate to support our future operations. In order to accommodate the increased size of our operations, we will need to hire, train and retain appropriate personnel to manage our operations.

We depend on the availability of skilled labor, which is difficult to attract and retain. The success of our growth strategy will depend to a significant extent upon our ability to attract, train and retain skilled operational, technical, financial, management, sales and marketing personnel. Competition for skilled personnel is intense. We may not be successful in attracting

and retaining the personnel necessary to conduct our business successfully. If we are unable to attract, hire, assimilate, and retain such personnel, it could have a material adverse effect on our business, financial condition and results of operations. Moreover, even if we are to expand our employee base, the resources required to attract and retain such employees may adversely affect our operating margins.

Our growth heavily depends on our key personnel, the loss of whom would materially adversely affect our business. We believe that our success will depend on the continued employment of certain key personnel, including Gerard M. Jacobs, our President and Chief Executive Officer, and S. Patrick Martin, the President and Chief Executive Officer of our WebSourced, Inc. subsidiary. If one or more of our key management personnel were unable or unwilling to continue their present positions, such persons would be very difficult to replace and our business could be seriously harmed. In addition, we expect that we will find it necessary to offer such key personnel and the independent members of our Board of Directors compensation in the form of stock options and warrants. In addition, if any of WebSourced, Inc.’s key employees joins a competitor or forms a competing company, some of our clients might choose to use the services of that competitor or new company instead of ours.

Weak general economic and business conditions may adversely affect our revenues and operating margins. Weak general economic and business conditions, international tension and wars, terrorism and epidemics, globally, nationally, regionally or locally, may have a significant adverse effect on our revenues and operating margins.

We face competition from many small and various large companies worldwide, some of whom are more established and better capitalized than we are. Competition in technology service markets is intense. If we fail to compete successfully against current or future competitors, our business, financial condition and operating results would be seriously harmed. Because relatively low barriers to entry characterize our current and many prospective markets, we expect other companies to enter our markets. In addition, some of our competitors may develop services that are superior to, or have greater market acceptance than, the services that we offer. Also, if our market sectors appear attractive, then numerous existing companies that have greater financial and human resources may be expected to enter those markets. The superior financial and marketing resources of those potential competitors may provide a substantial advantage to those competitors over us.

We lack long-term contracts with clients. Few if any of our clients retain us under contracts longer than 12 months. As a result, our revenues may be difficult to predict. Because we sometimes incur costs based on expectations of future revenues, our failure to predict future revenues accurately may seriously harm our financial condition and results of operations.

There is a lack of brand awareness of our services. Due to lack of marketing resources, we have not been able to develop any widespread awareness of our brand name. Any increase in our advertising and marketing expenditures could cause our operating margins to decline. In addition, our WebSourced, Inc. subsidiary has hired a public relations firm and we have in the past and may in the future retain an investor relations firm. The cost of such firms will harm our results of operations. Moreover, our brand may be closely associated with the business success or failure of some of our Internet clients, some of who are pursuing unproven business models in competitive markets. As a result, the failure or difficulties of one of our clients may damage our

reputation. If we fail to successfully promote and maintain our brand name or incur significant related expenses, our operating margins and our growth may decline.

A failure by us to meet client expectations could result in losses and negative publicity. Any failure to meet our clients’ expectations could result in: delayed or lost revenues due to adverse client reactions; requirements to provide additional services to clients at no charge; negative publicity regarding our services, which could adversely affect our ability to attract or retain clients; and claims for damages against us, regardless of our responsibility for such failure. We cannot be sure that our contracts will protect us from liability for damages in the event we are sued. Also, if we are sued, the legal fees involved in defending a lawsuit may exceed the amount of the claim in question.

Our success depends upon increased adoption of the Internet and the use of search engines as a means for commerce. Our success depends heavily on the continued use and acceptance of the Internet and of search engines as a means for commerce. The widespread acceptance and adoption of the Internet and search engines for conducting business is likely only in the event that the Internet and search engines provide businesses with greater efficiencies and improvements. If commerce on the Internet and on search engines does not continue to grow, or grows more slowly than expected, our business would be seriously harmed. Consumers and businesses may reject the Internet or search engines as a viable commercial medium or marketing tool for a number of reasons, including: taxes; potentially inadequate network infrastructure; difficulties or dissatisfaction with search engine algorithms; delays in the development of Internet and search engine enabling technologies and performance improvements; delays in the development or adoption of new standards and protocols required to handle increased levels of Internet and search engine activity; delays in the development of security and authentication technology necessary to effect secure transmission of confidential information over the Internet; changes in, or insufficient availability of, telecommunications services to support the Internet and search engines; problems associated with computer hackers and viruses; decreased use of search engines; increased popularity of alternative Internet marketing techniques and strategies; and failure of companies to meet their customers’ expectations in delivering goods and services over the Internet.

Increasing government regulations or taxation could adversely affect our business. We are affected not only by regulations applicable to businesses generally, but also by laws, regulations and taxes directly applicable to eBusiness. Although there are currently few such laws, regulations and taxes, state, federal and foreign governments may adopt a number of these laws, regulations and taxes. Any such legislation, regulation or tax could dampen the growth of the Internet and decrease its acceptance as a communications and commercial medium. If such a decline occurs, companies may decide in the future not to use our services. This decrease in the demand for our services would seriously harm our business and operating results. Any new laws, regulation and taxes may govern, restrict, tax or affect any of the following issues: user privacy; the pricing and taxation of goods and services offered over the Internet; the content of web sites; consumer protection; and the characteristics and quality of products and services offered over the Internet.

We may be unable to protect our intellectual property. We cannot guarantee that we can safeguard or deter misappropriation of our intellectual property. In addition, we may not be able to detect unauthorized use of our intellectual property and take appropriate steps to enforce our

rights. If former employees or third parties infringe or misappropriate our trade secrets, copyrights, trademarks or other proprietary information or intellectual property, our business could be seriously harmed. In addition, although we believe that our proprietary rights do not infringe the intellectual property rights of others, other parties may assert infringement claims against us or claim that we have violated their intellectual property rights. Such claims, even if not true, could result in significant legal and other costs and may be a distraction to our management.

A significant portion of our stock is owned by insiders. Our current Directors and officers and those of our subsidiary WebSourced, Inc., as a group, together with their affiliates, beneficially own a significant percentage of our outstanding shares of common stock. Accordingly, these stockholders will have substantial influence over our policies and management. Voting control over a significant portion of these stockholders’ shares has been transferred, pursuant to irrevocable proxies, to Gerard M. Jacobs, our President and Chief Executive Officer.

We have not paid dividends since our inception and do not expect to do so in the foreseeable future. As a result, our stockholders will not be able to receive any return on their investment without selling their shares. We presently anticipate that all earnings, if any, will be retained for development of our business. Any future dividends will be subject to the discretion of the Board of Directors and will depend on, among other things, our future earnings, operating and financial condition, capital requirements and general business conditions.

Nevada laws may discourage investor purchases of, or mergers or other transactions involving, our stock. Certain Nevada laws limit the circumstances under which a person or entity may acquire a controlling interest in the stock of a Nevada corporation or may cause a merger, consolidation or other “combination” to occur involving a Nevada corporation. These laws may discourage companies or persons interested in acquiring a significant interest in or control of our company, or delay or make such an acquisition or transaction more difficult or expensive to consummate, regardless of whether such an acquisition or transaction may be in the interest of a our stockholders.

Item 3. Control and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation, under the supervision and with the participation of our management, including our chief executive officer and the chief financial officer, of the effectiveness and the design and operation of our disclosure controls and procedures as of June 30, 2004, the end of the period covered by this report. This evaluation was subsequently modified due to the identification of items described below. Based on and as of the date of the foregoing evaluation as modified, we determined that our internal controls over revenue recognition for certain of our contracts at our search engine enhancement segment were deficient, and constituted a material weakness, and therefore our disclosure controls and procedures were not effective as of June 30, 2004.

The deficiencies in our internal controls resulted in improper recognition of revenue at our WebSourced subsidiary. The first deficiency at WebSourced was the lack of adequate objective criteria of the value of services provided to customers to support use of the proportional performance model using the pattern in which value is provided to the customer over the term of the contract to recognize revenue generated by WebSourced. The second deficiency at WebSourced related to the lack of sufficient evidence to support the collectibility of amounts recognized under certain contracts on an accelerated basis.

During the fourth quarter of 2005, we began a process to improve upon our internal controls in an effort to remediate these deficiencies, in part by establishing additional policies and procedures related to revenue recognition. Management is implementing compensating controls and procedures, principally manual checks and additional levels of review as it relates to revenue recognition. In addition, our WebSourced subsidiary now performs a credit check at the time it enters into a contract with a client to determine the appropriate payment terms for the client, which provides an objective basis for our belief that the collectibility of amounts recognized as revenue associated with the client is reasonably assured. Additionally, management has directed our internal audit staff, which reports directly to our audit committee and is not involved in the preparation of our financial statements, to focus on evaluating and documenting our disclosure controls and procedures over financial reporting including revenue recognition. Further, on a going forward basis, our audit committee will review a list of all critical accounting policies and estimates with supporting schedules for each pending acquisition prior to closing. Management has approved and intends to hire additional internal audit staff. To date, we have incurred expenses of approximately $25,000 to remediate these deficiencies in our internal controls. These expenses include the costs of the credit checks and a pro rata portion of the time incurred by our internal audit staff to improve our disclosure controls and procedures over financial reporting. In 2006, we expect these expenses to be approximately $35,000. We anticipate that the material weakness in our disclosure controls and procedures caused by the deficiencies set forth above will be fully remediated during the first quarter of 2006 and prior to the filing of our annual report for the year ended December 31, 2005.

There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The certifications of our chief executive officer and chief financial officer attached as Exhibits 31.1 and 31.2 to this quarterly report on Form 10-QSB/A include, in paragraph 4 of each certification, information concerning our disclosure controls and procedures and internal control over financial reporting. These certifications should be read in conjunction with the information contained in this Item 3 for a more complete understanding of the matters covered by the certifications.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The Company and its WebSourced subsidiary are plaintiffs in a lawsuit entitled CGI Holding Corporation and WebSourced, Inc., Plaintiffs, v. Global Payments, Inc., Defendant, Case No. 03A10759-5, in the State Court of DeKalb County, Georgia. The Defendant has answered the Company’s and WebSourced, Inc.’s Complaint, and has denied any liability, Discovery is currently in progress. Reference is hereby made to the Company’s Form 8-K filed on September 2, 2003. The lawsuit was filed in August, 2003. The Company cannot guarantee the outcome of this litigation.

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

The following sets forth securities sold by us during the quarter ended June 30, 2004 without registration under the Securities Act. Unless otherwise noted, in each case we sold shares of our common stock or warrants to acquire common stock in private transactions to persons we believed were “accredited investors” and/or “sophisticated investors” not affiliated with us unless otherwise noted, and purchasing the shares with an investment intent. Each of the transactions involved the offering of such securities to a substantially limited number of persons.

Each person took the securities as an investment for his/her/its own account, and not with a view to distribution. We relied upon exemptions contained in Section 4(2) of the Securities Act or Regulation D promulgated thereunder in each of these instances. In each case, we did not engage in general solicitation and advertising. In each case where we relied upon exemptions contained in Section 4(2) of the Securities Act, the shares were purchased by investors with whom we, through our officers and directors, had preexisting relationships. Each person had access to information equivalent to that which would be included on a registration statement on the applicable form under the Securities Act. We did not use underwriters for any of the transactions described below; therefore, these transactions did not involve underwriter discounts or commissions.

(1) On April 7, 2004, the Company issued 400 shares of common stock to Clayton Sinclair as part of an exercise of an option.

(2) On April 14, 2004, the Company issued 50,000 shares of common stock to Infopoint, Inc. as part of an exercise of an option.

(3) On April 20, 2004, the Company issued 15,000 shares of common stock to Thomas M. Roeder as part of an exercise of an option.

(4) On April 20, 2004, the Company issued 2,000 shares of common stock to Management Systems as part of an exercise of an option.

(5) On May 25, 2004, the Company issued 3,313 shares of common stock to Kristin Albright as part of an exercise of an option.

(6) On June 3, 2004, the Company issued 200,000 shares of common stock to Carol Schmidt as part of an exercise of an option.

(7) On June 4, 2004, the Company issued 100,000 shares of common stock to Jason Dowdell as part of an asset purchase agreement.

(8) As of July 23, 2004, the Company has 25,491,186 shares of its common stock issued and 22,991,186 outstanding, and the Company has issued options and warrants to purchase a total of 6,509,654 shares of the Company’s common stock at exercise prices ranging from $0.001 to $3.80 per share.

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 NO.

31.1		Certification by Gerard M. Jacobs, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2		Certification by Jody Brown, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1		Certification by Gerard M. Jacobs, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

32.2		Certification by Jody Brown, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

* Filed as part of this document.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, we caused this report to be signed on our behalf by the undersigned, thereunto duly authorized on this 29^th day of December, 2005.

	CGI HOLDING CORPORATION (Registrant)

	By:	/s/ Gerard M. Jacobs
		Gerard M. Jacobs, Director, Chief Executive Officer, Treasurer and Secretary

	By:	/s/ Jody Brown
		Jody Brown, Chief Financial Officer