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 March 31, 2005

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 May 13, 2005 was 33,323,406 shares.

Transitional Small Business Disclosure Format

Yes o No ý

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CGI HOLDING CORPORATION

CONSOLIDATED BALANCE SHEET

MARCH 31, 2005, AS AMENDED

Assets
Current Assets
Cash and Cash Equivalents	$	10,664,207
Restricted Cash	605,002
Accounts Receivable	3,647,973
Allowance for Doubtful Accounts	(200,316		)
Notes Receivable – Related Party	280,175
Deferred Tax Asset	756,937
Prepaid Expenses	1,012,235
Other Current Assets	512,868
Total Current Assets	17,279,081
Property and Equipment, net	1,769,604
Other Assets
Deferred Tax Asset	708,647
Goodwill	17,076,173
Intangible Assets	5,689,760
Other Assets	369,759
Total Other Assets	23,844,338
Total Assets	$	42,893,022

Liabilities and Shareholders’ Equity
Current Liabilities
Current Portion of Long-Term Debt	$	666,509
Accounts Payable	1,303,065
Deferred Revenue	3,090,360
Client Prepaid Media Buys	529,935
Deferred Tax Liabilities	467,378
Accrued Expenses and Other Current Liabilities	671,021
Total Current Liabilities	6,728,268

Long-Term Liabilities	2,202,306
Shareholders’ Equity
Preferred Stock, $.001 par value:
Authorized Shares – 5,000,000 – none issued or outstanding	$	0
Common Stock, $.001 par value:
Authorized Shares – 100,000,000
Issued Shares – 35,823,006
Outstanding Shares – 33,323,006	35,823
Additional Paid in Capital	37,444,463
Accumulated Deficit	(2,977,837		)
Treasury Stock	(540,000		)
Total Shareholders’ Equity	33,962,448
Total Liabilities and Shareholders’ Equity	$	42,893,022

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

CGI HOLDING CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS, AS AMENDED

THREE MONTHS ENDED MARCH 31, 2005 AND 2004

	2005			2004
Net Revenue	$	9,172,479		$	2,740,023
Cost of Revenue	3,226,075			564,868
Gross Profit	$	5,946,405		$	2,175,155
Operating Expenses
Selling, General and Administrative	5,268,247			2,045,432
Amortization of Purchased Intangibles	178,346			0
Income from Operations	$	499,812		$	129,722
Other Income(Expenses)
Interest Income	54,650			0
Interest Expense	(11,088		)	(28,100		)
Other Income(Expense)	0			87,905
Income before Income Taxes	$	543,373		$	189,527
Provision for Income Taxes	204,815			73,195
Net Income	$	338,558		$	116,332

Net Income Per Share
Basic	$	0.01		$	0.01
Fully Diluted	$	0.01		$	0.00

Weighted Average Shares(Basic)	32,672,371			21,209,749
Weighted Average Shares(Fully Diluted)	39,390,940			26,886,223

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

CGI HOLDING CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY, AS AMENDED

				Additional								Total
	Common Stock			Paid In		Accumulated			Treasury			Shareholders’
	Shares	Amount		Capital		Deficit			Stock			Equity
Balance at January 1, 2005	31,484,023	$	33,984	$	30,658,267	$	(3,316,395	)	$	(540,000	)	$	26,835,856

Exercise of Stock Options, Net	209,383	209		122,174								122,383

Purchase Transactions, Net	1,629,600	1,630		6,664,022								6,665,652

Net Profit, March 31, 2005						338,558						338,558

Balance at March 31, 2005	33,323,006	$	35,823	$	37,444,463	$	(2,977,837	)	$	(540,000	)	$	33,962,448

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

THREE MONTHS ENDED MARCH 31, 2005 AND 2004

	2005			2004

Operating Activities
Net Profit	338,558			116,332
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and Amortization	292,700			5,371
Provision for Doubtful Accounts	241,453			9,945
Deferred Taxes	166,780			73,196
Loss on Deposit	0			25,000
Change in operating assets and liabilities:
Restricted Cash	(99,612		)	0
Accounts Receivable	(961,817		)	(149,426		)
Other Assets	(390,610		)	0
Prepaid Expenses	(510,339		)	(57,644		)
Accounts Payable	558,924			(179,232		)
Deferred Revenue	133,589			184,271
Other Accrued Liabilities	(273,686		)	74,357
Net cash (used in) provided by operating activities	(504,060		)	102,170

Investing Activities
Purchases of property and equipment	(182,426		)	(254,251		)
Cash in Acquisitions, Net	(5,583,193		)	0
Other Investing Activities	(20,988		)	(6,205		)
Net cash used in investing activities	(5,786,607		)	(260,456		)

Financing Activities
Principal Payments Made	(295,580		)	(2,152,143		)
Proceeds from Notes Payable	0			140,000
Net proceeds from Equity Transactions, Net	89,935			2,750,000
Net cash (used in)provided by financing activities	(205,646		)	737,857
Net Cash Change	(6,496,313		)	591,571
Cash Balance, January 1	17,160,520			311,849
Cash Balance, March 31	$	10,664,207		$	891,420

Supplemental Information
Interest Paid	$	11,088		$	28,100
Income Taxes Paid	$	391,678		$	24,827

Non Cash Investing and Financing Activities

On January 14, 2005, the Company purchased the stock of the MarketSmart Companies. $3 million of the purchase price was paid utilizing the Company’s common stock along with options valued at $150,000. The Company received net intangible assets of $6,439,941 and net tangible liabilities of ($289,941).

CGI HOLDING CORPORATION

FOOTNOTES TO FINANCIAL STATEMENTS

MARCH 31, 2005 AND 2004

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, and to be reissued concurrently with this filing, 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, 2005 of the correction of the error would have decreased retained earnings as of that date by $2.45 million, net of tax. The effect of the error was material to the years ended December 31, 2004 and 2003 and the respective quarters.

Quarter Ended March 31, 2005

	Previously Reported		As Amended

Revenue	$	10,179,157	$	9,172,479
Cost of Sales	3,226,144		3,226,075
Gross Profit	6,953,012		5,946,405
Selling, General and Administrative	5,571,754		5,446,593
Other Income(Expense)	43,561		43,561
Income Before Taxes	1,424,820		543,373
Income Tax Provision	545,230		204,815
Net Income	$	879,590	$	338,558

Earnings Per Share
Basic	0.03		0.01
Fully Diluted	0.02		0.01

Quarter Ended March 31, 2004

	Previously Reported		As Amended

Revenue	$	3,825,431	$	2,740,023
Cost of Sales	1,460,526		564,868
Gross Profit	2,364,905		2,175,155
Selling, General and Administrative	1,465,241		2,045,432
Other Income(Expense)	59,805		59,805
Income Before Taxes	959,469		189,527
Income Tax Provision	320,778		73,195
Net Income	$	638,691	$	116,332

Earnings Per Share
Basic	0.03		0.01
Fully Diluted	0.02		0.00

March 31, 2005

	As Reported		Adjustment			As Restated
Summarized Consolidated Balance Sheet
Total Current Assets	$	19,841,491	$	(2,562,410	)	$	17,279,081
Total Other Assets	25,629,882		(15,940		)	25,613,942
Total Assets	$	45,471,373	$	(2,578,351	)	$	42,893,022

Total Current Liabilities	$	6,312,268	$	416,000		$	6,728,268
Total Long-Term Liabilities	2,202,306					2,202,306
Shareholders’ Equity	36,956,799		(2,994,351		)	33,962,448
Total Liabilities and Shareholders’ Equity	$	45,471,373	$	(2,578,351	)	$	42,893,022

Reclassification

For comparability, the 2004 financial statements reflect reclassifications where appropriate to conform to the financial statement presentation used in 2005.

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.

The Company recognizes income on monthly and multi-monthly contracts on a straight line basis over the term of the contract.

Personals Plus, Inc.

Revenue is recognized on monthly and multi-monthly subscription contracts on a straight-line basis over the term of the contract.

The MarketSmart Companies

Revenue is recognized in the financial statements in the period in which services are performed.

Kowabunga! Marketing, Inc.

Revenue is recognized the month in which the software is utilized. Customers are invoiced on the first of the month for the monthly services. All overages for the month are billed at the end of the month and are included in the Company’s accounts receivable.

Ozona Online Networks, Inc.

Revenue is recognized in the financial statements in the period in which services are performed.

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 March 31, 2005 was:

Furniture & Fixtures	$	467,985
Equipment	1,018,578
Software	457,924
Leasehold Improvements	166,565
Subtotal	$	2,111,052
Accumulated Depreciation	341,448
Net Property & Equipment	$	1,769,604

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 2005 and 2004.

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.

	Quarter Ending March 31, 2005				Quarter Ending March 31, 2004
	Options		Weighted Average Exercise Price		Options	Weighted Average Exercise Price
Outstanding at beginning of year	4,531,140		$	0.78	4,138,026	$	0.23
Granted	1,650,000		$	5.20	38,225	$	2.36
Forfeited	(500	)	$	2.75	0	N/A
Exercised	0		N/A		0	N/A
Outstanding at end of year	6,180,640		$	1.90	4,176,251	$	0.33

The weighted average grant date fair value of options granted during the first quarter of 2005 was $1.08.

The following table summarizes information about stock options outstanding at March 31, 2005.

Options Outstanding

Range of Exercise Prices	Options Outstanding	Weighted Average remaining contractual life	Weighted Average Exercise Price
$0.13 - $0.99	3,660,661	7.13	$	0.16
$1.00 - $2.49	417,489	4.45	$	1.65
$2.50 - $3.79	85,725	4.41	$	2.87
$3.80 - $6.00	2,016,765	8.28	$	5.08
Total	6,180,640	7.28	$	1.90

The following table summarizes the options exercisable on March 31, 2005.

Options Exercisable

Range of Exercise Prices	Options Exercisable	Weighted Average Exercise Price
$0.13 - $0.99	3,660,661	$	0.16
$1.00 - $2.49	238,058	$	1.32
$2.50 - $3.79	25,725	$	2.75
$3.80 - $6.00	75,000	$	4.12
Total Options Exercisable at March 31, 2005	3,999,444	$	0.32

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:

	March 31, 2005		December 31, 2004
Expected Life(in years)	3.36		2.90
Volatility	48.3	%	61.00	%
Risk Free Interest Rate	3.42	%	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 quarter ended March 31, 2005 and March 31, 2004:

	Quarter Ending March 31, 2005			Quarter Ending March 31, 2004
Net Income, as reported	$	338,558		$	116,332
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of tax	(367,737		)	(4,183		)
Pro forma net income	$	(29,179	)	$	112,149
Earnings per share, as reported:
Basic	$	0.01		$	0.01
Fully Diluted	$	0.01		$	0.00
Pro forma earnings per share:
Basic	$	0.00		$	0.01
Fully Diluted	$	0.00		$	0.00

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.

Contingent Consideration

In connection with certain of the Company’s acquisitions, if certain future internal performance goals are later satisfied, the aggregate consideration for the respective acquisition will be increased. As of December 31, 2004, all additional consideration, if earned, will be paid in the form of cash. Any additional consideration paid will be allocated to goodwill and stock-based

compensation expense. The measurement, recognition and allocation of contingent consideration are accounted for using the following principles:

Measurement and Recognition

In accordance with SFAS No. 141, Business Combinations (“SFAS 141”) contingent consideration is recorded when a contingency is satisfied and additional consideration is issued or becomes issuable. The Company records the additional consideration issued or issuable in connection with the relevant acquisition when a specified internal performance goal is met.

Amount Allocated to Goodwill

In accordance with EITF Issue No. 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination (“EITF 95-8”) and FIN 44, the portion of additional consideration issuable to holders of unrestricted (i.e., not subject to risk of forfeiture) common stock and fully vested options as of the acquisition date is recorded as additional purchase price, as the consideration is unrelated to continuing employment with the Company. Such portion is allocated to goodwill.

Amount Allocated to Stock-Based Compensation Expense

In accordance with EITF 95-8, the value associated with additional consideration related to stock or options that vest between the acquisition date and the date at which the contingency is satisfied is recorded as an immediate charge to stock-based compensation expense at the time of vesting because the consideration is related to continuing employment with the Company.

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:

	2005	2004
Denominator – Shares
Basic weighted-average shares	32,672,371	21,209,749
Effect of dilutive securities	6,718,569	5,676,474
Fully Diluted weighted-average shares	39,390,940	26,886,223

Impact of New Accounting Standards Recent Accounting Pronouncements

Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123 (Revised 2004) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions) with the cost recognized over the period during which an employee is required to provide service in exchange for the award. This statement is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005 and the Company will adopt the standard in the first quarter of fiscal 2006. The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations.

On March 29, 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the Staff’s interpretation of SFAS 123(R). This interpretation expresses the views of the Staff regarding the interaction between SFAS 123(R) and certain SEC rules and regulations and provides the Staff’s views regarding the valuation of share-based payment arrangements by public companies. In particular, this SAB provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods, the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS 123(R) in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123(R), the modification of employee share options prior to adoption of SFAS 123(R) and disclosures in Management’s Discussion and Analysis subsequent to adoption of SFAS 123(R). The Company will adopt SAB 107 in connection with its adoption of SFAS 123(R). The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations.

Intangible Assets and Goodwill

During 2004 and 2005 to date, the Company entered into six purchase agreements in which it allocated a total of $22,832,177 of the purchase price to intangible assets. The following is a schedule of the Company’s intangible assets, by segment, as of March 31, 2005:

Online Dating

	Term	Initial Value		Accumulated Amortization		Net Carrying Value
Goodwill		$	12,209,681	$	0	$	12,209,681
Client List	7 Years	416,000		24,453		391,547
Website Code and Development	5 Years	1,220,584		97,350		1,123,234
Client Relations	6 Months	99,000		51,750		47,250
Totals		$	13,945,265	$	173,553	$	13,771,712

Search Engine Optimization

	Term	Initial Value		Accumulated Amortization		Net Carrying Value
Web Application Tools	5 Years	$	175,000	$	26,250	$	148,750
Goodwill		53,708		0		53,708
Totals		$	228,708	$	26,250	$	202,458

Advertising

	Term	Initial Value		Accumulated Amortization		Net Carrying Value
Goodwill		$	3,424,941	$	0	$	3,424,941
Trade Names		590,000		0		590,000
Employment Agreements	4 Years	535,000		33,437		501,563
Customer Relations	8 Years	1,890,000		39,375		1,850,625
Totals		$	6,439,941	$	72,812	$	6,367,129

Software and Systems Development and Hosting

	Term	Initial Value		Accumulated Amortization		Net Carrying Value
Goodwill		$	1,387,843	$	0	$	1,387,843
Software Code		580,000		5,313		574,687
Employment Agreements	4 Years	471,011		8,907		462,104
Totals		$	2,438,854	$	14,220	$	2,424,634

Company Totals

	Initial Value		Accumulated Amortization		Net Carrying Value
Goodwill	$	17,076,173	$	0	$	17,076,173
Other Intangibles	5,976,595		286,835		5,689,760

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

2005	$	786,325
2006	973,980
2007	967,230
2008	884,123
2009	633,637
Thereafter	854,465
Total	$	5,099,760

Long Term Liabilities

The long term liabilities consisted of the following as of March 31, 2005:

Notes Payable, Net of Current Portion	$	362,867
Deferred Income Tax Payable, Net of Current Portion	1,579,269
Deferred Rent	258,872
Other	1,298
Total	$	2,202,306

Acquisitions

On January 14, 2005, the Company completed its acquisition of the MarketSmart Companies, Raleigh, North Carolina. The MarketSmart Companies provide advertising, public relations, marketing, branding and shopping evaluation services and has been assigned to the Advertising segment. The Company acquired 100% of the voting stock of the MarketSmart Companies through a merger. As a result of the merger, the MarketSmart shareholders received an aggregate of $3 million in cash and one million shares of the Company’s common stock valued at $3 million. In addition, the MarketSmart shareholders may receive an aggregate of up to $100,000 based on the pre-tax earnings of the MarketSmart Companies for the first four full calendar quarters following the closing. In addition, the Company issued options to purchase an aggregate of 240,000 shares of its common stock to the MarketSmart shareholders and the employees of the MarketSmart Companies. The Company’s primary reason for the acquisition was to help it develop into a full marketing agency encompassing both on-line and off-line advertising capabilities.

On February 21, 2005, the Company completed its acquisition of Personals Plus, Inc. (PPI), Apollo Beach, Florida, by acquiring 100 percent of the voting stock. PPI is in the business of owning and operating online dating and relationship websites, including www.swappernet.com and has been assigned to the Online Dating segment. Immediately following the merger, the Company contributed all of the stock of the PPI to its Cherish, Inc. subsidiary. As consideration for the merger, the shareholder of PPI received $2,262,500 in cash and 426,244 shares of Company common stock, valued at $2,262,500. In addition, the Company issued to the shareholder of PPI options to purchase an aggregate of 60,000 shares of Company common stock at $5.30 per share. Further, the shareholder of PPI may receive an aggregate earnout payment of up to $450,000 based on the pre-tax earnings of PPI for the first eight full calendar quarters following the closing. The Company’s primary reasons for the acquisition were to expand its market share in the relevant online dating market.

On February 21, 2005, the Company completed its acquisition of Ozona Online Network, Inc., (“Ozline”), Clearwater, Florida, by acquiring 100 percent of the voting stock. Ozline is in the business of providing online services including web design, custom web-based applications, database systems, managed and shared hosting solutions, e-commerce and high-speed business Internet access and has been assigned to the Software and Systems Development and Hosting segment. As consideration for the merger, the shareholders of Ozline received an aggregate of $300,000 in cash and 75,538 shares of Company common stock valued at $400,000. In addition, the Company issued options to purchase an aggregate of 60,000 shares of Company common stock at $5.30 per share. Further, the shareholders of Ozline may receive an aggregate earnout payment of up to $200,000 based on the pre-tax earnings of Ozline for the first eight full

calendar quarters following the closing. Upon acquiring Ozona Online Network, Inc. during the first quarter of 2005 the Company’s Cherish division no longer receives payments under their lease agreement. The Company completed this acquisition to provide its existing entities with website site hosting and for Ozline’s website and systems development capabilities.

On March 11, 2005 the Company completed its acquisition of KowaBunga! Marketing, Inc. (“Kowabunga!”) by acquiring 100 percent of the voting stock, for an aggregate of $500,000 cash and 127,818 shares of the Company’s common stock valued at $750,000. KowaBunga! is in the business of producing and selling software services related to the marketing of products and services of its customers over the Internet and has been assigned to the Advertising segment. The Company completed this acquisition to help in the development of the Company’s affiliate marketing strategy.

The results of operations for the above acquisitions are included from the date of acquisition in the consolidated financial statements of the Company.

The Company calculated the fair value of the tangible and intangible assets acquired to allocate the purchase prices in accordance with SFAS 141. Based upon those calculations, the purchase price for each of the acquisitions was allocated as follows:

	Net Assets (Liabilities) Assumed		Goodwill and Purchased Intangibles	Deferred Tax Liabilities		Total Consideration
Market Smart	855,516		6,439,941	(959,087	)	6,336,370
Personals Plus	(355,594	)	5,247,790	(268,312	)	4,623,884
Ozona Online	(15,692	)	916,413	(114,439	)	786,283
Kowabunga	16,739		1,522,440	(287,573	)	1,251,606

Accounting for Contingent Consideration

In connection with its prior acquisitions, the merger consideration may be increased as the former stockholders of each entity are entitled to earn a payment in cash contingent upon satisfaction of certain future internal performance goals set forth in the definitive merger agreement. The total amount of future consideration available to the stockholders of each entity will be treated as additional purchase price and allocated to goodwill and are as follows:

	WebCapades		MarketSmart		Ozona Online		Personals Plus		Kowabunga
Balance, January 1, 2005	$	500,000	$	0	$	0	$	0	$	0
Quarter Acquisitions	0		100,000		200,000		450,000		2,250,000
Totals	$	500,000	$	100,000	$	200,000	$	450,000	$	2,250,000

In connection with the acquisition of Kowabunga! Marketing, Inc., the merger acquisition may also be increased as the former shareholders are entitled to earn a payment in stock upon meeting certain performance goals. The maximum amount of stock they may earn is $2,700,000 to be valued after the performance goals are met.

In addition, the former shareholders of the above acquisitions were granted a total of 270,000 options which when vested will be charged to stock based compensation expense (see stock based compensation).

Pro Forma Financial Information

During the quarter ended March 31, 2005, the Company acquired the following businesses in transactions that were accounted for using the purchase method of accounting: 1) acquisition of MarketSmart Companies, 2) Personals Plus, Inc., 3) Ozona Online Networks, Inc. and 4) Kowabunga! Marketing, Inc. The following table summarizes the pro forma results of our operations for the three months ended March 31, 2005 and 2004 as if the acquisitions had occurred on January 1, 2004, instead of their respective later acquisition dates:

	Three Months Ended March 31, 2005		Three Months Ended March 31, 2004
	Historical, as amended	Pro Forma Combined, as amended	Historical, as amended	Pro Forma Combined, as amended
Revenues	9,172,479	10,028,261	2,740,023	7,591,044
Net Income	338,558	432,214	116,332	726,069
Basic Earnings Per Share	0.01	0.01	0.01	0.03
Diluted Earnings Per Share	0.00	0.01	0.00	0.02

The pro forma results are not indicative of the results of operations had the acquisition taken place at the beginning of the year (or future results of the combined companies).

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 four operating segments at March 31, 2005, search engine enhancement, online dating, traditional advertising and software, systems development and hosting. 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

	2005, as amended					2004, as amended
	Amount			Percent		Amount		Percent
Search Engine Enhancement	$	4,810,315		52.44		$	2,740,023	100.00
Online Dating	1,869,944			20.39		0		0.00
Advertising	2,341,698			25.53		0		0
Software, Systems Development and Hosting	193,236			2.11		0		0
Elimination	(42,713		)	(0.47	)	0		0.00
Total	$	9,172,479		100.00		$	2,740,023	100.00

PRE TAX PROFIT FROM CONTINUING OPERATIONS

	2005, as amended			2004, as amended
Search Engine Enhancement	$	312,268		$	264,430
Online Dating	381,724			0
Advertising	160,777			0
Software, Systems Development and Hosting	(268		)	0
Other	(311,128		)	(74,903		)
Total	$	543,373		$	189,527

TOTAL ASSETS BY INDUSTRY SEGMENT

	March 31, 2005, as amended			March 31, 2004, as amended
	Amount		Percent	Amount		Percent
Search Engine Enhancement	$	7,156,071	16.69	$	2,308,023	60.22
Online Dating	15,024,714		35.03	0		0.00
Advertising	8,325,661		19.41	0		0.00
Software, Systems Development and Hosting	3,125,563		7.29	0		0.00
Other	9,261,013		21.59	2,325,909		39.78
Total	$	42,893,022	100.00	$	4,633,932	100.00

Subsequent Events

On April 22, 2005, the Company acquired PrimaryAds Inc. pursuant to a merger agreement. PrimaryAds is an affiliate marketing company specializing in pay for performance advertising. PrimaryAds Merger Sub, a wholly owned subsidiary of the Company, was merged with and into PrimaryAds which, as a result, became a wholly owned subsidiary of the Company. As consideration for the merger, the shareholders of PrimaryAds received an aggregate of $9,950,000 in cash. In addition, the Company issued to the shareholders and employees of PrimaryAds warrants to purchase an aggregate of 146,000 shares of Company common stock. Further, the shareholders of PrimaryAds may receive an aggregate earnout payment of up to $16,000,000 (the “Earnout Payment”) based on the pre-tax earnings of PrimaryAds for the first twelve full calendar quarters following the closing. The first $10,000,000 of the Earnout Payment, to the extent earned, will be paid in shares of Company common stock. The remainder

of the Earnout Payment, to the extent earned, will be paid 50% in cash and 50% in shares of the Company’s common stock. The Company granted to the PrimaryAds shareholders certain registration rights with respect to the shares of the Company’s common stock that may be issued as part of the Earnout Payment.

The Company is in the process of valuing certain intangible assets related to the above acquisition and thus the allocation of the purchase price has not been completed.

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 29 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.

Through a series of acquisitions completed in 2004 and 2005 to date, we now operate our businesses through eight direct wholly owned subsidiaries: WebSourced, Inc., the three companies which make up the MarketSmart Companies, Cherish, Inc., Ozona Online Network, Inc., KowaBunga! Marketing, Inc., and Primary Ads, Inc. We also operate through one indirect wholly owned subsidiary, Personals Plus, Inc. which is a direct, wholly owned subsidiary of Cherish, Inc.

On March 18, 2005, we entered into a letter of intent to acquire Vintacom Media Group Inc. Located in Alberta, Canada, Vintacom operates several dating properties including DreamMates.com, SingleMe.com, PassionatePersonals.com and The Relationship Exchange. Finally, on March 25, 2005, we entered into a letter of intent to acquire Real Estate School Online, Inc. Located in Miami, Florida, Real Estate School is a leading provider of online education products and services specializing in delivering fully accredited real estate licensing and continuing education courses in the States of Florida and Georgia.

We have also entered into a letter of intent to acquire privately held Morex Marketing Group, LLC, a New York limited liability company (“Morex”) which owns the Internet website www.Babytobee.com. Through Babytobee.com, Morex has developed a model for direct marketing to expectant parents, primarily via the Internet.

We have also entered into a letter of intent to acquire privately held Member’s Edge, LLC, a Delaware limited liability company (“Member’s Edge”), a provider of value-added consumer services.

We have begun doing business under the name “Think Partnership Inc.” At our next annual meeting of shareholders we will seek approval to formally change our legal name to Think Partnership 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.

• Online Dating Segment. We recognize income on monthly and multi-monthly subscription contracts on a straight line basis over the term of the contract.

• Affiliate Marketing Segment. We recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements.” Under SAB 104, we recognize revenue when the following criteria have been met: persuasive evidence of an arrangement exists, the fees are fixed and determinable, we have no significant obligations that remain and collection of the related receivable is reasonably assured. Revenue is recognized when the related services are performed, provided that no significant obligations of ours remain, the collection of the resulting receivable is reasonably assured and the fees are fixed and determinable. Additionally, consistent with the provisions of EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” the Company recognizes revenue as an agent in affiliate marketing transactions. Accordingly, service fee revenue is recognized on a net basis as any affiliate expenses are the responsibility of the Company’s advertising customer.

• Software, Systems Development and Hosting Segment. For the Kowabunga subsidiary we recognize revenue the month in which the software is utilized. Customers are invoiced on the first of the month for the monthly services. All overages for the month are billed at the end of the month and are included in our accounts receivable. For the Ozline subsidiary we recognize revenue through a monthly hosting fee and additional usage fees as provided.

• Advertising. The Company is a full-service advertising agency offering primarily management services to manage the promotion of a customer’s marketing communication, which can include in-house creative and production services. Management service is recognized through a monthly management fee. In- house creative and production service revenue is recognized in the period in which the services are provided.

• 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.

• Recently our Search Engine Enhancement segment has experienced significant collection issues despite our efforts to aggressively pursue delinquent accounts through collection agencies and legal avenues.

• 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.

• Additional consideration payable in connection with certain acquisitions, if earned, is accounted for using the following principles:

• In accordance with SFAS No. 141, Business Combinations (“SFAS 141”) contingent consideration is recorded when a contingency is satisfied and additional consideration is issued or becomes issuable. We record the additional consideration issued or issuable in connection with the relevant acquisition when the contingency is satisfied.

• In accordance with EITF Issue No. 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination (“EITF 95-8”) and FIN 44, the portion of additional consideration issuable to holders of unrestricted (i.e. not subject to risk of forfeiture) common stock and fully vested options as of the acquisition date is recorded as additional purchase price because the consideration is unrelated to continuing employment with us and is allocated to goodwill.

• In accordance with EITF 95-8, the value associated with additional consideration related to stock or options that vest between the acquisition date and the date at which the contingency is satisfied is recorded as an immediate charge to stock-based compensation expense at the time of vesting because the consideration is related to continuing employment with us or the acquired subsidiary.

• 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.

Impact of New Accounting Standards Recent Accounting Pronouncements

SFAS No. 123 (Revised 2004), Share-Based Payment, issued in December 2004, is a revision of FASB Statement 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. The Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123 (Revised 2004) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions) with the cost recognized over the period during which an employee is required to provide service in exchange for the award. This statement is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005 and the Company will adopt the standard in the first quarter of fiscal 2006. The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations.

Comparison of Financial Condition at March 31, 2005 and December 31, 2004

Our total assets as of March 31, 2005 were approximately $42.9 million compared to approximately $32.4 million as of December 31, 2004. This increase was attributable to many factors. During the first three months of 2005 we acquired MarketSmart Advertising, Inc., RightStuff Inc. d/b/a Bright Idea Studio, CheckUp Marketing, Inc. (collectively, the “MarketSmart Companies”), Personals Plus, Inc., Ozona Online Network, Inc., and Kowabunga! Marketing, Inc. As a result of these acquisitions, we acquired approximately $14.1 million in intangible assets and allocated approximately $9.35 million to goodwill during 2005. Our accounts receivable increased approximately $1.65 million, from approximately $2.0 million on December 31, 2004 to $3.65 million of March 31, 2005. A portion of this increase ($960,000) is attributable to internal growth and $700,000 is attributable to acquisitions. Our cash and cash equivalents decreased from approximately $17.2 million on December 31, 2004 to $10.6 million on March 31, 2005. The decrease was primarily the result of acquisitions utilizing $5.6 million in cash.

Our total liabilities as of March 31, 2005 were approximately $8.9 million compared to approximately $5.6 million as of December 31, 2004. Total debt at March 31, 2005 was approximately $1.0 million, compared to $1.0 million on December 31, 2004. Our accounts payable increased from approximately $700,000 on December 31, 2004 to approximately $1.3 million on March 31, 2005. This increase was caused by internal growth of $400,000 and acquisitions of $200,000.

Shareholders’ Equity was approximately $34.0 million at March 31, 2005 compared to approximately $26.8 million at December 31, 2004. This increase resulted primarily from our issuing an aggregate of 1,629,400 shares of our common stock in connection with our acquisitions and our generating approximately $340,000 of net income during the three months ended March 31, 2005.

Comparison of Operating Results for Three Months ended March 31, 2005 and March 31, 2004

Sales for the three months ended March 31, 2005 increased 234% to approximately $9.2 million from the same period in the prior fiscal year. Sales from our search engine enhancement segment increased from approximately $2.7 million to approximately $4.8 million during this period. 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. Additionally, during 2004 and the first three months of 2005, as a result of our acquisitions, we entered into the online dating, advertising and software development and hosting segments. Sales from these segments were approximately $4.4 million during the first three months of 2005. We did not begin entering these segments until the third quarter of 2004. We expect to continue to grow as we acquire and integrate new businesses and expand our current businesses.

The gross profits for the three months ended March 31, 2005 were approximately $5.9 million (65% of sales). In contrast the gross profits for the equivalent period in 2004 were approximately $2.2 million (79% 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. As well, the Company has entered into business segments that traditionally have lower gross profit percentages including its advertising and web development segments.

General and administrative expenses were approximately $5.5 million (59% of sales) for the three months ended March 31, 2005. For the same period last year, the expenses totaled approximately $2.05 million (75% 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 three months ended March 31, 2005 was approximately $340,000 compared to approximately $116,000 for the three months ended March 31, 2004. Basic earnings per common share for the three months ended March 31, 2005 were $0.01 and $0.01 for the three months ended March 31, 2004. Fully diluted earnings per share for three months ended March 31, 2005 was $0.01 versus $0.00 for the three months ended March 31, 2004.

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 March 31, 2005 and December 31, 2004 were approximately $10.7 million and $17.2 million, respectively. During the three months ended March 31, 2005 we used cash primarily to fund acquisitions.

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 $9.65 million 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.

On June 15, 2005, we signed a Commercial Loan Commitment Letter from Wachovia Bank, National Association that will permit us to borrow up to $15.0 million. Our existing line of credit with Wachovia Bank, which allows us to borrow up to $5.0 million, will be replaced by this new facility, and any amounts outstanding under the $5.0 million line of credit will be paid off with proceeds from the new facility. The Commercial Loan Commitment Letter is subject to the negotiation and signing of definitive agreements and contemplates the following principal terms of the line of credit:

• Borrowings of up to $15 million.

• Borrowings will not exceed 1.75 times our 12-months trailing EBITDA.

• Borrowings will be used solely for working capital purposes and for acquisitions that are materially in the same line of business as us and are cash flow accretive.

• The line of credit facility will have a term of 36 months.

• The interest rate will be 1-month LIBOR plus 2.10 percent.

• Payments will be interest only until the maturity date of the line of credit.

Borrowings under the line of credit will be secured by a first lien security interest on all of our assets.

Cash Flows from Operating Activities

We used, on a net basis, approximately $500,000 in cash from operating activities during the three months ended March 31, 2005, as compared to generating approximately $100,000 during the same period for the fiscal year ended December 31, 2004. This decrease in cash from operating activities is primarily a result of a greater increase to our accounts receivable during the three months ended March 31, 2005 as compared to during the three months ended March 31, 2004, offset by an increase in our accounts payable during the same period. Our accounts receivable increased from $2.0 million on December 31, 2004 to $3.65 million on March 31, 2005. A portion of this increase ($960,000) is attributable to internal growth and $700,000 of this increase is attributable to acquisitions. Our prepaid expenses increased by $510,000, primarily the result of federal and state income taxes paid of $370,000 through the first three months which will be refundable. Our accounts payable, accrued expenses, other current liabilities and deferred revenue increased from $3.5 million on December 31, 2004 to $5.05 million on March 31, 2005. The increase of $1.55 million is primarily attributable to acquisitions.

Cash Flows from Investing Activities

We used, on a net basis, approximately $5.8 million cash in investing activities during the first three months of 2005 as compared to using approximately $260,000 during the first three months of 2004. This increase was due primarily to our acquisitions during the first three months of 2005, for which we used approximately $5.6 million cash.

We expect to continue our growth in 2005 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 used approximately $200,000 cash in financing activities during the three months ended March 31, 2005, as compared to generating approximately $740,000 during the same period in 2004. The primary use of cash from financing activities during the three months ended March 31, 2005 was to repay principal on outstanding installment debt related to prior acquisitions. During the three months ended June 30, 2005 we repaid principal on this debt totaling $300,000. The primary source of cash generated from financing activities during the three months of 2004 was proceeds, totaling approximately $2.8 million, from the sale of common stock. These proceeds were offset by cash used to repay principal on outstanding debt totaling approximately $2.15 million.

Segment Analysis

NET SALES BY INDUSTRY SEGMENT

	2005					2004
	Amount			Percent		Amount		Percent
Search Engine Enhancement	$	4,810,315		52.44		$	2,740,023	100.00
Online Dating	1,869,944			20.39		0		0.00
Advertising	2,341,698			25.53		0		0
Software, Systems Development and Hosting	193,236			2.11		0		0
Elimination	(42,713		)	(0.47	)	0		0.00
Total	$	9,172,479		100.00		$	2,740,023	100.00

PRE TAX PROFIT FROM CONTINUING OPERATIONS

	2005			2004
Search Engine Enhancement	$	312,268		$	264,430
Online Dating	381,724			0
Advertising	160,777			0
Software, Systems Development and Hosting	(268		)	0
Other	(311,128		)	(74,903		)
Total	$	543,373		$	189,527

TOTAL ASSETS BY INDUSTRY SEGMENT

	March 31, 2005			March 31, 2004
	Amount		Percent	Amount		Percent
Search Engine Enhancement	$	7,156,071	16.69	$	2,308,023	60.22
Online Dating	15,024,714		35.03	0		0.00
Advertising	8,325,661		19.41	0		0.00
Software, Systems Development and Hosting	3,125,563		7.29	0		0.00
Other	9,261,013		21.59	2,325,909		39.78
Total	$	42,893,022	100.00	$	4,633,932	100.00

Subsequent Events

PrimaryAds, Inc.

Risk Factors

Our limited operating history and relatively new business model in emerging and rapidly evolving markets make it difficult to evaluate our future prospects. We have only a limited operating history, have lost money during two of the last four years ended December 31, 2004. There is no assurance we will generate net income in future periods. Failure to generate net income could have a material adverse effect on the trading price of our common stock.

We may not be able to identify, negotiate, finance or close acquisitions. A significant component of our growth strategy focuses on acquiring additional companies or assets, including businesses or assets in new or additional lines of business. We may not, however, be able to identify or acquire companies or assets on acceptable terms if at all. Failure to acquire additional companies or assets on acceptable terms, if at all, would have a material adverse effect on our ability to increase assets, revenues and net income and on the trading price of our common stock.

The terms and conditions of any acquisition could require us to take actions that would not require your approval. In order to acquire certain companies or assets, we may issue additional shares of common or preferred stock, borrow money or issue debt instruments including debt convertible into capital stock. We may take any of these actions without seeking your approval even if these actions dilute your economic or voting interest as a shareholder.

We may be unable to successfully integrate acquired businesses. Even if we are able to acquire additional companies or assets, we may not be able to successfully integrate these companies or assets. For example, 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 requiring significant management time and attention. Failure to successfully integrate acquired businesses could have a material

adverse effect on our business, results of operations and financial condition and the trading price of our common stock.

We cannot assure you that we will effectively manage our growth. We have experienced rapid growth and demand in our businesses. The continued growth and expansion of our businesses, including new service offerings and new geographic markets, requires significant management time as well as, operational and financial resources. There is no assurance that we will be able to continue managing our growth or that we will have the operational or financial resources necessary to manage our growth. Failure to do so could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We depend on the availability of skilled labor, which is difficult to attract and retain. The success of our growth strategy depends to a significant degree 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 necessary personnel. Failure to attract, train, and retain skilled personnel could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our future growth heavily depends on our key personnel, the loss of whom would materially adversely affect our business. Our ability to grow depends on our ability to retain certain key personnel, including Gerard M. Jacobs, our president and chief executive officer, and S. Patrick Martin, the president and chief executive officer of WebSourced. We do not have an employment agreement with Mr. Jacobs. Further, if we lost one or more of these key persons, we could be required to spend significant time, attention and money in finding replacements. There is no assurance we would be able to find similarly qualified replacements which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We lack long-term contracts with clients. Few if any of our clients retain us under contracts longer than twelve months. As a result, our revenues may be difficult to predict and may vary significantly. Because we sometimes incur costs based on expectations of future revenues, our failure to predict future revenues accurately could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our brands are not well known. We have not been able to develop widespread awareness of our brands. Moreover, our brands may be closely associated with the success or failure of some of our Internet clients, some of whom are pursuing unproven business models in competitive markets. Lack of brand awareness or the failure or difficulty of one of our clients may damage our reputation, all of which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our business depends in part on the growth and maintenance of the Internet and telecommunications infrastructure. The success of our business depends in part on the continued growth and maintenance of the Internet and telecommunications infrastructure. This

includes maintaining a reliable network backbone with the necessary speed, data capacity and security for providing reliable Internet services. Internet infrastructure may be unable to support the demands placed on it if the number of Internet users continues to increase or if existing or future Internet users access the Internet more often or increase their bandwidth requirements. We have no control over the providers of access services to the Internet. Regional and national telecommunications outages have caused our online dating business to experience service interruptions during which our users could not access our subscription-based services. Interruptions, delays or capacity problems with any points of access between the Internet and our websites could adversely affect our ability to provide services to users of our websites. The temporary or permanent loss of all or a portion of our services on the Internet, the Internet infrastructure generally, or our users’ ability to access the Internet, could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

The telecommunications industry is a regulated industry. Amendments to current regulations could disrupt or adversely affect the profitability of our business. In addition, if any of our current agreements with telecommunications providers are terminated, we may not be able to replace the terminated agreement on favorable terms and conditions, if at all. There can be no assurance that we will be able to renew any of our current agreements when they expire or expand our agreements on favorable terms, if at all, all of which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Growth of our business depends upon increased adoption of the Internet and the use of search engines as a means for commerce. The growth of our business depends heavily on the continued use and acceptance of the Internet and of search engines as a means for commerce. If commercial use of the Internet and search engines does not continue to grow, or grows more slowly than expected, our business and prospects would be seriously harmed. Individuals and businesses may reject the Internet or search engines as a viable commercial medium or marketing tool. Failure of the Internet and search engines to grow as a means of commerce would have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We compete with many companies, some of whom are more established and better capitalized than us. We compete with a variety of companies on a worldwide basis. Some of these companies are larger and better capitalized than us. There are also few barriers to entry in our markets and thus above average profit margins will likely attract additional competitors. Further, our online dating business competes with traditional dating and personals services, as well as with newspapers, magazines and other traditional media companies that provide dating and personals services. In addition, our competitors may develop services that are superior to, or have greater market acceptance than our services. For example, many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources and larger customer bases than us. These factors may allow our competitors to respond more quickly than we can to new or emerging technologies and changes in customer requirements. Our competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies which may allow them to build larger registrant and membership

bases. In addition, current and potential competitors are making, and are expected to continue to make, strategic acquisitions or establish cooperative, and, in some cases, exclusive relationships with significant companies or competitors to expand their businesses or to offer more comprehensive products and services. To the extent these competitors or potential competitors establish exclusive relationships with major portals, search engines and ISPs, our ability to reach potential members through online advertising may be restricted. Any of these competitors could cause us difficulty in attracting and retaining registrants and converting registrants into members and could jeopardize our existing affiliate program and relationships with portals, search engines, ISPs and other Internet properties. Failure to compete effectively including by developing and enhancing our services offerings would have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Search Engine Optimization may become more difficult or less desirable over time. Search engines generally seek to rank websites based upon their degree of relevancy to the key words in question. The search engines are frequently changing their algorithms and criteria in order to try to prevent their rankings from being manipulated creating a risk that over time the search engines may succeed in limiting the efficacy of our services either through continued refinement of their ranking system or in some other way hindering search engine optimization efforts. The search engine optimization industry is relatively new with limited technological barriers to entry. Increased competition over time may reduce the overall efficiency of our efforts as other competitors produce similar results for their clients. Search engines are increasing the number of “pay per click” listings in their search results, generally lessening the desirability of our SEO services. Although we perform “pay per click” campaign management, there is no assurance that the revenues from “pay per click” campaign management will offset any decline in demand for our SEO services. All of these factors could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Increasing government regulations or taxation could adversely affect our business. We are affected not only by regulations applicable to businesses generally, but also by federal, state, local and foreign laws, rules, regulations and taxes directly applicable to electronic communications, telecommunications and the Internet. Laws and regulations related to the Internet are becoming more prevalent, and new laws and regulations are under consideration in various jurisdictions. Many areas of law affecting the Internet remain unsettled, and it may take years to determine whether and how existing laws such as those governing consumer protection, intellectual property, libel and taxation apply to the Internet. New, or amendments to existing, laws and regulations, including laws and regulations that govern, restrict, tax or affect things such as user privacy, the pricing and taxation of goods and services offered over the Internet, the content of websites, access to websites, linking of websites, outgoing email solicitations, consumer protection and the characteristics and quality of products and services offered over the Internet could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

The ability of our online dating business to generate cash flow and operating profits depends on a number of factors that are difficult to predict. The ability of our online dating business to generate cash flow and profits, if any, depends on acceptance of online dating services and our ability to, among other things, (1) create and increase brand awareness and

attract and retain a large number of members and subscribers, including converting members into paying subscribers; (2) maintain current, and develop new, relationships with portals, search engines, ISPs and other Internet properties and entities capable of attracting individuals who might subscribe to our fee-generating services; (3) implement expansion plans or integrate newly acquired companies, including controlling the costs associated with expansion or acquisitions; (4) control general infrastructure costs including the amount and timing of operating and capital expenditures; (5) introduce new websites, features and functionality on a timely basis; (6) achieve economies of scale across our various websites; (7) protect our data from loss or electronic or magnetic corruption; (8) provide failure and disaster recovery programs; (9) upgrade our technology and protect our sites from technology failures; and (10) anticipate and adapt to changing Internet business strategies. Failure to accurately predict or respond to these factors could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We need to attract and retain a large number of paying members on an ongoing basis. Our online dating business must attract and retain a large number of paying members. To do so, we must continue to invest significant resources in order to enhance our existing products and services and to introduce new high-quality products and services. There is no assurance we will have the resources, financial or otherwise, required to enhance or develop services. Further, if we are unable to predict user preferences or industry changes, or if we are unable to modify our products and services on a timely basis, we may lose existing members and may fail to attract new registrants. Failure to enhance or develop services or to respond to the needs of our members in an effective or timely manner could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our member acquisition costs may increase significantly. The member acquisition costs of our online dating business depend in part upon our ability to purchase advertising at a reasonable cost. Advertising costs vary over time, depending upon a number of factors, some of which are beyond our control. Historically, we have used online advertising as the primary means of marketing our services. In general, the costs of online advertising have increased substantially and are expected to continue to increase as long as the demand for online advertising remains robust. We may not be able to pass these costs on in the form of higher user fees. Continuing increases in advertising costs could thus have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our online dating business must keep pace with rapid technological change to remain competitive; our services are not well-suited to many alternate Internet access devices. Our online dating business operates in a market characterized by rapidly changing technology, evolving industry standards, frequent new product and service announcements, enhancements, and changing customer demands. We must adapt to rapidly changing technologies and industry standards and continually improve the speed, performance, features, ease of use and reliability of our services. Introducing new technology into our systems involves numerous technical challenges, requires substantial amounts of capital and personnel resources, and often takes many months to complete. We may not successfully integrate new technology into our websites on a timely basis, which may degrade the responsiveness and speed of our websites. Technology, once integrated, may not function as expected. In addition, the number of people who access the Internet through devices other than desktop and laptop computers, including mobile telephones

and other handheld computing devices, has increased dramatically in the past few years. The lower resolution, functionality and memory currently associated with mobile devices makes the use of our online dating services through mobile devices more difficult and generally impairs the member experience relative to access via desktop and laptop computers. Failure to attract and retain a substantial number of mobile device users to our online dating services, or failure to develop services that are more compatible with mobile communications devices, or failure to generally keep pace with the rapid technological change could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our online dating services may be interrupted due to problems with our server, our network hardware and software, or our inability to obtain network capacity. The performance of our server and networking hardware and software infrastructure is critical to our business and reputation and our ability to attract Internet users, advertisers, members and e-commerce partners to our websites and to convert members to subscribers. We have experienced occasional system interruptions as a result of unexpected increases in usage. We cannot assure you we will not incur similar or more serious interruptions in the future. An unexpected or substantial increase in the use of our websites could strain the capacity of our systems, which could lead to a slower response time or system failures. Any slowdowns or system failures could adversely affect the speed and responsiveness of our websites and would diminish the experience for our members and visitors. Further, 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. Any system failure that causes an interruption in service or a decrease in the responsiveness of our websites could reduce traffic on our websites and, if sustained or repeated, could impair our reputation and the attractiveness of our brands all of which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock. Furthermore, we rely on many different hardware and software systems. Failure of these systems or inability to rapidly expand our transaction-processing systems and network infrastructure in response to a significant unexpected increase in usage could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

The failure to establish and maintain affiliate agreements and relationships could limit the growth of our online dating business. We have entered into, and expect to continue to enter into, arrangements with affiliates to increase our member base, increase traffic to our websites and enhance our brands. If any of the current agreements are terminated, we may not be able to replace the terminated agreement with an equally beneficial arrangement. We cannot assure you that we will be able to renew any of our current agreements when they expire on acceptable terms, if at all. We also do not know whether we will be successful in entering into additional agreements or that any relationships, if entered into, will be on terms favorable to us. Failure to establish and maintain affiliate agreements and relationships could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our online dating business relies on a number of third-party providers, and their failure to perform or termination of our relationships with them could harm our business. We rely on third parties to provide important services and technologies to our online dating business, including third parties that manage and monitor our onsite data center, Internet services providers and credit card processors. In addition, we license technologies from third parties to facilitate our ability to provide our services. Any failure on our part to comply with the terms of these licenses could result in the loss of our rights to continue using the licensed technology, and we could experience difficulties obtaining licenses for alternative technologies. Furthermore, any failure of these third parties to provide these and other services, or errors, failures, interruptions or delays associated with licensed technologies, could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our online dating business may incur liability for information retrieved from or transmitted through its websites or websites linked to it. Because our online dating business publishes or makes various information available on its websites or though linked websites, we may be sued for, or incur liability related to, defamation, civil rights infringement, negligence, copyright or trademark infringement, invasion of privacy, personal injury, product liability or other legal claims. Our online dating business also offers email services subjecting us to liabilities or claims relating to unsolicited email or spamming, lost or misdirected messages, security breaches, illegal or fraudulent use of email or interruptions or delays in email service. Our insurance does not specifically provide coverage for liability or expenses for these types of claims or losses. Liability or expense relating to these types of claims could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our online dating business could be significantly impacted by the occurrence of natural disasters such as hurricanes and other catastrophic events. The data center for our online dating business is located in Clearwater, Florida and is therefore susceptible to damage from hurricanes or other tropical storms. We do not have adequate back-up. We may not be able to prevent outages and downtime caused by these storms or other events out of our control, which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We must continually seek new members to maintain or increase our current level of revenue. Internet users, in general, and users of online personal services specifically, freely navigate and switch among a large number of websites. We cannot assure you that we will be able to add more members than we lose each month. Failure to increase our membership on a cost-effective basis could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

The display of adult content on our websites could be restricted by regulation. We display adult content on some of our websites. The display of adult content is subject to significant regulation. Changes or increases in these regulations could restrict our ability to provide adult content in various jurisdictions. Any increase in these regulations or restrictions on the content that may be provided on our website could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We face certain risks related to the physical and emotional safety of the users of our online dating websites. We cannot control the offline behavior of users of our websites. There is a possibility that one or more of the users of our websites could be physically or emotionally harmed following interaction with another user of our websites. We do not and cannot screen the users of our websites, and cannot ensure personal safety on a meeting arranged following contact initiated via our websites. If an unfortunate incident were to occur in a meeting of people following contact initiated on one of our websites or a website of one of our competitors, any resulting negative publicity could materially and adversely affect the online dating industry in general and our business in particular and could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock. In addition, the affected users of our websites might initiate legal action against us, which could cause us to incur significant expense, regardless of whether liability is imposed on us which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We may incur liability if we fail to adequately protect personal information. Our online dating business handles personally identifiable information pertaining to our members and visitors residing in the United States as well as foreign countries. Many jurisdictions have adopted privacy, security, and data protection laws and regulations intended to prevent improper use and disclosure of personally identifiable information. In addition, some jurisdictions impose database registration requirements for which significant monetary and other penalties may be imposed for failure to comply. These laws, which are subject to change and may be inconsistent, may impose costly administrative requirements, limit our handling of information, and subject us to increased government oversight and financial liabilities all of which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Security breaches and inappropriate Internet use could damage our business. Concerns over the security of transactions conducted on the Internet and the privacy of users may inhibit the growth of the Internet and other online services generally, and online commerce in particular. Failure to successfully prevent security breaches could significantly harm our business and expose us to lawsuits. Anyone who is able to circumvent our security measures could misappropriate proprietary information, including customer credit card and personal data, cause interruptions in our operations, or damage our brand and reputation. Breach of our security measures could result in the disclosure of personally identifiable information and could expose us to legal liability. We cannot assure you that our financial systems and other technology resources are completely secure from security breaches or sabotage. We have experienced security breaches and attempts at “hacking.” We may be required to incur significant costs to protect against security breaches or to alleviate problems caused by breaches. Further, any well-publicized compromise of our security or the security of any other Internet provider could deter people from using our services or the Internet to conduct transactions that involve transmitting confidential information or downloading sensitive materials, which might adversely affect our online dating business. All of these factors could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Computer viruses could damage our business. Computer viruses, worms and similar programs may cause our systems to incur delays or other service interruptions and could damage our reputation and ability to provide our services and expose us to legal liability, all of which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We are exposed to risks associated with credit card fraud and credit payment. Many of our customers use credit cards to pay for our services. We have suffered losses, and may continue to suffer losses, as a result of membership orders placed with fraudulent credit card data, even though the associated financial institution approved payment. Under current credit card practices, a merchant is liable for fraudulent credit card transactions when the merchant does not obtain a cardholder’s signature. A failure to adequately control fraudulent credit card transactions would result in significantly higher credit card-related costs and could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We may be unable to protect our intellectual property. We cannot guaranty 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. These claims, even if not true, could result in significant legal and other costs all of which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our affiliate marketing business relies on a third-party software technology provider which has threatened to discontinue its services, and its failure to continue to provide such services could irreparably harm our business. We rely on Direct Response Technologies, Inc. (“DRT”) to provide important software technology services to PrimaryAds Inc. (“PrimaryAds”), our affiliate marketing business, pursuant to a written Agreement (the “Direct Track Agreement”). DRT has threatened to terminate the Direct Track Agreement unless we agree to direct PrimaryAds to only purchase software technology services from DRT, and to commit that we and all of our subsidiaries including KowaBunga! Marketing, Inc. (“KowaBunga”) -- a direct competitor of DRT -- will not compete with the network version of DRT’s software technology. To date we have been unable to obtain adequate assurances from DRT that it will not terminate its software technology services to PrimaryAds. We may seek among other things preliminary injunctive relief, and thereafter a permanent injunction, directing DRT to continue (as it is contractually obligated) to provide PrimaryAds access to and use of DRT’s software technology, and not to diminish or degrade the scope and quality of the services provided to PrimaryAds. If DRT is successful in terminating its software technology services to PrimaryAds, then our PrimaryAds business could suffer irreparable harm including but not limited to the destruction of its business, and loss of goodwill and reputation with its valued customers. This could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock. DRT has also refused to return certain information regarding

PrimaryAds’ business that is currently in DRT’s possession and control. If DRT is successful in refusing to provide this information, then our PrimaryAds business could suffer additional irreparable harm including but not limited to the further destruction of its business, and loss of goodwill and reputation with its valued customers. This could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock. Moreover, we expect this litigation to be expensive, both in terms of legal fees and expenses that we will be forced to expend, and in terms of the management time of our officers and the officers of our subsidiaries, including PrimaryAds and KowaBunga, that will be required during the course of this litigation. This could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We may incur legal fees and expenses, and possibly losses, in regard to a troubled construction project in St. Ann, Missouri. We have become aware that various disputes regarding the completion of certain work performed on a construction project in St. Ann, Missouri, have occurred and are scheduled to be arbitrated sometime during 2005. Further, we may be required to pay amounts under an indemnity agreement we have with the surety for the St. Ann project. There is no assurance we will be able to recover any amounts that we pay from a person who has agreed to indemnify us for these losses or expenses. Failure of this person to indemnify us could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

A significant portion of our stock is owned or controlled by insiders. Our officers, directors or entities controlled by us or these individuals own or control a significant portion of our common stock. Accordingly, these persons have substantial influence over our policies and management. We may take actions supported by these individuals that may not be viewed by some stockholders to be in our best interest.

We have not paid dividends since our inception and do not expect to do so in the foreseeable future. We have never paid dividends on our common stock and have no plans to do so for the foreseeable future. We presently anticipate that all earnings, if any, will be retained to develop our business and acquire additional companies and assets.

Certain provisions of Nevada corporate law may limit or discourage actions in your best interest. Certain provisions of Nevada corporate law limit the circumstances under which a person or entity may acquire a controlling interest in the stock of a Nevada corporation or 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 us, or delay or make an acquisition or transaction more difficult or expensive to consummate, regardless of whether the acquisition or transaction is in the best interest of our stockholders all of which may limit or prevent you from receiving a “control premium” for your common stock.

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 March 31, 2005, 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 March 31, 2005.

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 March 31, 2005 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.

None.

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

The following sets forth securities sold by us during the quarter ended March 31, 2005 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, the company did not engage in general solicitation and advertising and 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 January 14, 2005, as part of our acquisition of MarketSmart Advertising, Inc., Rightstuff, Inc. d/b/a Bright Idea Studio, and Checkup Marketing, Inc. (which we refer to collectively, as the “MarketSmart Companies”), we issued an aggregate of one million shares of common stock to the stockholders of the MarketSmart Companies.

2. On January 27, 2005, we issued 100,000 shares to Kellogg Capital Group LLC pursuant to the exercise of warrants at $0.13 per share. We also issued 13,258 shares to each of Benton Kendig and James Martin pursuant to the exercise of warrants at $1.00 per share.

3. On February 21, 2005, as part of our acquisition of Personals Plus, Inc, we issued 426,244 shares of common stock to the sole stockholder of Personals Plus.

4. On February 21, 2005, as part of our acquisition of Ozona Online Network, Inc., we issued an aggregate of 75,538 shares of our common stock to the stockholders of Ozona Online.

5. On March 6, 2005, we issued 82,867 shares to Richard H. Albright, Jr. pursuant to the exercise of warrants at $1.00 per share.

6. On March 11, 2005, as part of our acquisition of Kowabunga! Marketing, Inc., we issued 127,818 shares of our common stock to the sole stockholder of Kowabunga.

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.

2.1	Agreement entered into as of August 19, 2004, by and among CGI Holding Corporation, Webcapades Acquisition Sub, Inc., a Florida corporation and wholly-owned subsidiary of CGI Holding Corporation, Webcapades, Inc., a Florida corporation, Scott Mitchell and Kristine E. Mitchell. (1)

2.2	Plan of Merger by CGI Holding Corporation, Webcapades Acquisition Sub, Inc., a Florida corporation, and Webcapades, Inc., a Florida corporation. (1)

2.3	Agreement and Plan of Reorganization by and among CGI Holding Corporation and WorldMall Acquisition Corporation, WorldMall, Inc., S. Patrick Martin and the other stockholders of WorldMall, Inc. dated as of March, 2001. (2)

3.1	Articles of Incorporation of CGI Holding Corporation, as amended as of February 26, 2004. (2)

3.2	Restated By-laws of CGI Holding Corporation. (7)

4.1	Form of Warrant to purchase common stock of CGI Holding Corporation for August 2004 offering. (3)

4.2	Form of Warrant to purchase common stock of CGI Holding Corporation for December 6, 2004 offering. (3)

4.3	Form of Registration Rights Agreement by and among CGI Holding Corporation and certain of its shareholders for December 6, 2004 offering. (3)

10.1	Agreement, dated December 23, 2004, by and among CGI Holding Corporation, Proceed Acquisition Sub, Inc., Meandaur, Inc. d/b/a Proceed Interactive, Bruce A. Findley, Jonathan Schepke and Stephen Schepke. (4)

10.2	Agreement by and among the Company, MarketSmart Acquisition Sub, Inc., Rightstuff Acquisition Sub, Inc., Checkup Acquisition Sub, Inc., the MarketSmart Companies and the MarketSmart Shareholders, dated January 14, 2004. (5)

10.3	Employment Agreement by and between MarketSmart Advertising, Inc., RightStuff Inc. d/b/a Bright Idea Studio, CheckUp Marketing, Inc. and Gregory J. Cox. (7)

10.4	Employment Agreement by and between MarketSmart Advertising, Inc., RightStuff Inc. d/b/a Bright Idea Studio, CheckUp Marketing, Inc. and M. Lewis Finch III. (7)

10.5	Employment Agreement by and between MarketSmart Advertising, Inc., RightStuff Inc. d/b/a Bright Idea Studio, CheckUp Marketing, Inc. and Steven Thanhauser. (7)

10.6	First Amendment to Agreement, dated December 23, 2004, by and among CGI Holding Corporation, Proceed Acquisition Sub, Inc., Meandaur, Inc. d/b/a Proceed Interactive, Bruce A. Findley, Jonathan Schepke and Stephen Schepke., dated February 15, 2005. (4)

10.7	Agreement by and among the Company, PPI Acquisition Sub, Inc., Personals Plus, Inc. and Paul Widisky, dated February 21, 2005. (6)

10.8	Employment Agreement by and between Webcapades, Inc., PPI Acquisition Sub, Inc. and Paul Widisky. (7)

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. *

(1)	Incorporated by reference and filed as an exhibit to the CGI Holding Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 25, 2004 (SEC File No. 033-19980-D).

(2)	Incorporated by reference and filed as an exhibit to the CGI Holding Corporation’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 1, 2004 (SEC File No. 033-19980-D).

(3)	Incorporated by reference and filed as an exhibit to the CGI Holding Corporation’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on December 30, 2004 (SEC File No. 333-121761).

(4)	Incorporated by reference and filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2005 (SEC File No. 001-32442).

(5)	Incorporated by reference and filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 20, 2005 (SEC File No. 033-19980-D).

(6)	Incorporated by reference and filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 24, 2005 (SEC File No. 033-19980-D).

(7)	Incorporated by reference and filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on May 16, 2005 (SEC File No. 033-19980-D).

* Filed as part of this document.

	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

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