Brookside Technology Holdings, Corp. - Quarterly Report (10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2008


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

For the transition period from _________ to _________

Commission File Number 333-133253

BROOKSIDE TECHNOLOGY HOLDINGS CORP.

(Exact name of registrant as specified in its charter)


Florida		20-3634227

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

15500 Roosevelt Blvd, Suite 101
Clearwater, FL 33760
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (727) 535-2151

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company þ

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

Number of shares outstanding of registrant’s class of common stock as of August 15, 2008: 96,404,745

Index


ITEM

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements
Item 2.	Management’s Discussion and Analysis or Plan of Operation	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
Item 4.	Controls and Procedures
Item 4(T)	Controls and Procedures	29

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Submission of Matters to a Vote of Securities Holders	31
Item 5.	Other Information	31
Item 6.	Exhibits	31
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

INTRODUCTORY NOTE

This Report on Form 10-QSB for Brookside Technology Holdings Corp. (“we,” “us,” or the “Company”) may contain forward-looking statements. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” and “continue” or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these words very carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties set forth under “Risk Factors” in our Form 10-KSB for the year ended December 31, 2007, as filed with the Securities and Exchange Commission, and any other periodic reports filed with the Securities and Exchange Commission. Accordingly, to the extent that this Quarterly Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that the Company’s actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in its forward-looking statements.

BROOKSIDE TECHNOLOGY PARTNERS, INC
BALANCE SHEETS
As of June 30, 2008 and December 31, 2007


	June 30, 2008			December 31,
	(Unaudited)			2007
ASSETS
Current assets
Cash and cash equivalents	$	233,819		$	187,846
Accounts receivable, net		2,828,224			2,113,675
Inventory		1,132,807			849,176
Deferred contract costs		90,484			89,922
Deferred finance charges, net of amortization		70,865			245,155
Prepaid expenses		64,654			40,954

Total current assets		4,420,853			3,526,728


Property and equipment
Office equipment		408,579			330,022
Furniture, fixtures and leasehold improvements		143,100			137,745

		551,679			467,767
Less: accumulated depreciation		(260,898	)		(194,089	)

Property and equipment, net		290,781			273,678


Goodwill		13,236,369			13,236,369
Intangible assets, net		195,022			510,868
Deposits and other assets		96,117			41,699

TOTAL ASSETS	$	18,239,142		$	17,589,342


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Liabilities
Current liabilities
Accounts payable and accrued expenses	$	1,736,390		$	981,766
Billings in excess of revenues		1,986,199			1,776,271
Payroll liabilities		391,636			371,470
Current portion of long term debt		12,361,135			8,207,900
Other current liabilities		723,885			838,589

Total current liabilities		17,199,245			12,175,996

Long term debt, less current portion		1,044,607			1,850,183

Total liabilities		18,243,852			14,026,179


Stockholders’ equity (deficit)
Series A Convertible Preferred Stock, 1,850,332 and 2,175,322 issued and outstanding at June 30, 2008 and December 31, 2007, respectively, at 8% dividend yield. Liquidation preference of $2,271,672 and $2,315,178 at June 30, 2008 and December 31, 2007, respectively.		1,522,607			1,699,000
Common stock, $.01 par value, 250,000,000 shares authorized, 93,845,000 and 87,900,000 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively		93,845			87,900
Additional paid in capital		11,683,241			11,313,358
Retained deficit		(13,304,403	)		(9,537,095	)

Total stockholders’ equity (deficit)		(4,710	)		3,563,163

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	18,239,142		$	17,589,342

See accompanying notes and independent auditors’ report.

BROOKSIDE TECHNOLOGY PARTNERS, INC
STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2008 and 2007


	Quarter Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
REVENUES
Installation and other services	$	1,335,230		$	178,894		$	2,347,539		$	310,026
Equipment sales		3,198,217			285,168			6,393,974			691,413

Total revenues		4,533,447			464,062			8,741,513			1,001,439

COST OF SALES		2,250,924			239,162			4,480,805			591,648


GROSS PROFIT		2,282,523			224,900			4,260,708			409,791


OPERATING EXPENSES
General and administrative		2,000,996			493,404			3,745,486			793,268
Stock Compensation Expense		115,500			915,000			115,500			915,000
Depreciation expense		29,341			11,091			66,809			21,576

Total operating expenses		2,145,837			1,419,495			3,927,795			1,729,844


OTHER INCOME (EXPENSE)
Interest expense		(664,130	)		(22,406	)		(1,339,583	)		(26,557	)
Amortization expense		(1,348,200	)		—			(2,670,524	)		—
Other income (expenses), net		408			(49	)		3,871			1,526

Total other income (expense)		(2,011,922	)		(22,455	)		(4,006,236	)		(25,031	)


LOSS BEFORE INCOME TAXES		(1,875,236	)		(1,217,050	)		(3,673,323	)		(1,345,084	)

Income tax benefit		—			—			—			—


NET LOSS	$	(1,875,236	)	$	(1,217,050	)	$	(3,673,323	)	$	(1,345,084	)


Preferred stock dividends		(40,430	)		(39,265	)		(83,936	)		(52,844	)


Net loss attributable to common shareholders	$	(1,915,666	)	$	(1,256,315	)	$	(3,757,259	)	$	(1,397,928	)


Loss per share—basic and fully diluted	$	(0.021	)	$	(0.016	)	$	(0.042	)	$	(0.019	)


Weighted average shares outstandings		90,714,185			80,500,000			89,307,092			75,472,376

See accompanying notes and independent auditors’ report.

BROOKSIDE TECHNOLOGY PARTNERS, INC
STATEMENTS OF CASH FLOWS
For the Six Months June 30, 2008 and 2007


	2008			2007
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(3,673,323	)	$	(1,345,084	)

Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation		66,809			21,576
Amortization		2,670,524			—
Non-cash interest expense		518,069			—
Stock based compensation		115,500			915,000
(Increase) decrease in:
Accounts receivable		(714,549	)		5,039
Inventory		(283,631	)		—
Deferred contract costs		(526	)		10,883
Prepaid expenses		(23,700	)		(19,618	)
Deposits and other assets		(54,418	)		(1,500	)
Increase (decrease)in:
Accounts payable and accrued expenses		754,624			(107,916	)
Accrued payroll liabilities		20,166			12,454
Billings in excess of revenues		209,928			(159,784	)
Other current liabilities		(59,790	)		(38,559	)

		3,219,006			637,575


NET CASH USED IN OPERATING ACTIVITIES		(454,317	)		(707,509	)


CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment		(83,912	)		(35,304	)
Deposits and other assets related to possible acquisition		(65,000	)		(276,130	)

NET CASH USED IN INVESTING ACTIVITIES		(148,912	)		(311,434	)


CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt		6,958,275			135,000
Proceeds from issuance of series A preferred Stock net of issuance costs of $376,653		—			1,280,337
Cash paid for fees in conjunction with the Share Exchange		—			(293,963	)
Repayment of long term debt		(6,309,073	)		(28,861	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		649,202			1,092,513


NET INCREASE (DECREASE) IN CASH		45,973			73,570

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		187,846			35,666

CASH AND CASH EQUIVALENTS AT END OF YEAR	$	233,819		$	109,236


SUPPLEMENTAL DISCLOSURE

Income taxes paid	$	(364,690	)	$	—

Interest paid	$	(17,147	)	$	(22,406	)


Non-cash financing and investing activities
Exchange Transaction fee to Venture Fund II for consulting fees, paid in preferred stock	$	—		$	250,000

Accrual of preferred stock dividend	$	83,936			52,844

Payment of notes payable paid in Preferred Stock	$	—		$	235,000


Accrued interest added to note payable balance	$	503,893		$	46,556

Conversion of series A preferred stock to Common stock	$	260,328		$	—

See accompanying notes

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 1 — Basis of Presentation and Nature of Business

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Brookside Technology Holdings Corp., a Florida corporation (“Company”), have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company’s Form 10-KSB for the fiscal year ended December 31, 2007. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly the financial position of the Company as of June 30, 2008 and December 31, 2007, and the results of operations and cash flows for the quarters and six months ended June 30, 2008 and 2007. The results of operations for the quarters and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the entire fiscal year.

Operations

We are the holding company for Brookside Technology Partners, Inc, a Texas corporation (“Brookside Technology Partners”), and US Voice & Data, LLC, an Indiana Limited Liability Company (“USVD”), and all operations are conducted through those two wholly owned subsidiaries.

Headquartered in Austin, Texas, Brookside Technology Partners is a provider and global managed service company specializing in selling, designing, analyzing and implementing converged Voice over IP (VoIP), data and wireless business communications systems and solutions for commercial and state/government organizations of all types and sizes in the United States.

Headquartered in Louisville, Kentucky, USVD is a leading regional provider of telecommunication services including planning, design, installation and maintenance for the converged voice and data systems. USVD serves the Kentucky and Southern Indiana markets, operating out of offices in Louisville, Lexington and Indianapolis.

Brookside Technolgy Partners and USVD combine technical expertise in a range of communications products, including IP-enabled platforms, wired and wireless IP and digital endpoints and leading edge communications applications to create converged voice, video and data networks that help businesses increase efficiency and optimize revenue opportunities, critical for success in today’s competitive business environment. The sale of new systems, built on either Mitel/Inter-Tel, Nortel or NEC platforms, is the backbone of the business, typically accounting for approximately 65% of the Company’s revenue.

Background/Name Change/Redomestication

Cruisestock, Inc, (“Cruisestock”) was incorporated in September 2005 under the laws of the State of Texas. Immediately prior to February 21, 2007, it was a shell corporation with no significant operations or assets. On February 21, 2007, Cruisestock acquired all of the stock of Brookside Technology Partners, a Texas corporation, in a transaction where the shareholders of Brookside Technology Partners exchanged all of their shares for shares of common stock of Cruisestock (the “Share Exchange”). As a result, Brookside Technology Partners became a wholly owned subsidiary of Cruisestock. However, from an accounting perspective, Brookside Technology Partners was the acquirer in the Share Exchange.

Because Brookside Technology Partners was the accounting acquirer in the Share Exchange, management does not believe that it is informative or useful to compare Cruisestock’s historical results of operations with those of Brookside Technology Partners. Instead, below we discuss only Brookside Technology Partners’ results of operations and financial performance.

Subsequent to the Share Exchange, on July 6, 2007 (the “Effective Time”), Cruisestock changed its name to Brookside Technology Holdings Corp. and redomesticated into Florida. The name change and redomestication were accomplished by merging Cruisestock into a newly-formed, Florida wholly-owned subsidiary, with the subsidiary being the surviving entity (the “Redomestication”).

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 1 — Basis of Presentation and Nature of Business (continued)

Background/Name Change/Redomestication (continued)

The Company’s common stock is quoted on the Over the Counter Bulletin Board (OTCBB) under the symbol: BKSD.

Stock Split

Concurrently with the Redomestication and as of the Effective Time:

	•		Each outstanding share of Cruisestock’s common stock, $0.001 per share, was automatically converted into seven shares of Brookside Technology Holdings Corp.’s common stock, $0.001 par value per share;

	•		Each outstanding share of Cruisestock’s series A preferred stock, $0.001 per share, was automatically converted into one share of Brookside Technology Holdings Corp.’s series A preferred stock, $0.001 par value per share;

	•		The price at which the series A preferred stock converts into common stock was automatically adjusted, on a proportionate basis, to account for the forward split of the common shares by reducing the current conversion price of $0.40 per share to $0.0571428; and

	•		The number of shares of common stock underlying all of Cruisestock’s outstanding options and warrants to purchase common stock, and the exercise price of such options and warrants, was automatically adjusted to account for the 7-for-1 common share stock split.

Acquisition of USVD

On September 26, 2007, the Company acquired all of the membership interest of US Voice & Data, LLC, an Indiana Limited Liability Company (“USVD”) USVD, headquartered in Louisville, Kentucky, with offices in Lexington, Kentucky and Indianapolis, Indiana, is a leading regional provider of telecommunication services, including planning, design, installation and maintenance for converged voice and data systems.

Vicis Equity Infusion

On July 3, 2008, Brookside Technology Holdings Corp. (the “Company”) entered into a Securities Purchase Agreement (the “Vicis Agreement”) with Vicis Capital Master Fund, a sub-trust of Vicis Capital Series Master Trust (“Vicis”), pursuant to which Vicis acquired (a) 2,500,000 shares of Series A Convertible Preferred Stock (“Series A Stock”); and (b) a warrant (the “Warrant”) to purchase 250,000,000 shares of common stock of the Company at $0.03 per share (the “Exercise Price”), for an aggregate purchase price of $2,500,000 (“Vicis Equity Infusion”). Furthermore, pursuant to the Vicis Agreement, all of 3,000,000 shares of the Company’s Series B Convertible Preferred Stock (“Series B Stock”) previously owned by Vicis were converted into 3,000,000 shares of Series A Stock. Accordingly, the Company no longer has any outstanding shares of Series B Stock. The Exercise Price is subject to a price adjustment from time to time upon the occurrence of certain events set forth in the Warrant.

In connection with the foregoing equity infusion, Vicis also purchased and assumed from Hilco Financial, LLC (“Hilco”), and Hilco assigned to Vicis, all credit agreements, loans and promissory notes under which Hilco had loaned money to the Company. The Company consented to such assignments. In connection with such assignments, Hilco transferred to Vicis their warrants to purchase 61,273,835 shares, of common stock of the Company.

The Warrant and Series A Stock each contain provisions that limit their holders ability to exercise and convert, as applicable, the Warrant and Series A Stock to the extent that, after such conversion/exercise, the sum of the number of shares of common stock beneficially owned by the holder would result in beneficial ownership by any holder and its affiliates of more than 4.99% of the outstanding shares of common stock.

As a result of Vicis equity infusion described above, the exercise price of all of the Company’s outstanding warrants, including the warrants transferred to Vicis from Hilco, has been reset to $0.03 pursuant to the price protection provisions of those warrants. Additionally, the conversion price of all outstanding shares of Series A Stock, including those previously owned by Vicis, has been reset to $0.03 pursuant to the price protection provisions of the Series A Stock.

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 2 — Going Concern Uncertainties

The Company has incurred net losses during the first six months of 2008, and the years ended December 31, 2007 and 2006. As of June 30, 2008 the Company has a retained deficit of $13,304,403. The Company’s ability to meet its obligations in the ordinary course of business is dependent upon its ability to establish profitable operations, raise additional financing through public or private equity financings, or secure other sources of financing to fund operations. The Company has cash and cash equivalents of $233,819 and a working capital deficit of $12,778,392 at June 30, 2008. The Company used net cash in operating activities of $454,317 and $268,106 during the six months ended June 30, 2008 and the year ended December 31, 2007, respectively. As of June 30, 2008 the Company was in default on its debt to Hilco of $6,649,423 and the Series B Preferred Stock, which is classified as a liability on the balance sheet, as discussed in Note 3, has matured in the amount of $3,000,000. As noted above the debt was assigned to Vicis and the series B preferred stock was converted to series A stock. In conjunction with the assignment, Vicis has agreed to waive the default on the Hilco note, and to reduce the interest rate from 15% to 10%.

These matters raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Note 3 — Significant Accounting Policies

The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (GAAP) and to the practices within the telecommunications industry. The following summarizes the more significant of these policies.

Cash Equivalents

For purposes of the statements of cash flows, the Company considers short-term investments, which may be withdrawn at any time without penalty, and restricted cash, which will become available within one year from the date of the financial statements, to be cash equivalents.

Use of Estimates

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

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets. The following table shows estimated useful lives of property and equipment:


Classification		Useful Lives
Telecom equipment		3-5 years
Software		3-5 years
Computer equipment		3-5 years
Furniture, fixtures and leasehold improvements		2-7 years

The Company periodically evaluates the estimated useful lives used to depreciate its assets and the estimated amount of assets that will be abandoned or have minimal use in the future. While the Company believes its estimates of useful lives are reasonable, significant differences in actual experience or significant changes in assumptions may affect future depreciation expense.

Expenditures for maintenance and repairs are charged to expense as incurred. Major expenditures for additions, replacements and betterments are capitalized. When assets are sold, retired or fully depreciated, the cost, reduced by the related amount of accumulated depreciation, is removed from the accounts and any resulting gain or loss is recognized as income or expense.

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

Financial Instruments and Credit Risk

Financial instruments that potentially subject the Company to credit risk include cash and cash equivalents, accounts receivable and unbilled receivables from customers. Cash is deposited in demand accounts in federally insured domestic institutions to minimize risk. Accounts receivable and unbilled receivables are generally unsecured. With respect to accounts receivable and unbilled receivables, the Company performs ongoing credit evaluations of customers and generally does not require collateral.

Receivables are concentrated with a small number of customers. The Company maintains reserves for potential credit losses on customer accounts when deemed necessary. There were no allowances for credit losses at June 30, 2008 and December 31, 2007.

The amounts reported for cash equivalents, receivables, accounts payable, accrued liabilities and notes payable are considered to approximate their market values based on comparable market information available at the respective balance sheet dates and their short-term nature.

Inventories

Inventories are comprised primarily of telephone systems ordered for installations, and spare parts or common parts used in telephone system installations and are stated at the lower of cost (first-in, first out) or market through the use of an inventory valuation allowance. In order to assess the ultimate realization of inventories, the Company is required to make judgments as to future demand requirements compared to current or committed inventory levels. Allowance requirements generally increase as the projected demand requirement decreases due to market conditions, technological and product life cycle changes.

Classification of Series B Preferred Stock as a Liability

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (SFAS 150). SFAS 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company classified mandatorily redeemable series B preferred stock as a liability in the balance sheet and related accretion being charged to interest expense in the statement of operations. On July 3, 2008, pursuant to the Vicis Agreement, Vicis agreed to convert this series B preferred stock to series A preferred stock. The series A preferred stock is not presently redeemable and has been classified in equity in the consolidated financial statements.

Revenue Recognition

The Company derives its revenues primarily from sales of converged VOIP telecommunications equipment and professional services implementation/installation, data and wireless equipment and installation, recurring maintenance/managed service and network service agreements and other services. The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”), as amended by SAB No. 104 “Revenue Recognition, Corrected Copy” (“SAB 104”). Under SAB 101 and SAB 104, revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectibility is reasonably assured. Sales are recorded net of discounts, rebates, and returns.

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Provision for anticipated losses on uncompleted contracts is made in the period in which such losses become evident.

Revenue from contracts that contain multiple elements that are not accounted for under the percentage-of-completion method are accounted for in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Revenue from these contracts is allocated to each respective element based on each element’s relative fair value, if determinable, and is recognized when the respective revenue recognition criteria for each element are fulfilled. The Company’s recognizes revenue from the equipment sales and installation services using the percentage of completion method. The services for maintaining the systems we install are sold as a stand-alone contract and treated according to the terms of the contractual arrangements then in effect. Revenue from this service is generally recognized over the term of the subscription period or the terms of the contractual arrangements then in effect. A majority of equipment sales and installation services revenues are billed in advance on a monthly basis based upon the fixed price, and are included both accounts receivable and deferred income on the accompanying balance sheets. Direct costs incurred on such contracts are deferred until the related revenue is recognized and are included in deferred contract costs on the accompanying balance sheets. The Company also provides professional services (maintenance/managed services) on a fixed price basis. These services are billed as bundles and or upon completion of the services.

Warranty Reserves

Reserves are provided for estimated warranty costs when revenue is recognized. The costs of warranty obligations are estimated based on warranty policy or applicable contractual warranty, historical experience of known product failure rates and use of materials and service delivery charges incurred in correcting product failures. Specific warranty accruals may be made if unforeseen technical problems arise. If actual experience, relative to these factors, adversely differs from these estimates, additional warranty expense may be required. To date the Company has not accrued for warranty costs as the telecommunications equipment is covered by original equipment manufacturer warranties and the remaining costs have not been considered material the financial statements.

Advertising

The Company recognizes advertising expenses as incurred.

Reclassifications

Certain prior year amounts have been reclassified to conform to the 2008 presentation.

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

Earnings Per Common Share

Basic and diluted net income per common share is presented in conformity with Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128) for all periods presented. Basic earnings per share is based on the weighted effect of all common shares issued and outstanding, and is calculated by dividing net loss available to common stockholders by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net loss available to common stockholders by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding.

At June 30, 2007, there were potentially dilutive securities outstanding consisting of Series A Preferred stock, warrants, and stock options issued to employees. At June 30, 2008, there were potentially dilutive securities outstanding consisting of Series A Preferred stock, Series B Preferred Stock, convertible debt, warrants, and stock options issued to employees. The potential shares would be anti-dilutive during 2008 and as such have not been considered in the calculation of earnings per share. At June 30, 2008, the number of potentially dilutive shares, that are anti-dilutive at December 31, 2007) consists of 14,000,000 stock option shares, 1,850,332 series A preferred stock shares (exercisable into 61,677,734 common shares), 48,727,206 common shares purchase warrants issued in connection with the series A preferred stock, 3,000,000 series B shares (exercisable into 24,000,000 common shares), 24,000,000 common share purchase warrants issued in connection with the series B preferred stock, and 77,073,835 common share warrants issued in connection with the USVD acquisition debt financing.

Recent Accounting Pronouncements

In April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of Intangible Assets , which amends the factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset under SFAS No. 142. The FSP amends paragraph 11(d) of SFAS No. 142 to require an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations-Revised 2007. SFAS 141R provides guidance on improving the relevance, representational faithfulness, and comparability of information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R applies to business combinations where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Brookside Technology Holdings Corp. is in the process of analyzing the effects SFAS 141R will have on the Company’s financial statements.

The FSP also requires the following incremental disclosures for renewable intangible assets:

	•		The weighted-average period prior to the next renewal or extension (whether explicit and implicit) for each major intangible asset class

	•		The entity’s accounting policy for the treatment of costs incurred to renew or extend the term of a recognized intangible asset

	•		For intangible asset renewed or extended during the period:

	•		For entities that capitalize renewal or extension costs, the costs incurred to review or extend the asset, for each major intangible asset class

	•		The weighted-average period prior to the next renewal or extension (whether explicit and implicit) for each major intangible asset class

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

The FSP is effective for financial statements for fiscal years beginning after December 15, 2008. The guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. Accordingly, the FSP would not serve as a basis to change the useful life of an intangible asset that was acquired prior to the effective date (January 1, 2009 for a calendar year company). However, the incremental disclosure requirements described above would apply to all intangible assets, including those recognized in periods prior to the effective date of the FSP. The Company is currently evaluating the impact that the adoption of this FSP will have on its consolidated financial statements.

Fair Value Measurements

In February 2008, the FASB issued Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, excluding those assets that are recognized or disclosed at fair value on a recurring basis for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. According to Note 2- Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements, the Company elected a partial deferral of SFAS No. 157 under the provisions of FSP No. FAS 157-2, associated with the measurement of fair value used when evaluating goodwill, other intangible assets and other long-lived assets for impairment. The company is currently evaluating the impact of FSP No. FAS 157-2 on its financial statements.

As described in “Adoption of New Accounting Standards,” the Company adopted SFAS No. 157 effective January 1, 2008. SFAS 157 established a framework for measuring fair value in GAAP and clarified the definition of fair value within that framework. SFAS 157 does not require assets and liabilities that were previously recorded at cost to be recorded at fair value or for assets and liabilities that are already required to be disclosed at fair value, SFAS 157 introduced, or reiterated, a number of key concepts which form the foundation of the fair value measurement approach to be used for financial reporting purposes. The fair value of the Company’s financial instruments reflects the amounts that the Company estimates to receive in connection with the sale of an asset or paid in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). SFAS 157 also established a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:

Level 1 — quoted prices in active markets for identical assets and liabilities.

Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities.

Level 3 — unobservable inputs.

The adoption of FAS 157 did not have an effect on the Company’s financial condition or results of operations, but SFAS 157 introduced new disclosures about how the Company values certain assets and liabilities. Much of the disclosure is focused on the inputs used to measure fair value, particularly in instances where the measurement uses significant unobservable (Level 3) inputs. As of June 30, 2008, the Company did not have financial assets or liabilities that would require measurement on a recurring basis based on the guidance in SFAS 157. At June 30, 2008 all financial assets consisted of cash and cash equivalents at financial institutions in the United States.

Note 4 —Billings in Excess of Revenues

Billings in excess of revenues at June 30, 2008 and December 31, 2007 consisted of the following:


			Year Ended
	June 30,		December 31,
	2008		2007
Customer deposits and deferred income on installation contracts	$	833,714	$	718,574
Deferred revenue on maintenance contracts		1,152,485		1,057,697

	$	1,986,199	$	1,776,271

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 5 —Long Term Debt

Long term debt as of June 30, 2008 and December 31, 2007 consisted of the following:


	June 30			December 31,
	2008			2007
Note payable to an individual, unsecured, accruing interest at 2% per annum, with monthly payments of $5,215 due September 1, 2010.		123,182			153,066
Note payable to executive officers and shareholders, unsecured, accruing interest at 0% per annum, due in installments over 3 years with a maturity date of September 26, 2009, less unamortized discount of $179,590.		2,920,410			2,816,632
Notes payable to an individual, unsecured, accruing interest at 7% per annum, with monthly payments of $1,130 due May 1, 2011.		35,668			40,361
Note payable to executive officer and shareholders, unsecured, accruing interest at 7% per annum, with monthly payments of $1,343, due September 1, 2009.		23,318			28,558
Notes payable to shareholder, unsecured, accruing interest at 7% per annum, with monthly payments of $6,432 due June 1, 2010.		143,658			176,547
Note payable to Vicis, secured by all assets of the Company, accruing interest at 10% per annum, principal and accrued interest due in full September 26, 2009. Principal amount due of $7,088,301, less unamortized discount of $926,437. Formerly payable to Hilco Financial, LLC. Note was assigned to Vicis on June 18, 2008.		6,161,864			3,235,930
Series B Preferred Stock issued to Vicis Capital, unsecured, accruing interest at 16% per annum, matured on December 27, 2007, converted to series A preferred stock on July 3, 2008 and now accruing interest at 8%.		3,000,000			3,000,000
Note payable to Dynamic Decisions Strategic Opportunities, unsecured, accruing interest at 10% per annum, total principal and accrued interest due September 26, 2008. Less unamortized discount of $43,632. Note was subsequently assigned to Vicis on July 3, 2008.		956,368			596,323
Secured notes payable to Huntington Bank, accruing interest at a prime rate plus 3.73% with monthly payments of $383, with a maturity date of March 28, 2009. Note is secured by a vehicle.		10,478			10,666
Secured notes payable to NEC Financial Services, accruing interest at 11.25% with monthly payments of $1,128, with a maturity date of February 25, 2011. Note is secured by testing equipment.		30,796			—

Total long term debt		13,405,742			10,058,083
Less current portion		(12,361,135	)		(8,207,900	)

Long term portion	$	1,044,607		$	1,850,183

Principal maturities of long-term debt as of June 30, 2008 are as follows:


Years Ending December 31,,	Gross		Net of Discount

2008	$	12,705,217	$	11,555,559
2009		912,303		912,303
2010		933,427		933,427
2011		4,453		4,453

	$	14,555,400	$	13,405,742

The Series B Preferred stock has matured effective December 27, 2007. Vicis has converted this to series A preferred stock. The Hilco debt was in default. However, as part of the assignment of the Hilco debt to Vicis, it is anticipated that the terms of the debt will be extended and that any covenant violations will be waived .

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 6 — Commitments and Contingencies

Leases

On July 26, 2007, the Company entered into a 31 month lease for its Austin operations under a lease classified as an operating lease. Effective September 26, 2007, the Company assumed current operating leases for the three offices leased by USVD. On October 15, 2007, the Company entered into a 60 month lease for its headquarters in Clearwater, Florida effective December 1, 2007. Minimum lease obligations are as follows:


2008	$	151,617
2009		297,976
2010		232,525
2011		109,165
2012		76,870

Rental expense for operating leases for the quarters ended June 30, 2008 and 2007, was approximately $108,000 and $7,000, respectively. Rental expense for operating leases for the six months ended June 30, 2008 and 2007, was approximately $216,000 and $13,000, respectively.

Liquidated Damages Under Registration Payment Arrangements

The Company has accrued $154,400 as additional interest expense and the liability is included in other current liabilities in the accompanying consolidated balance sheets for June 30, 2008 and December 31, 2007 related to expected liquidated damages that will be paid in cash or by issuance of additional common shares or warrants for common shares under various registration rights agreements related to common shares, conversion rights and warrants for common shares.

Litigation

The Company is not involved in any claims or legal actions, other than those that arise in the normal course of business.

Risk Management

The Company maintains various forms of insurance that the Company’s management believes are adequate to reduce the exposure to property and general liability risks to an acceptable level.

Note 7 — Related Party Transactions

The Company has notes payable to officers and shareholders of the Company. The balance of these notes payable was $3,266,976 and $3,305,105 at June 30, 2008 and December 31, 2007, respectively.

Note 8 — Cost of Sales

For the periods ended June 30, 2008 and 2007, costs of sales consisted of the following:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007

Equipment costs	$	1,854,207	$	212,631	$	3,714,853	$	528,184
Contract labor		36,210		19,493		114,421		44,792
Direct labor		257,677		—		488,885		—
Sales commissions and selling costs		22,666		5,241		26,101		7,162
Other costs		79,763		1,797		136,545		11,510

	$	2,250,523	$	239,162	$	4,480,805	$	591,648

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 10 — General and Administrative Expenses

For the Three and Six months ended June 30, 2008 and 2007, general and administrative expenses consisted of the following:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007

Employee compensation and benefits	$	827,435	$	358,926	$	1,603,787	$	592,408
Bad Debt Expense		60		—		736		—
Telephone		42,563		11,550		85,526		20,071
Travel expense		42,396		23,767		68,466		34,009
Occupancy		108,342		7,952		216,193		12,883
Professional fees		267,174		68,963		405,990		86,710
Other		713,026		22,246		1,364,788		47,187


	$	2,000,996	$	493,404	$	3,745,486	$	793,268

Note 10 — Employee Benefit Plan

The Company has a 401(k) profit sharing plan (the Plan) and other employee health and benefit plans. The Plan allows all eligible employees to defer a portion of their income on a pretax basis through contributions to the Plan. The Company has made 401(k) matching contributions of $35,649 and $0 for the quarters ended June 30, 2008 and 2007, respectively. The Company has made 401(k) matching contributions of $75,717 and $0 for the six months ended June 30, 2008 and 2007, respectively.

The Company provides group health and other benefits to its employees through plans that cover all employees that elect to be covered. The Company’s share of group health care costs was approximately $117,000 for the quarter ended June 30, 2008 and $11,000 for the quarter ended June 30, 2007 approximately $219,000 for the six months ended June 30, 2008 and $22,000 for the six months ended June 30, 2007 and such amounts have been included in employee compensation and benefits expense.

Note 11 — Acquisition of US Voice & Data, LLC

On September 26, 2007, the Company acquired all of the membership interest of USVD. The purchase price of $15,429,242 was paid through a combination of common stock, cash at closing and a seller note. Cash paid at closing was $9,938,690. The Company issued 7,000,000 shares of its common stock valued at $.335 per share on September 14, 2007. Also, the Company owes the Sellers a note payable of $3,100,000 with a maturity date of September 26, 2009, and an additional amount paid to Sellers of $356,160 in February 2008 based on a “true-up” calculation of net worth at September 14, 2007. Additionally, the Purchase Agreement provides the Sellers with the opportunity to earn additional stock or cash consideration in the form of a three-year performance based earnout.

Additionally, the Company caused USVD, its new subsidiary, to enter into employment agreements with Michael P. Fischer and M. Scott Diamond, with initial terms of three years, pursuant to which they will serve as USVD’s CEO and COO, respectively. The employment agreements contain standard terms and provisions, including non competition and confidentiality provisions, provisions relating to early termination and constructive termination, and provide for an annual base salary and certain standard benefits.

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 11 — Acquisition of US Voice & Data, LLC (continued)

A summary of the acquisition is as follows:

The Acquisition of USVD was accounted for under the purchase method of accounting that requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair market value. The judgments made in determining the estimated fair values assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income. Additional direct acquisition costs were unpaid at June 30, 2008 and may be paid in 2008 and 2009, if certain revenue targets are met. No amount has been recognized for their contingent earn out as of June 30, 2008. The purchase price was allocated to the assets acquired and liabilities assumed, based on estimated fair values at the date of the acquisition.

Goodwill represents the acquisition costs in excess of the fair value of net tangible and intangible assets of the businesses purchased. This premium paid for the acquisitions is based on management’s belief that the acquired technologies, businesses and engineering talent were of strategic importance in the Company’s growth strategy. Intangible assets consist primarily of the value of intellectual property, customer relationships, non-compete agreements, trademarks and goodwill (1). Goodwill is evaluated annually for impairment, or earlier if indications of impairment exist. The determination as to whether or not goodwill or other intangible assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the value of the reporting units. Changes in operating strategy and market conditions could significantly impact these judgments and require adjustments to recorded amounts of intangible assets.

We have adopted a policy to review goodwill and indefinite-lived intangibles for impairment using a discounted cash flow approach that uses forward-looking information regarding market share, revenues and costs for the reporting unit as well as appropriate discount rates. As a result, changes in these assumptions could materially change the outcome of the reporting unit’s fair value determination in future periods, which could require a further permanent write-down of goodwill.

(1)

An initial allocation has been made to intangible assets as of September 30, 2007. Management will determine the proper value of intangible assets acquired from USVD and allocate any additional adjustments of the goodwill to intangible assets within the twelve months after the acquisition date.

Operating results from the acquired business is included in the condensed consolidated statements of operations from the date of acquisition. A summary of the purchase price allocation is as follows:


Purchase price —
Cash paid	$	9,938,690
Stock issued		2,345,000
Notes payable issued to seller, net of discount		2,747,934
Additional amount due to seller		356,160
Legal & other acquisition costs		41,458
Acquisition costs		15,429,242

Net fair value of assets acquired and liabilities assumed		(1,592,873	)

Excess of cost over fair value of tangible assets acquired	$	13,836,369

Value assigned to customer contracts acquired		600,000

Goodwill acquired	$	13,236,369


Fair value of assets acquired and liabilities assumed —
Cash acquired	$	885,859
Accounts receivable		1,975,430
Inventory and work in progress		1,865,309
Property and equipment		203,249
Other assets		69,587
Accounts payable and accrued expenses		(529,903	)
Customer deposits and deferred income		(2,773,232	)
Other liabilities		(103,426	)

Net fair value of assets acquired and liabilities assumed	$	1,592,873

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 11 — Acquisition of US Voice & Data, LLC (continued)

In addition, the Company paid $100,000 for non-compete agreements. Amortization expense related to the intangible assets was $189,132 during the year ended December 31, 2007, and $157,923 and $315,846 for the quarter and six months ended June 30, 2008, respectively. The unamortized intangible assets will be amortized to expense as follows:


2008	$	136,689
2009		33,333
2010		25,000

Total	$	195,027

The following unaudited pro forma financial information presents the results of operations for the quarters and six months ended June 30, 2007 as if the acquisitions had occurred at the beginning of each period presented. The pro forma financial information has been adjusted for the effect of interest paid on the term loan and the reduced interest earned on cash used in the acquisition of USVD. The pro forma financial information for the combined entities has been prepared for comparative purposes only and is not indicative of what actual results would have been if the acquisitions had taken place at the beginning of each period presented, or of future results.


	(Unaudited)			(Unaudited)
	Three Months Ended			Six Months Ended
	June 30, 2007			June 30, 2007

Pro forma net revenues	$	4,539,042		$	9,546,419
Pro forma net income (loss)		(525,360	)		(325,917	)

Pro forma net income per share:
Diluted	$	(0.01	)	$	(0.00	)

The following summarizes the financing of the USVD acquisition:

Credit Facility

The Company, through Midtown Partners & Co., LLC and LCG Capital, raised approximately $11,000,000 less fees and expenses of $1,192,000 for net cash proceeds of $9,938,690 to finance the acquisition of USVD. The financing consisted of approximately $8.0 million of senior and subordinated debt and $3.0 million of series B preferred stock. In connection therewith, the Company and its two subsidiaries, USVD and Brookside Technology Partners, entered into a Credit Agreement with Hilco Financial LLC, pursuant to which Hilco agreed to provide a $7,000,000 ($6,000,000 advanced at acquisition date) revolving line of credit, bearing interest at 15% and maturing on September 26, 2008 (the “Senior Loan”). On June 18, 2008, Hilco assigned this note to Vicis. Vicis then waived all defaults of the covenants and also reduced the interest rate to 10%.

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 11 — Acquisition of US Voice & Data, LLC (continued)

Additionally, the Company also entered into a Subordinated Note and a related Subordinated Note Purchase Agreement with DD Growth Premium Fund, pursuant to which DD Growth Premium Fund loaned the Company $1 million, bearing interest at 10% per annum and maturing on December 30, 2008 (the “Subordinated Loan”). Additionally, the Company entered into a Securities Purchase Agreement with Vicis Capital Master Fund, a sub-trust of Vicis Capital Series Master Trust, pursuant to which Vicis acquired 3,000,000 shares of Series B Convertible Preferred Stock of the Company for $3,000,000, which shares are convertible into 24,000,000 shares of common stock of the Company (subject to certain adjustments). On July 3, 2008, Vicis converted all of the Series B Preferred Stock to Series A Preferred Stock. As a result, the interest rate accruing effective July 3, 2008 was reduced to 8% from 16%.

The price adjustments are primarily related to issuance of stock, warrants or stock options at prices below the conversion or warrant prices or by dilution through stock splits or stock dividends. Since this redemption date has passed, Vicis has been earning accrued interest of 16% on the Series B Convertible Preferred Stock. Effective July 3, 2008, the Vicis Series B Convertible Preferred Stock was converted into 3,000,000 shares of series A convertible preferred stock. The Hilco debt was in default. However, as part of the assignment of the Hilco debt to Vicis, it is anticipated that the terms of the debt will be extended and that any covenant violations will be waived.

Warrants Issued in Connection with Financing:

In connection with the foregoing financing of the acquisition of USVD, the Company granted (a) Vicis a warrant to purchase 24,000,000 shares of common stock of the Company at an exercise price of $0.125 per share; (b) Hilco Financial LLC a warrant to purchase 61,273,835 shares of common stock of the Company at an exercise price of $0.137 per share; (c) DD Growth Premium Fund a warrant to purchase 10,000,000 shares of common stock of the Company at an exercise price of $0.114 per share; and (d) Midtown Partners & Co. a warrant to purchase 4,800,000 shares of common stock of the Company at an exercise price of $0.125 per share and a warrant to purchase 1,000,000 shares of common stock of the Company at an exercise price of $0.114.

A summary of the notes payable and warrants is as follows:

As a result of these contract provisions, the Hilco Senior Convertible Note balance at Inception (September 26, 2007) was adjusted as follows:


Notional balance of Hilco Senior Convertible Note	$	6,000,000
Adjustments:
Discount for warrant issued (based on relative fair value assigned)		(4,000,227	)
Discount for loan fees paid to Hilco on Note		(340,000	)

Hilco Senior Convertible Note balance, net of unamortized discount at September 26, 2007	$	1,659,773

Hilco Senior Convertible Note at June 30, 2008-

The Hilco Senior Convertible Note balance on the consolidated balance sheet as of June 30, 2008 is comprised of the following:


Notional balance of Hilco Senior Convertible Note at June 30, 2008	$	7,088,301
Adjustments:
Unamortized discount		(926,437	)

Hilco Senior Convertible Note balance, net of unamortized discount at June 30, 2008	$	6,161,864

As a result of these contract provisions, the DD Subordinated Convertible Note balance at Inception (August 31, 2007) was adjusted as follows:


Notional balance of DD Subordinated Convertible Note at August 31, 2007	$	1,000,000
Adjustments:
Discount for warrant (based on relative fair value assigned)		(696,049	)

DD Subordinated Convertible Note balance, net of unamortized discount at August 31, 2007	$	303,951

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 11 — Acquisition of US Voice & Data, LLC (continued)

Credit Facility (continued)

DD Subordinated Convertible Note at June 30, 2008 —

The DD Subordinated Convertible Note balance on the consolidated balance sheet as of June 30, 2008 is comprised of the following:


Notional balance of DD Subordinated Convertible Note at June 30, 2008	$	1,000,000
Adjustments:
Unamortized discount		(43,632	)

DD Subordinated Convertible Note balance, net of unamortized discount at June 30, 2008	$	956,368

As a result of these contract provisions, the Series B Preferred stock balance at Inception (September 14, 2007) was adjusted as follows:


Notional balance of Series B Preferred stock	$	3,000,000
Adjustments:
Discount for warrants issued (based on relative fair value assigned)		(2,054,995	)
Discount for beneficial conversion feature (based on relative fair value assigned)		(695,005	)
Discount for loan fees paid to Vicis		(250,000	)

Series B Preferred Stock balance, net of unamortized discount at September 14, 2007	$	—

Series B Preferred Stock at June 30, 2008—

The Series B Preferred Stock balance on the consolidated balance sheet as of June 30, 2008 is comprised of the following:


Notional balance of Series B Preferred Stock at June 30, 2008	$	3,000,000
Adjustments:
Unamortized discount		—

Series B Preferred Stock balance, net of unamortized discount at June 30, 2008	$	3,000,000

As a result of these contract provisions, the USVD Seller’s Note balance at Inception (September 14, 2007) was adjusted as follows:


Notional balance of USVD Seller’s Note	$	3,100,000
Adjustments:
Discount for imputed interest		(352,066	)

USVD Seller’s Note balance, net of unamortized discount at September 14, 2007	$	2,747,934

USVD Seller’s Note at June 30, 2008—

The USVD Seller’s Note balance on the consolidated balance sheet as of June 30, 2008 is comprised of the following:


Notional balance of USVD Seller’s Note at June 30, 2008	$	3,100,000
Adjustments:
Unamortized discount		(179,590	)

USVD Seller’s Note balance, net of unamortized discount at June 30, 2008	$	2,920,410

Change in unamortized discount and loan costs of the Convertible Note —

For the quarter and six months ended June 30, 2008, the discount on the above Notes changed for amortization of discounts in connection with the notes. The total discount on the Convertible Notes changed from $8,338,342 at inception to $3,848,016 at December 31, 2007, then to $1,149,659 at June 30, 2008. Unamortized discounts totaling $4,490,326 were amortized to expense over the terms of the notes during the year ended 2007, and $1,336,191 and $2,698,357 were amortized to expense during the quarter and six months ended June 30, 2008, respectively.

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 11 — Acquisition of US Voice & Data, LLC (continued)

Credit Facility (continued)

The following assumptions were used in the preparation of the Warrant valuations using the Black-Scholes method, at inception (September 26, 2006), December 31, 2007 and February 13, 2007:


	Hilco Note			DD Sub Debt			Series B
Assumptions	Warrant			Warrant			Warrant

Dividend yield		0.00	%		0.00	%		0.00	%
Risk-free interest rate		4.21	%		4.21	%		4.21	%
Volatility		61.55	%		61.55	%		61.55	%
Expected Term	5 years			5 years			5 years

Note 12 — Stock-Based Compensation

The following disclosures provide information regarding the Company’s stock-based compensation awards, all of which are classified as equity awards in accordance with SFAS No. 123(R):

Stock options. The Company grants stock options to employees that allow them to purchase shares of the Company’s common stock. Options are also granted to members of the Board of Directors. The Company determines the fair value of stock options at the date of grant using the Black-Scholes valuation model. Most options vest annually over a three-year service period. The Company will issue new shares upon the exercise of stock options.

2007 Stock Incentive Plan

Effective April 19, 2007, we adopted the Brookside Technology Holdings Corp. (formerly Cruisestock, Inc) 2007 Stock Incentive Plan. The Stock Incentive Plan is discretionary and allows for an aggregate of up to 35,000,000 shares of our common stock to be awarded through incentive and non-qualified stock options and stock appreciation rights. The Stock Incentive Plan is administered by our Board of Directors, which has exclusive discretion to select participants who will receive the awards and to determine the type, size and terms of each award granted.

There was no compensation expense recognized for options for the quarters ended June 30, 2008 and March 31, 2008.

A summary of the changes in the total stock options outstanding during the quarter ended March 31, 2008 follows:


			Weighted
			Average
	Options		Exercise Price
Outstanding at December 31, 2007		14,000,000	$	0.186
Granted		1,200,000	$	0.050
Forfeited or expired		—		—
Exercised		—		—
Outstanding at June 30, 2008		15,200,000	$	0.175
Vested and exercisable at June 30, 2008		12,600,000	$	0.186

The weighted average remaining term of the options is approximately 4 years at June 30, 2008. All stock options issued in 2007 had a exercise price of $0.186 per share. The grant date fair value was approximately $0.087 per share.

At June 30, 2008, there was $305,000 of total unrecognized compensation cost related to non-vested stock option awards which are expected to be recognized over a weighted-average period of 1-5 years.

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 13 — Subsequent Events

Vicis Equity Infusion

On July 3, 2008, Brookside Technology Holdings Corp. (the “Company”) entered into a Securities Purchase Agreement (the “Vicis Agreement”) with Vicis Capital Master Fund, a sub-trust of Vicis Capital Series Master Trust (“Vicis”), pursuant to which Vicis acquired (a) 2,500,000 shares of Series A Convertible Preferred Stock (“Series A Stock”); and (b) a warrant (the “Warrant”) to purchase 250,000,000 shares of common stock of the Company at $0.03 per share (the “Exercise Price”), for an aggregate purchase price of $2,500,000 (“Vicis Equity Infusion”). Furthermore, pursuant to the Vicis Agreement, all of 3,000,000 shares of the Company’s Series B Convertible Preferred Stock (“Series B Stock”) previously owned by Vicis were converted into 3,000,000 shares of Series A Stock. As a result, interest will accrue as a preferred stock dividend (payable in cash or common stock) at 8% versus 16%. Accordingly, the Company no longer has any outstanding shares of Series B Stock. The Exercise Price is subject to a price adjustment from time to time upon the occurrence of certain events set forth in the Warrant.

As part of the assignment of the Hilco debt to Vicis, it is anticipated that the terms of the debt will be extended and that any covenant violations will be waived .

STN Acquisition

The Company has entered into a Stock and Membership Interest Purchase Agreement (the “Purchase Agreement”), dated July 17, 2008, by and among the Company, Trans-West Network Solutions, Inc., a California corporation (“Trans-West”), ProLogic Communications, Inc., a Nevada corporation (“ProLogic”), Michael Promotico, Herbert C. Rosen, Sam Standridge, and Peggy Standridge (collectively, “Trans-West Shareholders”), and Keith Askew and Craig Scarborough (collectively, the “ProLogic Shareholders”).

Pursuant to the Purchase Agreement, the Company has agreed to acquire (the “Acquisition”), through its wholly owned subsidiary Standard Tel Acquisitions, Inc. (“Sub”), (a) all of the stock of Trans-West from the Trans West Shareholders, and (b) all of ProLogic’s membership interest in Standard Tel Networks, LLC (“STN”). Trans West, a holding company with no operations, owns eighty percent (80%) of the membership interest of STN and ProLogic owns twenty percent (20%) of the membership interest of STN, and, accordingly, upon the closing of the Purchase Agreement, the Company will own (directly, in part, and indirectly through Trans West, in other part) one hundred percent (100%) of STN. The purchase price for STN will be financed primarily through a combination of debt and equity.

STN, a platinum Mitel distributer, is in the business of selling, designing, analyzing and implementing converged Voice over IP (VoIP), data and wireless business communications systems and solutions for commercial organizations of all types and sizes in the United States.

Brookside Technology Holdings Corp.
Notes to Unaudited Consolidated Financial Statements

Note 13 — Subsequent Events (continued)

The parties have agreed to use their best efforts to close the Acquisition as soon as possible but in any event prior to August 31, 2008. The closing of the Acquisition is subject to various closing conditions set forth in the Purchase Agreement including but not limited to (a) the Company having been satisfied with the results of its due diligence investigation of STN and Trans-West, (b) the Company obtaining adequate financing to complete the Acquisition, and (c) Michael Promotico having entered into an employment agreement pursuant to which he will serve as the chief executive officer of the Sub in form and substance mutually acceptable to the Company and Mr. Promotico. There can be no assurances that these closing conditions will be satisfied or that the Company will be able to consummate the Acquisition. The Purchase Agreement can be terminated by any party thereto if the Acquisition is not closed by August 31, 2008


Item 2.		Management’s Discussion and Analysis or Plan of Operations

The information presented in this section should be read in conjunction with our audited financial statements and related notes for the periods ended December 31, 2007 and 2006 included in our Form 10-KSB, as filed with the Securities and Exchange Commission, as well as the information contained in the financial statements, including the notes thereto, appearing in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” of our Form 10-KSB for the year ended December 31, 2007, and elsewhere in this report.

General

Organizational History

Our company, Brookside Technology Holdings Corp. (formerly “Cruisestock, Inc.”), was incorporated in September, 2005 under the laws of the State of Texas. On February 21, 2007, through a series of transactions (the “Share Exchange”), we acquired Brookside Technology Partners, Inc. (“Brookside Technology Partners”), which was incorporated in December 2001 under the laws of the State of Texas. Prior to the Share Exchange, we were a development stage company and had not realized any revenues from our operations. As a result of the Share Exchange, (i) Brookside Technology Partners became our wholly-owned subsidiary, (ii) the former stockholders of Brookside Technology Partners obtained, collectively, the majority ownership of the outstanding common stock of our company and (iii) we succeeded to the business of Brookside Technology Partners as our sole business. From an accounting perspective, Brookside Technology Partners was the acquirer in the Exchange Transactions.

Subsequent to the Share Exchange, on July 6, 2007 (the “Effective Time”), the Company changed its name to Brookside Technology Holdings Corp. and redomesticated into Florida. The name change and redomestication were accomplished by merging the Company into a newly-formed, Florida wholly-owned subsidiary, with the subsidiary being the surviving entity (the “Redomestication”). As a result, the Company is now a Florida corporation and its name is Brookside Technology Holdings Corp.

Stock Split

Concurrently with the Redomestication and as of the Effective Time:

	•		Each outstanding share of Cruisestock’s common stock, $0.001 per share, was automatically converted into seven shares of Brookside Technology Holdings Corp.’s common stock, $0.001 par value per share;

	•		Each outstanding share of Cruisestock’s series A preferred stock, $0.001 per share, was automatically converted into one share of Brookside Technology Holdings Corp.’s series A preferred stock, $0.001 par value per share;

	•		The price at which the series A preferred stock converts into common stock was automatically adjusted, on a proportionate basis, to account for the forward split of the common shares by reducing the current conversion price of $0.40 per share to $0.0571428, which was subsequently automatically adjusted down to $0.03 in conjunction with the Vicis Equity Infusion; and

	•		The number of shares of common stock underlying all of Cruisestock’s outstanding options and warrants to purchase common stock, and the exercise price of such options and warrants, was automatically adjusted to account for the 7-for-1 common share stock split.

In this Quarterly Report, whenever we refer to per share data, we are referring to shares outstanding after the Share Exchange and stock split.

On September 26, 2007, we acquired all of the membership interest of US Voice & Data, LLC, an Indiana Limited Liability Company (“USVD”) from The Michael P. Fischer Irrevocable Delaware Trust under Agreement dated April 5, 2007, and The M. Scott Diamond Irrevocable Delaware Trust under Agreement dated April 23, 2007 (the “Sellers”), pursuant to a Membership Interest Purchase Agreement closed on such date (the “Purchase Agreement”). USVD, headquartered in

Louisville, Kentucky, with offices in Lexington, Kentucky and Indianapolis, Indiana, is a regional provider of telecommunication services, including planning, design, installation and maintenance for converged voice and data systems. The purchase price of $15,429,242 was paid through a combination of common stock, cash and a seller note. Cash paid at closing was $9,938,690. Subsequent to the closing there was a $356,160 seller true-up, which was paid in February 2008. The Company issued 7,000,000 shares of its common stock valued at $.335 per share on September 14, 2007. Also, the Company owes the Sellers a note payable of $2,747,934, net of original issue discount of $352,066, with a maturity date of June 30, 2010. Additionally, the Purchase Agreement provides the Sellers with the opportunity to earn additional stock or cash consideration in the form of a three-year performance based EBITDA earnout.

Vicis Equity Infusion

On July 3, 2008, Brookside Technology Holdings Corp. (the “Company”) entered into a Securities Purchase Agreement (the “Vicis Agreement”) with Vicis Capital Master Fund, a sub-trust of Vicis Capital Series Master Trust (“Vicis”), pursuant to which Vicis acquired (a) 2,500,000 shares of Series A Convertible Preferred Stock (“Series A Stock”); and (b) a warrant (the “Warrant”) to purchase 250,000,000 shares of common stock of the Company at $0.03 per share (the “Exercise Price”), for an aggregate purchase price of $2,500,000 (“Vicis Equity Infusion”). Furthermore, pursuant to the Vicis Agreement, all of 3,000,000 shares of the Company’s Series B Convertible Preferred Stock (“Series B Stock”) previously owned by Vicis were converted into 3,000,000 shares of Series A Stock. As a result, interest will accrue as a preferred stock dividend (payable in cash or common stock) at 8% versus 16%. Accordingly, the Company no longer has any outstanding shares of Series B Stock. The Exercise Price is subject to a price adjustment from time to time upon the occurrence of certain events set forth in the Warrant.

In connection with the foregoing equity infusion, Vicis also purchased and assumed from Hilco Financial, LLC (“Hilco”), and Hilco assigned to Vicis, all credit agreements, loans and promissory notes under which Hilco had loaned money to the Company. The Company consented to such assignments. Effective June 18, 2006, Vicis has reduced the interest rate to accrue at 10% and has waived all defaults. In connection with such assignments, Hilco transferred to Vicis their warrants to purchase 61,273,835 shares, of common stock of the Company.

As part of the assignment of the Hilco debt to Vicis, it is anticipated that the terms of the debt will be extended and that any covenant violations will be waived .

Overview of Business

We are the holding company for Brookside Technology Partners, Inc., a Texas corporation (“Brookside Technology Partners”), and US Voice & Data, LLC, an Indiana Limited Liability Company (“USVD”), and all operations are conducted through those two wholly owned subsidiaries.

Headquartered in Louisville, Kentucky, USVD is a leading regional provider of telecommunication services including planning, design, installation and maintenance for the converged voice and data systems. USVD serves the Kentucky and southern Indiana markets, operating out of offices in Louisville, Lexington and Indianapolis.

The Company combines technical expertise in a range of communications products, including IP-enabled platforms, wired and wireless IP and digital endpoints and leading edge communications applications to create converged voice, video and data networks that help businesses increase efficiency and optimize revenue opportunities, critical for success in today’s competitive business environment. The sale of new systems, built on either Mitel/Inter-Tel, Nortel or NEC platforms, is the backbone of the Company’s business, typically accounting for approximately 65% of revenue. The Company has a diverse customer base of approximately 2,400 accounts. The Company’s target market is in the 5-1,000 seat range, although it has the technical capabilities to service much larger accounts. The Company’s largest concentration of accounts is the 50-150 seat range.

Results of Operations

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.

Three and Six Months Ended June 30, 2008 compared to Three and Six months Ended June 30, 2007.

Revenues, Cost of Sales and Gross Margins

Total revenues from operations for the quarter ended June 30, 2008 were $4,533,447 compared to $464,062 reported for the same period in 2007, representing an increase of $4,069,385 or 877%. This increase in revenues is primarily due to acquisition of US Voice & Data, LLC (“USVD”), which accounted for $3,527,325 of the increase. The remaining increase of $542,060, or 117% increase over previous year, was due to the increase in revenues at Brookside Technology Partners, Inc (“BTP”) as a result of sales initiatives put in place by management in the previous six months. Total revenues from operations for the six months ended June 30, 2008 were $8,741,513 compared to $1,001,439 reported for the same period in 2007, representing an increase of $7,740,074 or 773%. This increase in revenues is primarily due to acquisition of US Voice & Data, LLC (“USVD”), which accounted for $7,326,214 of the increase. The remaining increase of $413,860 was due to the increase in revenues at Brookside Technology Partners, Inc (“BTP”) as a result of sales initiatives put in place by management in the previous six months.

Cost of sales was $2,250,523 for the quarter ended June 30, 2008 compared to $239,162 for the quarter ended June 30, 2007, an increase of $2,011,361 or 841%. This increase in cost of sales is due to the acquisition of USVD, which accounted for $1,728,196 of the increase. The remaining increase of $283,165 was due to the cost of goods sold associated with the increased revenues at Brookside Technology Partners. As a percentage of sales, cost of sales was 50% and 52% for the quarter ended June 30, 2008 and 2007, respectively. This decrease was primarily due to increased profit margin realized on sales consummated in the second quarter 2008 versus the comparative period in 2007. This improvement in cost of sales as a percentage of sales is primarily attributable to the Company’s focus on higher margin, non-governmental business implemented since the second quarter of 2007. Cost of sales was $4,480,805 for the six months ended June 30, 2008 compared to $591,648 for the six months ended June 30, 2007, an increase of $3,889,157 or 657%. This increase in cost of sales is due to the acquisition of USVD, which accounted for $3,618,116 of the increase. The remaining increase of $271,041 was due to the cost of goods sold associated with the increased revenues at Brookside Technology Partners. As a percentage of sales, cost of sales was 51% and 59% for the quarter ended June 30, 2008 and 2007, respectively. This decrease was primarily due to increased profit margin realized on sales consummated in the first six months of 2008 versus the comparative period in 2007. This improvement in cost of sales as a percentage of sales is primarily attributable to the Company’s focus on higher margin, non-governmental business implemented since the second quarter of 2007.

Our gross margin was 50.0% for the quarter ended June 30, 2008 compared to 48.5% for the quarter ended June 30, 2007. The increase in gross margin percentage is due primarily to the Company’s focus on higher margin, non-governmental business since the second quarter ended June 30, 2007. Our gross margin was 48.7% for the six months ended June 30, 2008 compared to 40.9% for the six months ended June 30, 2007. The increase in gross margin percentage is due primarily to the Company’s focus on higher margin, non-governmental business since the second quarter ended June 30, 2007.

General and Administrative Expenses

General and administrative expenses were $2,000,996 and $493,404 for the quarter ended June 30, 2008 and 2007, respectively. This represented an increase of $1,507,592. This increase in General and administrative expenses in 2008 was due primarily to the acquisition of USVD, which accounted for $1,245,921 of the increase. The remaining increase was due primarily to increased professional fees incurred by the Company during the quarter ended June 30, 2008. General and administrative expenses were $3,745,486 and $793,268 for the six months ended June 30, 2008 and 2007, respectively. This represented an increase of $2,952,218. This increase in General and administrative expenses in 2008 was due primarily to the acquisition of USVD, which accounted for $2,664,592 of the increase. The remaining increase was due primarily to increased professional fees and executive salary expense incurred by the Company during the six months ended June 30, 2008 versus the comparable period in 2007.

Rental expense for operating leases during the quarters ended June 30, 2008 and 2007 was $107,851 and $7,000, respectively. This represented an increase of $100,851. $80,486 of this increase during the quarter ended June 30, 2008 was due to the acquisition of USVD. The Company also entered into a lease to rent out approximately 5,500 square feet of office space in Austin Texas in July 2007, as well as 2,000 square feet of office space in Clearwater, Florida in December 2007. Rental expense for operating leases during the six months ended June 30, 2008 and 2007 was $216,193 and $13,000, respectively. This represented an increase of $203,193. $160,459 of this increase during the six months ended June 30, 2008 is due to the acquisition of USVD.

Stock Compensation Expense

The Company incurred stock compensation expense of $115,500 and $915,000 for the quarter and six months ended June 30, 2007 and 2008, respectively. The 2008 expense relates to the stock option agreements entered into with Dan Parker, our Regional Vice President, Bonnie Parker, our Project Manager and the vesting of 2,100,000 of George Pacinelli’s shares in 2008. The 2007 charge of $915,000 relates to the stock option agreements entered into with George Pacinelli, our President, and Bryan McGuire, our Chief Financial Officer. Pursuant to Mr. Pacinelli’s stock option agreement, we granted to Mr. Pacinelli an option to purchase up to 7,000,000 shares of our common stock at an exercise price of $0.185714 per share (the “Pacinelli Options”). Pursuant to Mr. McGuire’s stock option agreement, we granted to Mr. McGuire an option to purchase up to 7,000,000 shares of our common stock at an exercise price of $0.185714 per share (the “McGuire Options”). Pursuant to Mr. Parker’s stock option agreement, we granted to Mr. Parker an option to purchase up to 1,000,000 shares of our common stock at an exercise price of $0.05 per share (the “Dan Parker Options”). Pursuant to Ms. Parker’s stock option agreement, we granted to Ms. Parker an option to purchase up to 200,000 shares of our common stock at an exercise price of $0.05 per share (the “Bonnie Parker Options”. The Dan Parker Options, the Pacinelli Options and the McGuire Options collectively hereinafter referred to as the “Options”). The Options are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and were granted pursuant to our 2007 Stock Option Plan, pursuant to which we have reserved 35,000,000 shares of common stock for issuance to employees, directors and consultants. All of Mr. McGuire’s options are immediately exercisable. 5,600,000 of Mr. Pacinelli’s options are vested and are exercisable and the remaining 1,400,000 vest on April 19, 2009. 250,000 of Mr. Parker’s options are vested and are exercisable, and the remaining 750,000 vest at 250,000 per year, through 2011. 50,000 of Ms. Parker’s options are vested and are exercisable, and the remaining 150,000 vest at 50,000 per year, through 2011.

The Company recognizes employee stock based compensation in accordance with the adoption of SFAS 123R. The Company utilizes the Black-Scholes valuation model to value all stock options (the “Options”). Compensation for restricted stock awards is measured at fair value on the date of grant based on the number of shares expected to vest and the quoted market price of the Company’s common stock. Compensation cost for all awards will be recognized in earnings, net of estimated forfeitures, on a straight-line basis over the requisite service period. For the six months ended June 30, 2008 and 2007, the Company recognized $115,000 and $915,000, respectively, in Employee Stock Compensation Expense. The Company has

unrecognized stock compensation expense of $86,800 which will be recognized to expense over the remaining 21 month vesting period.

Amortization Expense

The Company recognized $1,348,200 of amortization expense for the quarter ending June 30, 2008 related to the non-cash accounting treatment of the warrants issued and amortization of intangible assets associated with the USVD acquisition. There was no such expense for the comparable period in 2007. The Company recognized $2,670,524 of amortization expense for the six months ending June 30, 2008 related to the accounting treatment of the warrants issued and amortization of intangible assets associated with the USVD acquisition. There was no such expense for the comparable period in 2007.

Interest Expense

Interest expense was $644,130 and $22,406 for the quarters ended June 30, 2008 and 2007, respectively, and $1,339,583 and $26,557 for the six months ended June 30, 2008. The increase is due primarily to the additional debt incurred with the acquisition of USVD.

Net Profit/Net Loss from Operations

We realized a net loss from operations of $1,875,236 for the quarter ended June 30, 2008 compared to a net loss from operations of $1,217,050 for the quarter ended June 30, 2007. This decrease in income from operations is primarily due to the amortization expense of $1,348,200 for the quarter and the increase in interest expense of $641,724 for the quarter ended June 30, 2008, partially offset by decrease in stock compensation expense of $799,500 in the second quarter ended June 30, 2008 versus the comparable period in 2007. We realized a net loss from operations of $3,673,323 for the six months ended June 30, 2008 compared to a net loss from operations of $1,345,084 for the six months ended June 30, 2007. This decrease in income from operations is primarily due to the amortization expense of $2,670,524 and the increase in interest expense of $1,313,026, respectively for the six months ended June 30, 2008, partially offset by the decrease in stock compensation expense of $799,500 realized in the second quarter ended June 30, 2008, versus the comparable period in 2007.

Liquidity and Capital Resources

The Company has financed its growth with debt and equity. On July 3, 2008 the Company raised approximately $2,500,000 through the sale of Series A Preferred stock. As part of the transaction the Company also issued additional Series A Preferred stock in exchange for all the outstanding Series B Preferred stock. In connection with the foregoing equity infusion, the purchaser of the Series A Preferred stock, also purchased and assumed from Hilco Financial, LLC (“Hilco”), all credit agreements, loans and promissory notes under which Hilco had loaned money to the Company. The Company consented to such assignments. In connection with such assignments, Hilco transferred to Vicis their warrants to purchase 61,273,835 shares, of common stock of the Company. The equity infusion will provide working capital to finance the growth of the Company.

As part of the assignment of the Hilco debt to Vicis, it is anticipated that the terms of the debt will be extended and that any covenant violations will be waived .

The Company has incurred net losses during the six months ended June 30, 2008, and the years ended December 31, 2007. The Company’s ability to meet its obligations in the ordinary course of business is dependent upon its ability to establish profitable operations, raise additional financing through public or private equity financings, or secure other sources of financing to fund operations. The Company has cash and cash equivalents of $233,819 and a working capital deficit of $12,778,392 at June 30, 2008. The Company had net cash used in operating activities of $454,317 during the six months ended June 30, 2008. See Note 2 to the Financial Statements.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported

amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. For a description of those estimates, see Note 3, Significant Accounting Policies, contained in the explanatory notes to our financial statements contained in this Report. On an ongoing basis, we evaluate our estimates, including those related to reserves, deferred tax assets and valuation allowance, and impairment of long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above described items, are reasonable.

Revenue Recognition

The Company primarily applies the percentage-of-completion method and generally recognizes revenue based on the relationship of total costs incurred to total projected costs. Profits expected to be realized on such contracts are based on total estimated sales for the contract compared to total estimated costs, including warranty costs, at completion of the contract. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Provision for anticipated losses on uncompleted contracts is made in the period in which such losses become evident.


Item 3.		Quantitative and Qualitative Disclosures about Market Risk

As a Smaller Reporting Company as defined Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item 3.


Item 4T.		Controls and Procedures

Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer (our Principal Executive Officer and Principal Financial Officer, respectively), has evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the period ended June 30, 2008, the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2008 to ensure the timely collection, evaluation and disclosure of information relating to our company that would potentially be subject to disclosure under the Securities Exchange Act of 1934, as amended,

and the rules and regulations promulgated thereunder is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting

During the most recent quarter ended June 30, 2008, the Company hired accounting consultants to augment its accounting staff and accounting and reporting capabilities. Management believes these are material changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act).

PART II — OTHER INFORMATION


Item 1.		Legal Proceedings

None.


Item 1A.		Risk Factors

Not applicable.


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

The information required by this Item 2 was previously disclosed and included in Current Reports on Form 8-K filed by the Company.


Item 3.		Defaults Upon Senior Securities

None.


Item 4.		Submission of Matters to a Vote of Security Holders {{ Renumber items per 10-Q}}

None.


Item 5.		Other Information

None.


Item 6.		EXHIBITS

Exhibit 31.1 — Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

Exhibit 31.2 — Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

Exhibit 32.1 — Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2 — Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.