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Article by DailyStocks_admin    (08-04-08 06:15 AM)

Filed with the SEC from July 16 to July 23:

CoActive Marketing Group (CMKG)
Aquifer Capital Group said it has been a shareholder for almost a year and has increased its position, as it sees "solid management execution" reflected in recent financial performance. Aquifer intends to discuss with management the steps necessary to move the stock to more appropriate valuation levels. Aquifer Capital reported holding 402,475 shares (5.06%).

BUSINESS OVERVIEW

Corporate Overview

CoActive Marketing Group, Inc., through its wholly-owned subsidiaries Inmark Services LLC, Optimum Group LLC, U.S. Concepts LLC and Digital Intelligence Group LLC, is an integrated sales promotional and marketing services company. We develop, manage and execute sales promotion programs at both national and local levels, utilizing both online and offline media channels. Our programs help our clients effectively promote their goods and services directly to retailers and consumers and are intended to assist them in achieving maximum impact and return on their marketing investment. Our activities reinforce brand awareness, provide incentives to retailers to order and display our clients’ products, and motivate consumers to purchase those products, and are designed to meet the needs of our clients by focusing on communities of consumers who want to engage brands as part of their lifestyles.

Our services include experiential and face to face marketing, event marketing, interactive marketing, ethnic marketing, and all elements of consumer and trade promotion, and are marketed directly to our clients by our sales force operating out of offices located in New York, New York; Cincinnati, Ohio; Chicago, Illinois and San Francisco, California.

CoActive was formed under the laws of the State of Delaware in March 1992 and is the successor to a sales promotion business originally founded in 1972. CoActive began to engage in the promotion business following a merger consummated on September 29, 1995 that resulted in Inmark becoming its wholly-owned subsidiary.

Our corporate headquarters are located at 75 Ninth Avenue, New York, New York 10011, and our telephone number is 212-660-3800. Our Web site is www.coactivemarketing.com. Copies of all reports we file with the Securities and Exchange Commission are available on our Web site.

What We Do

We use data and analytics to target and drive insight to optimize our clients’ marketing programs. Through the union of data, technology, creativity and a sophisticated marketing field force, we develop face to face and digital experiences that drive those consumers into a relevant relationship with the brands we promote. Our programs are designed to increase sales to targeted consumers and retailers while enhancing brand image. In contrast with general advertising, we provide specialized marketing services across a wide variety of communications channels, including “alternative media” channels, with the goal of increasing sales of our client’s products and services as a direct and verifiable consequence of our programs.

Utilizing our experiential marketing, loyalty marketing, digital marketing and retail promotional capabilities along with our analytic tools, we enable our clients to interact more meaningfully with their target consumers. Our strategy is to build a best in class data-driven, measurable, integrated marketing company that integrates experiential marketing, retail promotion, online marketing, customer relationship management (“CRM”) and loyalty programs into a highly optimized marketing architecture that can compete against any marketing organization in the United States.

Experiential Marketing

U.S. Concepts is among the nation’s most awarded event, experiential, mobile and field marketing resources. U.S. Concepts’ experiential programs include concerts, tours and festivals, sales driven sampling activities, demonstration programs and other events that introduce and promote our clients’ brands, services and products. U.S. Concepts designs and executes brand experiences based on the philosophy that “continuous consumer contact drives brand growth.” Our technological and data capture capabilities at events have evolved our business to include word of mouth and advocate marketing techniques.

Digital Marketing

We see our digital capability as four lines of business: a) interactive marketing which includes advertising, marketing promotions and sweepstakes, b) social networking and word of mouth marketing – building brand extensions that allow consumers and advocates to participate in the brand, c) data analytics and segmentation – the ability to analyze what we do through the collection of data across experiential, promotional and traditional marketing campaign execution, and d) business process enablement – the development of technology and applications that allow companies to drive efficiencies and optimize their marketing infrastructures.

Multi-Cultural Marketing

Through our introduction of sophisticated online and offline segmentation techniques and a focus on African American and Latino consumers, we have created a multi-cultural segmentation product that, coupled with a highly motivated and culturally diverse creative team, has opened the doors to Fortune 500 companies looking to grow their share across these underserved consumers.

Strategic Planning and Sales Promotion

Taking into account each client’s unique needs for brand positioning, message creation and the selection of the appropriate communication channels to be employed, we immerse ourselves in our client’s business and collaborate with their marketing team to develop a strategic and sales promotion plan. Once the plan is developed, we focus on creative and program development and implementation, recognizing that successful execution is as important as the plan.

Trade Marketing

We have extensive experience in developing customized programs for retailers in a variety of channels. We are active in all major retail channels, including mass, grocery, drug, do-it-yourself (“DIY”) and convenience. With our clients, we present marketing and promotional programs to retailers, capitalizing on established relationships we have cultivated with these retailers over many years.

The Growth of Alternative Media

The digital, experiential and other marketing arenas in which we interact with consumers on behalf of our clients have come to be known as “alternative media”. Included in alternative media are word-of-mouth campaigns, which we are able to execute through our extensive field network of part-time employees. The increased use of alternative media as a marketing tool is attributable to the need to target difficult to find yet highly desirable consumers who are no longer predictable in their media consumption habits. According to recent statistics, marketing spending on alternative media in the U.S. jumped 22% to $73.5 billion from 2006 to 2007, and represented 16% of total marketing spending in 2007, up from only 8% in 2002. Industry publications expect spending on alternative media to continue to grow over the next five years. We believe that we are well positioned to capitalize on this anticipated growth in spending.

Premier Client Roster

Our principal clients are large manufacturers of packaged goods and other consumer products. Our client partners are actively engaged in promoting their products to both the consumer as well as trade partners, (i.e., retailers, distributors, etc.), and include, among others, Bayer HealthCare, LLC, Coty, Diageo North America, Inc. (“Diageo”), Fas Mart Convenience Stores, Fresh Express, Inc., Kikkoman International, Inc., Moet Hennessy, Nintendo of America, Pepsi Cola North America, The Procter & Gamble Company, SAP, and SuperValu.

For our fiscal years ended March 31, 2008 and 2007, Diageo accounted for approximately 65% and 53%, respectively, of our revenues (inclusive of reimbursable program costs and expenses) and 62% and 64%, respectively, of our accounts receivable.

To the extent that we continue to have a heavily weighted sales concentration with one or more clients, the loss of any such client would have a material adverse effect on our earnings. Unlike traditional general advertising firms which are engaged as agents of record on behalf of their clients, as a promotional company, we are typically engaged on a product-by-product, or project-by-project basis.

Backlog

Excluding sales backlogs attributable to reimbursable costs and expenses, at March 31, 2008, our sales backlog amounted to approximately $7,700,000 compared to a sales backlog of approximately $9,750,000 at March 31, 2007. As described further below our revenue patterns are unpredictable and may vary significantly from period to period. Our backlog at any given point in time is similarly subject to fluctuation.

Competition

The market for promotional services is highly competitive, with hundreds of companies claiming to provide various services in the promotions industry. In general, our competition is derived from two basic groups: other full service promotion agencies, and companies which specialize in providing one specific aspect of a general promotional program. Some of our competitors are affiliated with larger general advertising agencies, and have greater financial and marketing resources available than we do. These competitors include Wunderman and OgilvyAction, divisions of WPP Group, Arnold Brand Promotions, part of Havas, and Momentum Worldwide, part of IPG. Niche independent competitors include PromoWorks, Ryan Partnership and ePrize LLC.

Employees

We currently have approximately 270 full-time and 4,500 part-time employees. Our part-time employees are primarily involved in marketing support, program management and in-store sampling and demonstration, and are employed on an as needed basis. None of our employees are represented by a labor organization and we consider our relationship with our employees to be good.

CEO BACKGROUND

Marc C. Particelli Chairman of the Board of the Company
Age: 62 since July 12, 2006, and its interim
Director since February 2005; President and Chief Executive Officer
Chairman of the Board from July 12, 2006 until October 9, 2006.
Mr. Particelli was the Chief Executive
Officer of Modem Media, an interactive
marketing services firm, from January
1991 until its acquisition by Digitas
Inc. in October 2004, and more recently,
from August 2005 until March 2006, he was
the Chief Executive Officer of TSM
Corporation, a telecommunications company
serving the Hispanic market. Earlier, Mr.
Particelli was a partner at Oak Hill
Capital Management, a private equity
investment firm, and managing director at
Odyssey Partners L.P., a hedge fund.
Prior to entering the private equity
business, Mr. Particelli spent 20 years
with Booz Allen where he helped create
the Marketing Industries Practice and led
its expansion across Europe, Asia and
South America. Mr. Particelli also
currently serves as a director of and
investor in several private companies,
and as an advisor to several private
equity firms. Mr. Particelli presently
serves as a director of Pacifichealth
Laboratories, Inc.

Charles F. Tarzian Chief Executive Officer of the Company
Age: 50 since October 9, 2006. From 1996 through
Director since October 2006; 1999, Mr. Tarzian was President of Blau
Chief Executive Officer Marketing Technologies, the technology
subsidiary of Barry Blau and Partners,
one of the largest independent direct
marketing agencies in the U.S. at that
time. In late 1998, he became Chief
Technology Officer of Circle.com, the
publicly traded subsidiary of Snyder
Communications Inc. providing Internet
professional services, including
strategic e-commerce consulting and
online marketing. Mr. Tarzian later
became Circle.com's Chief Strategy
Officer before being appointed its Chief
Executive Officer in November 2000. In
2001, Circle.com was integrated into Euro
RSCG Worldwide, the global advertising
unit of Havas, and Mr. Tarzian assumed
the title of Chief Executive Officer of
the New York region of Euro RSCG, a
position he held until May 2006.

James H. Feeney Principal of The Feeney Group LLC, an
Age: 68 advertising and marketing consulting firm
Director since July 2004 working with companies in developing
strategic positioning, since 2000. Also
Partner of O'Neil Lifton Huffstetler
Feeney & Barry, a venture marketing,
creative development firm, since May
2003. Prior thereto, from March 1996, was
President and CEO of Trone Advertising,
an advertising agency. Mr. Feeney was
President and Chairman of the Executive
Committee of Albert Frank-Guenther Law, a
125 year old international financial
service agency from 1993 to 1996. Prior
to AFGL, he spent 13 years as Executive
Vice President of Ally&Gargano where he
led the launch of MCI at the Agency for 5
years. He was at The Ted Bates
Advertising Agency for 12 years where he
was Managing Director, Senior Vice
President.

Herbert M. Gardner Executive Vice President, Barrett-Gardner
Age: 67 Associates, Inc., an investment and
Director since May 1997 merchant banking firm, since October
2002. Prior thereto, Senior Vice
President of Janney Montgomery Scott LLC,
an investment banking firm, since 1978.
Presently serves as Chairman of the Board
of Directors of Supreme Industries, Inc.
and as a director of Chase Packaging
Corp., Nu Horizons Electronics Corp., TGC
Industries, Inc. and Rumson Fair Haven
Bank and Trust Company.

John A. Ward, III Mr. Ward has been the Chief Executive
Age: 61 Officer of Innovative Card Technologies,
Director since July 2002 Inc. since August 15, 2006, and was the
interim Chief Executive Officer of Doral
Financial Corporation from September 15,
2005 until August 15, 2006. Previously,
Mr. Ward was the Chairman and Chief
Executive Officer of American Express
Bank from January 1996 until September
2000, and President of Travelers Cheque
Group from April 1997 until September
2000. Mr. Ward joined American Express
following a 27-year career at Chase
Manhattan Bank, during which he held
various senior posts in the United
States, Europe and Japan. His last
position at Chase was that of Chief
Executive Officer of ChaseBankCard
Services, which he held from 1993 until
1995. Presently serves as the Chairman of
the Board of Innovative Card Technologies
Inc. and as a director of Primus
Guaranty, Ltd. and Rewards Network Inc.

Brian Murphy Vice Chairman of the Company since April
Age: 50 2, 2007. Previously, Chief Executive
Vice Chairman Officer of U.S. Concepts, a wholly-owned
subsidiary of the Company, since December
29, 1998, and until January 6, 2000,
President of such company, and President
of predecessor of U.S. Concepts from 1992
through December 29, 1998.

Susan Murphy Interim Chief Financial Officer of the
Age: 46 Company since July 2, 2007, and a
Interim Chief Financial Officer financial consultant to the Company since
March 2007, during which time she has
spearheaded the Company's efforts to
implement and improve its internal
controls over financial reporting. Ms.
Murphy has been a financial reporting and
internal controls consultant since July
2003, during which time she has been
retained by Euro-RSCG, a division of
Havas Advertising, and DoubleClick, among
others. Previously, from August 1987 to
June 2003, Ms. Murphy held numerous
senior level positions with Euro-RSCG,
and was the Chief Financial Officer for
its North American division from November
1999 until June 2003. From 1987 until
1999, she was the Chief Financial Officer
and Managing Partner of Cohn & Wells, a
direct marketing network, and a division
of Euro-RSCG.

Denise Felitti Vice President - Controller of the
Age: 43 Company since July 2, 2007. Ms. Felitti
Vice President - Controller has been employed by the Company in its
(Principal Accounting Officer) finance and accounting department since
August 2005. Previously, from 2003 to
June 2005, Ms. Felitti was the Assistant
Controller at Deutsch Advertising (a
subsidiary of IPG), and from 2000 until
May 2003, she was the Controller at
Messner, Vetere, Berger, McNamee
Schmetterer (a subsidiary of Euro RSCG).
Ms. Felitti was also employed for 10
years, ultimately as the
Controller/Finance Manager, of Charlex
Inc., a video production company. Ms.
Felitti holds an MBA in Management.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

During Fiscal 2008, we made a conscious effort to eliminate single-project work clients in favor of growing revenues from existing and new clients with recurring, more profitable, work. This resulted in improvements in business profitability and working capital during the year, as evidenced by an increase in income from continuing operations before provision for income taxes to $2,934,000 compared to $1,745,000 in Fiscal 2007, and a $2,533,000 improvement in working capital from Fiscal 2007. However, our shift in focus also resulted in reduced revenues during Fiscal 2008.

The following information should be read together with the consolidated financial statements and notes thereto included elsewhere herein.

Critical Accounting Policies

Our significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 8 of this Form 10-K. We believe the following represent our critical accounting policies:

Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and of revenues and expenses during the reporting period. Estimates are made when accounting for revenue (as discussed below under “Revenue Recognition”), depreciation, amortization, bad debt reserves, income taxes and certain other contingencies. We are subject to risks and uncertainties that may cause actual results to vary from estimates. We review all significant estimates affecting the financial statements on a recurring basis and record the effects of any adjustments when necessary.

Revenue Recognition

Our revenues are generated from projects subject to contracts requiring us to provide services within specified time periods generally ranging up to twelve months. As a result, on any given date, we have projects in process at various stages of completion. Depending on the nature of the contract, revenue is recognized as follows: (i) on time and material service contracts, revenue is recognized as services are rendered and the costs are incurred; (ii) on fixed price retainer contracts, revenue is recognized on a straight-line basis over the term of the contract; (iii) on fixed price multiple services contracts, revenue is recognized over the term of the contract for the fair value of segments of the services rendered which qualify as separate activities or delivered units of service; to the extent multi-service arrangements are deemed inseparable, revenue on these contracts is recognized as the contracts are completed; (iv) on certain fixed price contracts, revenue is recognized on a percentage of completion basis, whereby the percentage of completion is determined by relating the actual cost of labor performed to date to the estimated total cost of labor for each contract; (v) on certain fixed price contracts, revenue is recognized on the basis of proportional performance as certain key milestones are delivered. Costs associated with the fulfillment of projects are accrued and recognized proportionately to the related revenue in order to ensure a matching of revenue and expenses in the proper period. Our business is such that progress towards completing projects may vary considerably from quarter to quarter.

If we do not accurately estimate the resources required or the scope of work to be performed, or do not manage our projects properly within the planned periods of time to satisfy our obligations under the contracts, then future profit margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. Our outside production costs consist primarily of costs to purchase media and program merchandise; costs of production; merchandise warehousing and distribution; third party contract fulfillment costs; and other costs directly related to marketing programs.

In many instances, revenue recognition will not result in related billings throughout the duration of a contract due to timing differences between the contracted billing schedule and the time such revenue is recognized. In such instances, when revenue is recognized in an amount in excess of the contracted billing amount, we record such excess on our balance sheet as unbilled contracts in progress. Alternatively, on a scheduled billing date, should the billing amount exceed the amount of revenue recognized, we record such excess on our balance sheet as deferred revenue. In addition, on contracts where costs are incurred prior to the time revenue is recognized on such contracts, we record such costs as deferred contract costs on our balance sheet. Notwithstanding this, labor costs for permanent employees are expensed as incurred.

Goodwill and Other Intangible Asset

Our goodwill consists of the cost in excess of the fair market value of the acquired net assets of our subsidiary companies, Inmark, Optimum, U.S. Concepts, and Digital Intelligence, which have been identified as our reporting units. We also have an intangible asset consisting of an Internet domain name and related intellectual property rights. At both March 31, 2008 and 2007, our balance sheet reflected goodwill in the amount of approximately $7,357,000 and an intangible asset in the amount of $200,000.

Goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. Goodwill impairment tests require the comparison of the fair value and carrying value of reporting units. Measuring fair value of a reporting unit is generally based on valuation techniques using multiples of earnings. We assess the potential impairment of goodwill and intangible assets annually and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Upon completion of such review, if impairment is found to have occurred, a corresponding charge will be recorded.

Goodwill and the intangible asset will continue to be tested annually at the end of each fiscal year to determine whether they have been impaired. Upon completion of each annual review, there can be no assurance that a material charge will not be recorded. During the year ended March 31, 2008, we have not identified any indication of goodwill impairment in our reporting units.

Accounting for Income Taxes

Our ability to recover the reported amounts of the deferred income tax asset is dependent upon our ability to generate sufficient taxable income during the periods over which net temporary tax differences become deductible. In assessing the realizability of deferred tax assets and liabilities, management considers whether it is more likely than not that some or all of them will not be realized. As of March 31, 2008 and 2007, we determined that a valuation allowance against our deferred tax asset was not necessary. We must generate approximately $8,260,000 of taxable income, exclusive of any reversals of timing differences, to fully utilize our deferred tax asset. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax asset during the periods in which we are able to utilize this asset under applicable tax regulations.

Results of Operations

Fiscal Year 2008 Compared to Fiscal Year 2007

Sales. Sales consist of fees for services, commissions, reimbursable program costs and expenses and other production and program expenses. We purchase a variety of items and services on behalf of our clients for which we are reimbursed pursuant to our client contracts. The amount of reimbursable program costs and expenses, and outside production and other program expenses which are included in revenues will vary from period to period, based on the type and scope of the service being provided. The general trend for the twelve months ended March 31, 2008 has been toward lower reimbursable program costs and other expenses as a percentage of total revenues versus comparable periods in the prior year. This trend is due in large part to our efforts described above to eliminate single-project work in favor of more profitable recurring work.

Sales for the twelve months ended March 31, 2008 were $85,523,000, compared to $95,880,000 for the fiscal year ended March 31, 2007, a decrease of $10,357,000. The decrease in sales reflects the shift in certain client contracts, under which the Company’s compensation is based primarily on labor, with lower associated reimbursable program and production costs. Additionally, sales for the twelve months ended March 31, 2007 were positively affected by several significant non-recurring projects.

Reimbursable Program Costs and Expenses . Reimbursable program costs and expenses for Fiscal 2008 and 2007 were $25,763,000 and $39,888,000, respectively. The decrease in reimbursable program costs and expenses of approximately $14,125,000, or 35%, in Fiscal 2008 was primarily due to the mix of such costs in experiential and sales promotion programs that have been executed during that period, and also reflect the growing shift in client contracts referred to above.

Outside Production and Other Program Expenses . Outside production and other program expenses consist of the costs of purchased materials, media, services, certain direct labor charged to programs and other expenditures incurred in connection with and directly related to sales but which are not classified as reimbursable program costs and expenses. Outside production costs for Fiscal 2008 were $24,820,000 compared to $20,983,000 for Fiscal 2007, an increase of $3,837,000, or 18%. The weighted `mix of outside production costs and the mark-up related to these cost components may vary significantly from project to project based on the type and scope of the service being provided.

Operating Revenue. For the twelve months ended March 31, 2008, Operating Revenue amounted to $34,940,000, a decrease of $69,000 compared to $35,009,000 for the fiscal year end March 31, 2007. As a result of the Company’s growing shift toward client contracts under which the Company’s compensation is based primarily on labor, with lower associated reimbursable program and production costs, Operating Revenue as a percentage of sales increased to 41% for the twelve months ended March 31, 2008, versus 37% for the same period ended March 31, 2007.



Compensation Expense . Compensation expense, exclusive of reimbursable program costs, consists of the salaries, payroll taxes and benefit costs related to indirect labor, overhead personnel and certain direct labor otherwise not charged to programs. For Fiscal 2008, compensation expense was $25,634,000, compared to $23,121,000 for Fiscal 2007, an increase of $2,513,000, or 11%. The increase was primarily due to a combination of the following: additional costs associated with recruiting senior talent to support growth in our technology group, performance based salary increases, an accrual for employee bonuses, and higher compensation expense for employee stock based compensation awards.

General and Administrative Expenses. General and administrative expenses consist of office and equipment rent, depreciation and amortization, professional fees, charges for doubtful accounts and other overhead expenses. For Fiscal 2008, general and administrative costs were $6,459,000, compared to $9,901,000 for Fiscal 2007, a decrease of $3,442,000, or 35%. The decrease reflects our continued efforts to reduce overall overhead costs and better track certain reimbursable overhead costs related to client programs.

Interest Income (Expense), Net. Net interest income for Fiscal 2008 amounted to $87,000, compared to net interest expense of ($35,000) for Fiscal 2007. Interest income consists primarily of interest on our money market and CD accounts. Interest expense consisted primarily of interest paid on bank debt and was tied to the bank’s prime rate in effect. In June 2007, the Company terminated its credit facility.

Other Expense, Net. Other expense, net for the year ended March 31, 2007 amounted to $207,000 and consisted of a charge of approximately $306,000 in connection with the provision for the uncollectible portion of a note receivable from an officer. Such expense was offset by $57,000 in proceeds from the sale of certain Internet domain names which were not being utilized by the Company as well as $42,000 of insurance policy proceeds.

Income from Continuing Operations before Provision for Income Taxes. Income from continuing operations before provision for income taxes for Fiscal 2008 increased 68% to $2,934,000, compared to $1,745,000 for Fiscal 2007.

Provision for Income Taxes. Our provision for income taxes was $1,447,000 in Fiscal 2008 as compared to $572,012 in Fiscal 2007, and was based upon our effective tax rate for the respective fiscal years, 49.3% in Fiscal 2008 and 32.8% in Fiscal 2007. The change in our effective tax rate was primarily the result of a change in estimate of the tax basis of the Company’s net operating loss carryforward..

Income from Continuing Operations. As a result of the items discussed above, income from continuing operations for the years ended March 31, 2008 and 2007 was $1,487,000 and $1,173,000, respectively. Diluted earnings per share from continuing operations amounted to $.21 and $.16 for the years ended March 31, 2008 and 2007, respectively.

Discontinued Operations. Loss from discontinued operations relating to the sale of MarketVision in May 2006 as well as the loss incurred on its disposal amounted to $177,000, on a net of tax basis for the year ended March 31, 2007. The loss on the disposal of MarketVision includes a tax provision of approximately $302,000 as a result of this sale with a corresponding reduction of the deferred tax asset on our balance sheet. Diluted loss per share from discontinued operations amounted to ($.02) for the year ended March 31, 2007.

Net Income. As a result of the items discussed above, net income for Fiscal 2008 rose 49% to $1,486,000, compared to net income of $996,000 for Fiscal 2007. Fully diluted earnings per share amounted to $.21 and $.14 for Fiscal 2008 and 2007, respectively.

Liquidity and Capital Resources

Beginning with our fiscal year ended March 31, 2000, we have continuously experienced negative working capital. This deficit has generally resulted from our inability to generate sufficient cash and receivables from our programs to offset our current liabilities, which consist primarily of obligations to vendors and other accounts payable and deferred revenues. We are continuing our efforts to increase revenues from our programs and reduce our expenses, but to date these efforts have not been sufficiently successful. We have been able to operate during this extended period with negative working capital due primarily to advance payments made to us on a regular basis by our largest customers, and to a lesser degree, equity infusions from private placements of our securities ($1 million in January 2000, and $1.63 million in January and February 2003), and stock option and warrant exercises. For the fiscal year ended March 31, 2008, we have generated sufficient net income to reduce the working capital deficit by $2,533,000 to $783,000.

On June 20, 2007, subsequent to the end of Fiscal 2007, we repaid the remaining obligations owed to our senior lender in the amount of $1,762,000. We believe cash currently on hand together with cash expected to be generated from operations will be sufficient to fund our operations through the end of Fiscal 2009. In addition, on June 12, 2008 we signed a commitment letter with a commercial lender providing for a $5,000,000 senior secured credit facility consisting of a three-year revolving credit facility in the principal amount of $2,500,000 and a three-year term loan in the amount of $2,500,000. There can be no assurance that we will be able to close the credit facility. If we are unable to secure financing when needed, our businesses may be materially and adversely affected.

At March 31, 2008, we had cash and cash equivalents of $5,324,000, a working capital deficit of $783,000, and stockholders’ equity of $11,988,000. In comparison, at March 31, 2007, we had cash and cash equivalents of $9,514,000, a working capital deficit of $3,316,000, an outstanding bank term loan of $2,000,000, an outstanding bank letter of credit of $450,000, and stockholders’ equity of $10,056,000. The decrease of $4,190,000 in cash and cash equivalents was primarily due to the repayment of our outstanding debt obligations, purchases of fixed assets and cash used in operating activities.

Operating Activities. Net cash used in operating activities for the twelve months ended March 31, 2008 was $1,523,000 compared to $5,191,000 of cash provided by operating activities in fiscal 2007. This $6,714,000 reduction in cash generated by operating activities was primarily attributable to a $10,709,000 change in certain balance sheet accounts during Fiscal 2008 as a result of timing differences between operating revenue recognized versus the amount of sales billed and program cost incurred as of March 31, 2008 and March 31, 2007, respectively. These accounts include unbilled contracts in progress, deferred contract costs, accrued job costs and deferred revenue. This was partially offset by $4,010,000 of cash provided from the net change in the accounts receivable and accounts payable balances from March 31, 2007 to March 31, 2008.

Investing Activities. For Fiscal 2008, net cash used by investing activities was $679,000 due primarily to the purchase of computer equipment and a new accounting system. For the twelve months ended March 31, 2007, net cash provided by investing activities was $925,000, primarily as a result of proceeds from sale of discontinued operations offset by the purchase of certain fixed assets.

Financing Activities. For the twelve months ended March 31, 2008, net cash used in financing activities was $1,988,000 resulting primarily from payments made to repay bank borrowings. For the twelve months ended March 31, 2007, net cash used in financing activities amounted to $531,000 resulting primarily from payments made to repay bank borrowings of $1,000,000, offset by $454,000 in proceeds from the exercise of stock options

Off-Balance Sheet Transactions

We are not a party to any “off-balance sheet transactions” as defined in Item 301 of Regulation S-K.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

The following table presents operating data of the Company expressed as a percentage of sales, net of reimbursable program costs and expenses, for the three and six months ended September 30, 2007 and 2006

Sales. Sales consist of fees for services, classified below as Operating Revenue, as well as sales from reimbursable costs and production expenses. We purchase a variety of items and services on behalf of our clients for which we are reimbursed pursuant to our client contracts. The amount of reimbursable program costs and expenses which are included in revenues will vary from period to period, based on the type and scope of the service being provided. Generally however, the trend for the three and six months ended September 30, 2007 has been toward lower reimbursable program costs and expenses as a percentage of total revenues versus comparable periods in the prior year.

Total sales for the three months ended September 30, 2007 were $17,824,000, compared to $25,650,000 for the quarter ended September 30, 2006, a decrease of $7,827,000. Sales for the six months ended September 30, 2007 were $38,240,000, compared to sales of $52,672,000 for the six months ended September 30, 2006, a decrease of $14,432,000. The decrease in gross sales reflects the growing shift in certain client contracts, under which the Company's compensation is based primarily on labor, with nominal associated reimbursable program and production costs. Additionally, sales for the six months ended September 30, 2006 were positively affected by several significant non-recurring projects, which, in the aggregate, resulted in gross sales of approximately $10 million during that period.

Operating Revenue. We believe Operating Revenue is a key performance indicator. Operating Revenue is defined as our gross sales less outside reimbursable production and other program expenses. Operating Revenue is the net amount derived from sales to customers that we believe is available to fund our compensation and general and administrative expenses, and capital expenditures. For the three and six months ended September 30, 2007, Operating Revenue amounted to $8,531,000 and $16,345,000, respectively. As a result of the Company's growing shift toward client contracts under which the Company's compensation is based primarily on labor, with nominal associated reimbursable program and production costs, Operating Revenue decreased by 20 % or $2,089,000, for the three months ended September 30, 2007 versus the same period ended September 30, 2006 and decreased by 17% or $3,289,000, for the six month period ended September 30, 2007 versus the same period ended September 30, 2006. However, Operating Revenue as a percentage of total sales has increased, to 48% for the three months ended September 30, 2007 from 41% for the three months ended September 30, 2006, and to 43% for the six months ended September 30, 2007 from 37% for the six months ended September 30, 2006.

Operating Expenses. Operating expenses for the three months ended September 30, 2007 decreased by $7,393,000, or 31%, and amounted to $16,482,000, compared to $23,875,000 for the three months ended September 30, 2006. Operating expenses for the six months ended September 30, 2007 decreased by $12,111,000, or 25%, and amounted to $37,250,000, compared to $49,361,000 for the six months ended September 30, 2006. The changes in operating expenses resulted from the aggregate of the following:

Reimbursable Program Costs and Expenses. Reimbursable costs and expenses for the three months ended September 30, 2007 and 2006 were $5,918,000 and $9,130,000, respectively. Reimbursable costs and expenses for the six months ended September 30, 2007 and 2006 were $12,091,000 and $19,844,000, respectively. The changes realized in any period with regard to reimbursable program costs and expense reflects the mix of such costs in experiential and sales promotion programs that have been executed during that period, but for the three and six months ended September 30, 2007, also reflect the growing shift in client contracts referred to above.

Outside Production and other Program Expenses. Outside production and other program expenses consist of the costs of purchased materials, media, services, certain direct labor charged to programs and other expenditures incurred in connection with and directly related to sales but which are not classified as reimbursable program costs and expenses. Outside production and other program expenses for the three months ended September 30, 2007 were $3,383,000 compared to $5,900,000 for the three months ended September 30, 2006, a decrease of $2,517,000. Outside production and other program expenses for the six months ended September 30, 2007 were $9,805,000 compared to $13,194,000 for the six months ended September 30, 2006, a decrease of $3,389,000. The weighted mix of outside production and other program expenses related to these components may vary significantly from project to project based on the type and scope of the services being provided, but again, reflect the growing shift in client contracts referred to above.

Compensation Expense. Compensation expense, exclusive of program reimbursable costs, consists of the salaries, payroll taxes and benefit costs related to indirect labor, overhead personnel and certain direct labor otherwise not charged to programs. For the three months ended September 30, 2007, compensation expense was $5,813,000, compared to $6,135,000 for the three months ended September 30, 2006, a decrease of $322,000. For the six months ended September 30, 2007, compensation expense was $12,478,000, compared to $11,431,000 for the six months ended September 30, 2006, an increase of $1,047,000. The increase in compensation expense for the six months ended September 30, 2007 reflects additional costs associated with recruiting senior talent to support growth in our technology group, as well as performance based salary increases and an accrual of $400,000 for employee bonuses.

General and Administrative Expenses. General and administrative expenses consisting of office and equipment rent, depreciation and amortization, professional fees, other overhead expenses and charges for doubtful accounts, were $1,368,000 for the three months ended September 30, 2007, compared to $2,709,000 for the three months ended September 30, 2006, a decrease of $1,341,000, or 49% and $2,876,000 for the six months ended September 30, 2007, compared to $4,892,000 for the six months ended September 30, 2006, a decrease of $2,016,000, or 41%. The decreases realized in general and administrative costs reflect our continued efforts to reduce overall overhead costs and better track certain reimbursable overhead costs related to client programs.

Interest and Other Income (Expense), Net. Net interest and other income (expense) for the three months ended September 30, 2007, totaled $45,000 net income as compared to a ($337,000) net expense for the three months ended in September 30, 2006. Net interest and other income (expense) for the six months ended September 30, 2007, totaled $38,000 net income as compared to a ($318,000) net expense for the six months ended September 30, 2006. Interest and other expense consists primarily of interest paid on bank debt and was tied to the bank's prime rate in effect. Interest income consists primarily of interest on our money market and CD accounts.

Income from Continuing Operations before Provision (Benefit) for Income Taxes. The Company's income before the provision for income taxes for the quarters ended September 30, 2007 and 2006 amounted to $1,395,000 and $1,438,000, respectively. The Company's income before the provision for income taxes for the six months ended September 30, 2007 and 2006 amounted to $1,028,000 and $2,993,000, respectively.

Provision for Income Taxes. The provision for federal, state and local income taxes for the three and six month ended September 30, 2007 and 2006 were based upon the Company's estimated effective tax rate for the respective fiscal years.

Income from Continuing Operations. As a result of the items discussed above, income from continuing operations for the quarters ended September 30, 2007 and 2006 was $822,000 and $863,000, respectively. Diluted earnings per share from continuing operations amounted to $.11 and $.08 for the three and six months ended September 30, 2007, respectively, compared to $.12 and $.25 in the three and six months ended September 30, 2006.

Net Income. As a result of the items discussed above, net income for the three and six months ended September 30, 2007 was $822,000 and $575,000, respectively, compared to net income of $863,000 and $1,619,000, for the prior year quarter and six month period ended September 30, 2006, respectively. Fully diluted earnings per share amounted to $.11 and $.08 for the three and six months ended September 30, 2007, compared to $.12 and $.23 in the three and six months ended September 30, 2006.

Liquidity and Capital Resources

Beginning with our fiscal year ended March 31, 2000, we have continuously experienced negative working capital. This deficit has generally resulted from our inability to generate sufficient cash and receivables from our programs to offset our current liabilities, which consist primarily of obligations to vendors and other payables, as well as deferred revenues. We are continuing our efforts to increase revenues from our programs and reduce our expenses, but to date these efforts have not been sufficiently successful. We have been able to operate during this extended period with negative working capital due primarily to advance payments made to us on a regular basis by our customers, bank financing made available to us, and to a lesser degree, equity infusions from private placements of our securities ($1 million in January 2000, and $1.63 million in January and February 2003), and stock option and warrant exercises.

On June 20, 2007, we repaid all outstanding remaining obligations owed to our senior lender in the amount of $1,762,000. We currently do not have a revolving credit facility in place. Although we believe cash currently on hand together with cash expected to be generated from operations will be sufficient to fund our operations through the end of Fiscal 2008, we are currently in discussions with several lending institutions to obtain revolving credit financing for working capital purposes to fund our operations if we do not produce the level of revenues required for our cash flow needs. There can be no assurance that funding will be available to us at the time it is needed or in the amount necessary to satisfy our needs, or, that if funds are made available, that they will be available on terms that are favorable to us. If we are unable to secure financing when needed, our businesses may be materially and adversely affected, and we may be required to cease all or a substantial portion of our operations. If we issue additional shares of common stock or securities convertible into common stock in order to secure additional funding, current stockholders may experience dilution of their ownership. In the event we issue securities or instruments other than common stock, we may be required to issue such instruments with greater rights than those currently possessed by holders of common stock.

At September 30, 2007, we had cash and cash equivalents of $8,967,000, a working capital deficit of $2,512,000, no outstanding bank loans or outstanding letters of credit, and stockholders' equity of $10,891,000. In comparison, at March 31, 2007, we had cash and cash equivalents of $9,514,000, a working capital deficit of $3,316,000, an outstanding bank term loan of $2,000,000, an outstanding bank letter of credit of $450,000, and stockholders' equity of $10,056,000. The decrease of $547,000 in cash and cash equivalents during the six months ended September 30, 2007, was primarily due to the repayment of our outstanding bank obligations, partially offset by accounts receivable collections and other changes in operating assets and liabilities.

Operating Activities. Net cash provided by operating activities was $1,742,000 for the six months ended September 30, 2007. This was primarily due to net income, non-cash adjustments and collection of accounts receivable, offset by other changes in certain other operating assets and liabilities.

Investing Activities. For the six months ended September 30, 2007, net cash used by investing activities amounted to $289,000. This was primarily due to the purchase of a new accounting system.

Financing Activities. For the six months ended September 30, 2007, net cash used by financing activities amounted to $2,000,000 resulting from payments made to pay off bank borrowings of $2,000,000.

Critical Accounting Policies

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Certain of the estimates and assumptions required to be made relate to matters that are inherently uncertain as they pertain to future events. While management believes that the estimates and assumptions used were the most appropriate, actual results may vary from these estimates under different assumptions and conditions.

Please refer to the Company's 2007 Annual Report on Form 10-K for a discussion of the Company's critical accounting policies relating to revenue recognition, goodwill and other intangible assets and accounting for income taxes. During the three and six months ended September 30, 2007, there were no material changes to these policies.

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