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

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

Commission File Number 0-52702

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 filero		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 November 18, 2009: 168,996,962

 

 

Index

ITEM

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Item 2. Management’s Discussion and Analysis Financial Condition and Results of Operation

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4(T) Controls and Procedures

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

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

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Securities Holders

Item 5. Other Information

Item 6. Exhibits

EX-31.1

EX-31.2

EX-32.1

EX-32.2

INTRODUCTORY NOTE

This Report on Form 10-Q 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 including those set forth under “Risk Factors” in our Form 10-K for the year ended December 31, 2008, 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.

On November 16, 2009, the Company concluded that it should have been accounting for certain warrants as a liability under EITF 00-19, due to the cash redemption rights included in the warrant agreements. The treatment and effect to the financial statements is further discussed in Note 14. In prior 10-K filings for years ended 2007 and 2008 and related quarterly filings, and quarterly information filed for three months ended March 31, June 30, and September 30, 2009, the Company had incorrectly accounted for these warrants resulting in not recording the quarterly change in estimated fair value of derivative financial instruments. Please refer Note 14 of these financial statements for a detailed discussion of the impact on the Company’s quarterly financial information.

BROOKSIDE TECHNOLOGY HOLDINGS CORP
CONSOLIDATED BALANCE SHEETS
As of September 30, 2009 and December 31, 2008
Unaudited

		September 30,				December 31,
		2009				2008 (Restated)
ASSETS
Current assets
Cash and cash equivalents		$	329,913			$	835,525
Restricted cash			361,097				1,366,666
Cash collateral account			175,324				368,666
Accounts receivable, net			3,087,155				4,225,692
Inventory			1,855,494				1,652,300
Deferred contract costs			15,610				107,382
Deferred finance charges, net of amortization			388,838				536,085
Prepaid expenses			68,778				79,493
Total current assets			6,282,209				9,171,809
Property and equipment
Office equipment			532,228				444,590
Vehicles			105,901				171,131
Furniture, fixtures and leasehold improvements			169,365				155,151
			807,494				770,872
Less: accumulated depreciation			(424,923	)			(326,383	)
Property and equipment, net			382,571				444,489
Goodwill			16,980,030				16,918,396
Intangible assets, net			—				731,710
Deposits and other assets			88,295				27,735
TOTAL ASSETS		$	23,733,105			$	27,294,139
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses		$	2,256,586			$	2,211,611
Billings in excess of revenues			2,052,369				2,620,857
Payroll liabilities			535,675				851,833
Current portion of long term debt			6,395,386				2,669,177
Income taxes payable			1,638				164,000
Other current liabilities			288,725				228,390
Total current liabilities			11,530,379				8,745,868
Long term debt, less current portion			1,597,837				5,053,135
Derivative financial instruments at fair value			3,619,902				12,016,463
Total liabilities			16,748,118				25,815,466
Stockholders’ equity (deficit)
Series A convertible preferred stock, 15,000,000 authorized, 13,191,716 and 12,216,716 issued and outstanding at September 30, 2009 and December 31, 2008, respectively, at 8% dividend yield. Liquidation preference of $14,559,954 and $12,832,595 at September 30, 2009 and December 31, 2008, respectively.			7,545,246				6,812,914
Common stock, $.01 par value, 1,000,000,000 shares authorized, 146,657,102 and 140,228,340 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively.			146,657				140,229
Additional paid in capital			11,881,763				11,885,674
Accumulated deficit			(12,588,679	)			(17,360,144	)
Total stockholders’ equity			6,984,987				1,478,673
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	23,733,105			$	27,294,139

See accompanying notes to these unaudited consolidated financial statements.

BROOKSIDE TECHNOLOGY HOLDINGS CORP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2009 and 2008
Unaudited

		Quarter Ended September 30,								Nine Months Ended September 30,
		2009				2008 (Restated)				2009				2008 (Restated)
REVENUES
Installation and other services		$	1,844,238			$	1,577,260				4,922,682			$	3,924,799
Equipment sales			2,525,490				4,079,863				8,992,396				10,473,837
Total revenues			4,369,728				5,657,123				13,915,078				14,398,636
COST OF SALES			1,743,472				3,175,528				5,716,204				7,656,333
GROSS PROFIT			2,626,256				2,481,595				8,198,874				6,742,303
OPERATING EXPENSES
General and administrative			2,960,994				1,932,108				8,911,386				5,793,094
Depreciation expense			37,241				31,140				108,104				97,949
Total operating expenses			2,998,235				1,963,248				9,019,490				5,891,043
OTHER INCOME (EXPENSE)
Interest expense			(663,478	)			(874,568	)			(1,575,733	)			(3,044,037	)
Amortization expense of loan discount and intangibles			(468,339	)			(1,003,282	)			(1,461,726	)			(3,673,806	)
Finance expense on derivatives			—				(4,156,069	)			(925,571	)			(4,156,069	)
Gain (loss) on change in fair value of derivative financial instruments			3,892,627				(925,326	)			10,322,132				5,294,495
Gain on debt extinguishment			—				151,619				—				151,619
Other income (expense), net			4,934				7,957				(989	)			11,828
Total other income (expense)			2,765,744				(6,799,669	)			6,358,113				(5,415,970	)
INCOME (LOSS) BEFORE INCOME TAXES			2,393,765				(6,281,322	)			5,537,497				(4,564,710	)
Provision for income taxes			—				—				—				—
NET INCOME (LOSS)		$	2,393,765			$	(6,281,322	)			5,537,497			$	(4,564,710	)
Preferred Stock Dividends			(263,834	)			(35,746	)			(752,328	)			(119,382	)
Net income (loss) attributable to common shareholders		$	2,129,931			$	(6,317,068	)			4,785,169			$	(4,684,092	)
Earnings (loss) per share- basic		$	0.01			$	(0.06	)			0.03			$	(0.05	)
Weighted average shares outstanding			146,657,102				99,576,825				142,922,293				92,755,324
Earnings (loss) per share- diluted		$	0.00			$	(0.06	)			0.00			$	(0.05	)
Weighted average shares outstanding			1,146,828,702				99,576,825				1,408,256,897				92,755,324

See accompanying notes to these unaudited consolidated financial statements.

BROOKSIDE TECHNOLOGY HOLDINGS CORP
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2009 and 2008
Unaudited

						2008
		2009				(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	5,537,497			$	(4,564,710	)
Adjustments to reconcile net income (loss) to net cash provided by (used) in operating activities:
Depreciation			108,104				97,949
Amortization of loan discounts and intangibles			1,461,724				3,673,806
Non-cash interest expense			310,907				1,845,417
Loss on disposal of fixed assets			6,717				—
Bad debt expense			176,358				—
Stock based compensation			52,491				168,833
Gain (loss) on change in fair market value of derivative financial instruments			(9,396,561	)			(1,138,426	)
Gain on debt extinguishment			—				(151,619	)
(Increase) decrease in:
Accounts receivable			962,179				(780,671	)
Inventory			(203,194	)			(79,863	)
Deferred contract costs			91,772				41,639
Prepaid expenses			10,715				(73,584	)
Deposits and other assets			(60,560	)			41,699
Increase (decrease) in:
Accounts payable and accrued expenses			44,975				615,655
Accrued payroll liabilities			(316,158	)			(43,743	)
Billings in excess of revenues			(568,488	)			462,885
Income taxes payable			(162,362	)			—
Other current liabilities			46,660				(65,469	)
			(7,434,721	)			4,614,508
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			(1,897,224	)			(49,798	)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment			(52,901	)			(166,069	)
Cash used for restricted cash			(233,334	)			(1,250,000	)
Cash provided by restricted cash			1,238,903
Cash used for cash collateral			(25,000	)			(366,877	)
Cash provided by cash collateral			218,342				366,877
Acquisition of Standard Tel Networks, LLC (“STN”), net of $855,791 in cash received			—				(2,835,610	)
Acquisition of US Voice & Data, LLC (“USVD”) additional EBITDA Earnout			(61,634	)			—
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			1,084,376				(4,251,679	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt			779,588				14,197,475
Proceeds from issuance of Series A preferred stock, net of issuance costs of $70,000			930,000				—
Deferred finance charges			—				(588,984	)
Proceeds from issuance of Series A preferred stock in connection with the STN acquisition			—				2,500,000
Repayment of long term debt			(1,402,352	)			(10,095,545	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			307,236				6,012,946
NET INCREASE (DECREASE) IN CASH			(505,612	)			(1,811,065	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			835,525				187,846
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	329,913			$	1,998,911
SUPPLEMENTAL DISCLOSURE
Income taxes paid		$	2,362			$	—
Interest paid		$	809,611			$	(27,872	)
Non-cash financing and investing activities
Accretion of preferred stock dividend		$	485,367			$	119,382
Accrued interest added to note payable balance		$	455,215			$	—
Value of common stock issued in STN acquisition		$	—			$	1,169,755
Cashless exercise of warrants		$	3,857			$	—
Accrual for derivative financial instruments at fair value		$	1,925,571			$	9,656,069
Conversion of series A preferred stock to common stock		$	20,026			$	—

See accompanying notes to these unaudited consolidated financial statements.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed 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 (the “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. 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 September 30, 2009 and December 31, 2008, and the results of operations and cash flows for the quarters and nine months ended September 30, 2009 and 2008. The results of operations for the quarter and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the entire fiscal year.

Operations

Brookside Technology Holdings Corp., (the “Company”), is the holding company for Brookside Technology Partners, Inc., a Texas corporation (“Brookside Technology Partners”), US Voice & Data, LLC, an Indiana Limited Liability Company (“USVD”), Standard Tel Acquisitions, Inc, a California Corporation (“Acquisition Sub”), Trans-West Network Solutions, Inc., (“Trans-West”), a California Corporation and Standard Tel Networks, LLC, a California Limited Liability Company (“STN”) and all operations are conducted through these wholly owned subsidiaries.

Collectively, the subsidiary companies are providers of converged business communications products and services from Mitel, Inter-tel (owned by Mitel), Nortel and NEC. The Company, as the 2^nd largest MITEL dealer, is recognized as a Diamond Dealer. 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. 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, the Company has offices that provide a national footprint. Headquartered in Huntington Beach, California, STN has additional offices in Sacramento and San Diego. Headquartered in Austin, Texas, Brookside Technology Partners serves the Texas market. Headquartered in Louisville, Kentucky, USVD serves the Kentucky and Southern Indiana markets, operating out of offices in Louisville, Lexington and Indianapolis. Combined, revenues from new implementations represent approximately 50% of the Company’s revenues with the remaining 50% generated by service, support, maintenance and other recurring revenues from our existing customer base.

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.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 — Nature of Business (continued)

Redomestication

Subsequent to the Share Exchange, on July 6, 2007 (the “Effective Time”), Cruisestock changed its name to Brookside Technology Holdings Corp. and redomesticated in 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”).

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

US Voice & Data, LLC

The Company has a wholly-owned subsidiary, 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.

Acquisition of Standard Tel Networks, LLC

On September 23, 2008, the Company, through its wholly-owned subsidiary, Standard Tel Acquisitions, Inc. (“Acquisition Sub”), acquired Standard Tel Networks, LLC (“STN”), an independent distributor of high quality, turnkey converged voice and data business communications products and services headquartered in Huntington Beach, CA, and having other California offices in Sacramento and San Diego. This acquisition was structured as the acquisition of (a) all of the stock of Trans-West Network Solutions, Inc. (“Trans-West”) from the shareholders of Trans-West (the “Trans-West Shareholders”) and (b) all of the membership interest of STN owned by ProLogic Communication, Inc. (“ProLogic” and collectively with the Trans-West Shareholders, the “Seller Parties”). Trans-West, a holding company with no operations, owned eighty percent (80%) of the membership interest of STN and ProLogic owned the other twenty percent (20%), and, accordingly, the Company now controls one hundred percent (100%) of STN. Collectively, the forgoing transactions are referred to in these financial statements as the “STN Acquisition.” Prior to the STN Acquisition, the Company did not have any relationships with the Seller Parties.

Operating results from the acquired business, STN, are included in the condensed consolidated statements of operations from the date of acquisition (September 23, 2008). Accordingly, the three and nine months ended September 30, 2008 have no operational activity related to STN.

Restatement of Prior Periods

On November 16, 2009, the Company concluded that it should have been accounting for certain warrants as a liability under EITF 00-19, due to the cash redemption rights included in the warrant agreements. The treatment and effect to the financial statements is further discussed in Note 14. In prior 10-K filings for years ended 2007 and 2008 and related quarterly filings, and quarterly information filed for three months ended March 31, June 30, and September 30, 2009, the Company had incorrectly accounted for these warrants resulting in not recording the quarterly change in estimated fair value of the warrants as derivative financial instruments. Please refer Note 14 of these financial statements for a detailed discussion of the impact on the Company’s quarterly financial information.

Note 2 — Liquidity and Capital Resources

These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of obligations in the normal course of business. The Company generated significant net losses in the prior three fiscal years.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 2 — Liquidity Capital Resources (continued)

The Company has cash and cash equivalents of $329,913 at September 30, 2009. Additionally, effective August 13, 2009, the Company and its senior creditor, Chatham Credit Management III, LLC (“Chatham”), further updated its letter agreement dated May 29, 2009 pursuant to which, among other things, Chatham agreed, for the period July 31, 2009 through September 30, 2010 (“Agreement Period”) to suspend the Company’s compliance of the minimum fixed charge coverage ratio and maximum leverage ratio contained in the credit agreement. The Company and Chatham agreed to a temporary minimum earnings before interest, taxes, depreciation and amortization covenant (“Modified EBITDA Covenant”) for this Agreement Period. At September 30, 2009, the Company is not in compliance with this Modified EBITDA Covenant under this agreement. As a result, all principal due to Chatham has been reclassified as a current liability.

Additionally, effective June 1, 2009, the Company entered into a Securities Purchase Agreement with Vicis Capital Master Fund, a sub-trust of Vicis Capital Series Master Trust, and the Company’s largest preferred stockholder (“Vicis”), pursuant to which Vicis invested an additional $1,000,000 in the Company and the Company issued to Vicis 1,000,000 shares of the Company’s Series A Convertible Preferred Stock (“Series A Stock”) and a warrant to purchase 100,000,000 shares of Common Stock at an exercise price of $0.01 per share. The warrant included a put provision inherent in the redemption provision included in the warrant agreements and recorded at issuance as a liability for “Derivative financial instruments at estimated fair value” on the Company’s balance sheet in accordance with the current authoritative guidance including EITF 00-19. In accordance with provisions of SFAS 133, the Company is required to adjust the carrying value of the above warrants to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrants the company used the Black-Scholes model. The warrant included a redemption right, payable in cash upon the future occurrence of a change in control. As such, the Company recorded a derivative financial instrument at fair value of $1,925,571 in connection with this transaction.

The Company had net income for the three months and nine months ended September 30, 2009 of approximately $2.4 million and $5.5 million, respectively, and has a retained deficit of approximately $12.6 million. This net income was primarily the result of the gains on change in fair value of derivative financial instruments recognized in 2009 in connection with the restatement of the financial statements as further discussed in Note 14. For the nine months ended September 30, 2009, the Company had net cash used in operations of approximately $1.9 million. Historically, the Company has relied on borrowings and equity financings to maintain its operations. The Company believes it has enough cash to operate for the coming year with its cash on hand, cash to be generated from operations and the borrowing availability with its lenders. However, the recent economic downturn could have a material effect on its business operations. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

Management is focused on managing costs in line with estimated total revenues for the balance of fiscal 2009 and beyond, including contingencies for cost reductions if projected revenues are not fully realized. However, there can be no assurance that anticipated revenues will be realized or that the Company will successfully implement its plans. Additionally, the Company is in discussions with its senior and subordinated lender regarding obtaining additional financing to execute its business plan.

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. There have been no significant changes in the Company’s significant accounting policies during the three and nine months ended September 30, 2009 compared to what was previously disclosed in the Company’s Annual Report on 10-K for the year ended December 31, 2008.

Principles of Consolidation

The consolidated financial statements include the accounts of Brookside Technology Holdings Corp. and its wholly-owned subsidiaries, certain of which are Brookside Technology Partners, Inc., US Voice & Data, LLC, an Indiana Limited Liability

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

Company, Standard Tel Acquisitions, Inc a California Corporation, Trans-West Network Solutions, Inc, a California Corporation and Standard Tel Networks, LLC, a California Limited Liability Company. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash Equivalents

For purposes of the statements of cash flows, the Company considers short-term investments, purchased with a remaining maturity at purchase of three months or less, to be cash equivalents. Restricted cash and deposits in the cash collateral account are not considered to be cash equivalents.

Use of Estimates

The preparation of consolidated 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. The Company believes its estimates of allowance for doubtful accounts, inventory reserves and the fair value of stock options and warrants, as further discussed below, to be the most sensitive estimates impacting financial position and results of operations.

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 September 30, 2009 and December 31, 2008.

The amounts reported for cash and cash equivalents, receivables, accounts payable, and accrued liabilities are considered to approximate their market values based on comparable market information available at the respective balance sheet dates and their short-term nature. The Company believes that the notes payable fair values approximate their notional value at September 30, 2009.

Inventory Reserves

Each quarter, the Company evaluates its inventories for excess quantities and obsolescence. Inventories that are considered obsolete are written off. Remaining inventory balances are adjusted to approximate the lower of cost or market value. The valuation of inventories at the lower of cost or market requires the use of estimates as to the amounts of current inventories that will be sold. These estimates are dependent on management’s assessment of current and expected orders from the Company’s customers.

Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company’s allowance for doubtful accounts is management’s best estimate of losses resulting from the inability of the Company’s customers to make their required payments. The Company maintains an allowance for doubtful accounts based on a variety of factors, including historical experience, length of time receivables are past due, current economic trends and changes in customer payment behavior. Also, the Company records specific provisions for individual accounts when management becomes aware of a

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

customer’s inability to meet its financial obligations to the Company, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to a customer change, the Company’s estimates of the recoverability of the receivables would be further adjusted

Convertible Securities With Beneficial Conversion Features

Warrant Valuation and Beneficial Conversion Feature. The Company calculates the fair value of warrants issued with convertible securities (preferred stock or debt) using the Black Scholes valuation method. The total proceeds received in the sale of preferred stock or debt and related warrants is allocated among these financial instruments based on their relative fair values. The debt discount arising from assigning a portion of the total proceeds to the warrants issued is recognized as interest expense from the date of issuance to the earlier of the maturity date of the debt or the conversion dates using the effective yield method. Additionally, when issuing convertible debt, including convertible debt issued with detachable warrants, the Company tests for the existence of a beneficial conversion feature. The Company records the amount of any beneficial conversion feature (“BCF”), calculated in accordance with these accounting standards, whenever it issues convertible debt that has conversion features at fixed rates that are in the money using the effective per share conversion price when issued. The calculated amount of the BCF is accounted for as a contribution to additional paid-in capital and as a debt discount that is recognized as interest expense from the date of issuance to the earlier of the maturity date of the debt or the conversion dates using the effective yield method. The maximum amount of BCF that can be recognized is limited to the amount that will reduce the net carrying amount of the debt to zero.

The Company considered the effect of a beneficial conversion feature of the Series A Stock issued in the December 2007 private placement and subsequently issued to Vicis during 2008. During 2008, the Company has attributed a beneficial conversion feature of $0 to the Series A Stock based upon the difference between the relative fair value assigned to costs in Series A Stock and the discount assigned to the warrants and zero (minimum basis). Since the redemption requirement of the Series A Stock is contingent on the occurrence of future events, the Company is not accreting the carrying value of the Series A Stock to redemption value and will not do so until the occurrence of any one of those future events becomes probable.

Derivative Financial Instruments at Fair Value. Amounts have been classified as derivative financial instruments because of the put provisions inherent in the redemption provision included in the Hilco and Vicis warrant agreements and recorded at issuance as a liability for “Derivative financial instruments at estimated fair value” on the Company’s balance sheet in accordance with the current authoritative guidance. The Company is required to adjust the carrying value of the above warrants to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrants, the Company used the Black-Scholes model.

The Company’s Series A Stock is redeemable under certain conditions, including:

o		The Company effecting a merger or consolidation with another entity
o		The Company sells all or substantially all of the Company’s assets
o		The Company’s shareholders approve a tender or exchange offer, or
o		The Company’s holders of the common stock exchange their shares for securities or cash

Accordingly, upon the occurrence of any one of these events, the Series A Stock will become redeemable and the Company will accrete the carrying value of the Series A Stock to redemption value at that time.

Goodwill and Intangibles

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

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

value of intellectual property, customer relationships, non-compete agreements, trademarks and goodwill. 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.

The Company has 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.

The Company amortizes the cost of other intangibles, that are not deemed indefinite, over their estimated useful lives. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows, appraised values or other market-based information.

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 when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectability is reasonably assured. Sales are recorded net of discounts, rebates, and returns.

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.

Revenue from contracts that contain multiple elements that are not accounted for under the percentage-of-completion method are accounted for in accordance with “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 recognizes revenue from the equipment sales and installation services using the percentage of completion method. The services for maintaining the systems the Company installs 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 in 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.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued) 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. At September 30, 2009 and 2008, the Company has accrued $156,974 and $247,417, respectively. The Company’s warranty accrual takes into account the telecommunications equipment covered by original equipment manufacturer warranties.

Reclassifications

Certain prior year amounts have been reclassified to conform to the 2009 presentation.

Income taxes

Income taxes are accounted for under the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

The Company records a valuation allowance to reduce its deferred assets when it is more likely than not that some portion or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends on the Company’s ability to generate sufficient future taxable income. Accordingly, establishment of the valuation allowance requires the Company’s management to use estimates and make assumptions regarding significant future events.

The Company’s management first determines whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. Any tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the condensed consolidated financial statements. Each identified tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. No such tax positions were identified during the three and nine months ended September 30, 2009 and 2008.

Earnings Per Common Share

Basic net income (loss) per share is based upon the weighted average number of shares of common stock outstanding. Diluted net income (loss) per share is based on the assumption that options, warrants and other instruments convertible into common stock are included in the calculation of diluted net income (loss) per share, except when their effect would be anti-dilutive. For instruments in which consideration is to be received for exercise, such as options or warrants, dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of actual issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Cumulative dividends on the Company’s cumulative convertible preferred stock, although not declared, constitute a preferential claim against future dividends, if any, and are treated as an incremental decrease in net income from continuing operations or increase in net loss from continuing operations for purposes of determining basic and diluted net income (loss) from continuing operations per common share.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

At September 30, 2009, there were potentially dilutive securities outstanding consisting of Series A Stock, warrants, and stock options issued to employees. The potential shares would be anti-dilutive during the three and nine months ended September 30, 2008 and dilutive for the three and nine months ended September 30, 2009, and as such, have not been considered in the calculation of earnings per share for 2008. At September 30, 2009, the number of potentially dilutive shares that are anti-dilutive consisted of 21,200,000 stock option shares, 13,191,716 Series A Stock (exercisable into 1,319,171,600 common shares), and 745,800,996 common shares purchase warrants (which would be net share settled). At September 30, 2008, there were potentially dilutive securities outstanding consisting of Series A Stock, convertible debt, warrants, and stock options issued to employees of 19,200,000. On November 19, 2009, shareholders representing a majority of the Company’s shares entitled to vote at a meeting executed and delivered to the Company written consents in lieu of a meeting approving an increase in the Company’s authorized shares of Common Stock from 1,000,000,000 to 10,000,000,000.

Derivatives

A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts (“embedded derivatives”) and for hedging activities. As a matter of policy, the Company does not invest in separable financial derivatives or engage in hedging transactions. However, complex transactions that the Company entered into in order to finance its operations and acquisitions, and the subsequent restructuring of such debt transactions, involved financial instruments containing certain features that have resulted in the instruments being deemed derivatives or containing embedded derivatives. The Company may engage in other similar complex equity or debt transactions in the future, but not with the intention to enter into derivative instruments. Derivatives and embedded derivatives, if applicable, are measured at fair value and marked to market through earnings. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation often incorporate significant estimates and assumptions, which may impact the level of precision in the financial statements.

Stock Based Compensation

The Company recognizes the compensation cost relating to share-based payment transactions in accordance with provisions of Share-Based Payment. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). The Company recorded $18,605 and $53,333 for stock compensation cost for the three months ended September 30, 2009 and 2008, respectively. The Company recorded $52,491 and $168,833 for stock compensation cost for the nine months ended September 30, 2009 and 2008, respectively.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

Recent Accounting Pronouncements

The FASB issued ASC No. 350-30, previously referred to as SFAS 142-3, Determination of the Useful Life of Intangible Assets. ASC No. 350-30 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC 350 Intangibles — Goodwill and Other. ASC No. 350-30 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company does not expect ASC No. 350-30 to have a material impact on the accounting for future acquisitions or renewals of intangible assets, but the potential impact is dependent upon the acquisitions of intangible assets in the future.

In June 2008, the FASB issued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (ASC Topic 260-10-55). ACS Topic 260 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, “Earnings Per Share” (ASC Topic 260). Under the guidance of ASC Topic 260-10-55, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and must be included in the computation of earnings per share pursuant to the two-class method. All prior period earnings per share information must be adjusted retrospectively. The Company adopted ASC Topic 260-10-55 as of January 1, 2009. The Company’s adoption of these statements in the first quarter of 2009 did not have any effect on its condensed consolidated financial statements.

In April 2009, the FASB issued three FSPs intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities.

*		FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (ASC Topic 820-10-65-4);
*		FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (ASC Topic 825-10-65-1); and
*		FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (ASC Topic 320-10-65-1).

ASC Topic 820-10-65-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements” (ASC Topic 820), when the value and level of activity for the asset or liability have significantly decreased in relation to normal market activity. ASC Topic 820-10-65-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. The Company adopted ASC Topic 820-10-65-4 as of March 30, 2009. As the new standard only clarified existing guidance, there was no material effect on the Company’s condensed consolidated financial statements and notes.

ASC Topic 825-10-65-1 amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” (ASC Topic 825), to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This new standard also amends Accounting Principles Board (APB) Opinion No. 28, “Interim Financial Reporting” (ASC Topic 270), to require those disclosures in summarized financial information at interim reporting periods. The Company adopted ASC Topic 825-10-65-1 as of March 30, 2009. This pronouncement has no impact on the Company’s current condensed consolidated financial statements.

ASC Topic 320-10-65-1 amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This new standard does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The Company adopted ASC Topic 320-10-65-1 as of March 30, 2009. This pronouncement has no impact on the Company’s condensed current financial statements.

In June 2009, the FASB issued SFAS No. 165, “Subsequent Events” (ASC Topic 855). ASC Topic 855 establishes the criteria for subsequent events, including: (a) the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (b) the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements; and (c) the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. The Company adopted ASC Topic 855 as of June 30, 2009. The adoption of this pronouncement did not have a material impact on the Company’s condensed consolidated financial statements.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued its Accounting Standards Codification (“ASC”), codifying all previous sources of accounting principles into a single source of authoritative, nongovernmental U.S. generally accepted accounting principles (“U.S. GAAP”). Although the ASC supersedes all previous levels of authoritative accounting standards, it did not affect accounting principles under U.S. GAAP. The Company adopted the codification effective September 30, 2009.

In June 2009, the FASB amended its existing standards related to the consolidation of variable interest entities, which is effective for interim and annual fiscal periods beginning after November 15, 2009. The new standard requires entities to analyze whether their variable interests give it a controlling financial interest of a variable interest entity (VIE) and outlines what defines a primary beneficiary. The new standard amends GAAP by: (a) changing certain rules for determining whether an entity is a VIE; (b) replacing the quantitative approach previously required for determining the primary beneficiary with a more qualitative approach; and (c) requiring entities to continuously analyze whether they are the primary beneficiary of a VIE among other amendments. The new standard also requires enhanced disclosures regarding an entity’s involvement in a VIE. It is possible that application of this new standard will change our assessment of whether or not we are the primary beneficiary of any VIEs with which we are involved. The Company is currently evaluating the impact of this standard on our condensed consolidated financial statements.

In September 2009, the Emerging Issues Task Force (EITF) issued guidance related to Revenue Recognition that amends the previous guidance on arrangements with multiple deliverables. This guidance provides principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and how the consideration should be allocated. It also clarifies the method to allocate revenue in an arrangement using the estimated selling price. This guidance is effective for the Company as of January 1, 2011 and is not expected to be material to the Company’s consolidated financial position or results of operations.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

Note 4 — Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

		September 30,				December 31,
		2009				2008
Accounts payable, trade		$	1,767,093			$	1,857,905
Accrued warranty liability			156,974				231,906
Other accrued expenses			332,519				121,800
Total		$	2,256,586			$	2,211,611

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 5 — Long Term Debt

Long-term debt as of September 30, 2009 and December 31, 2008 consisted of the following:

		September 30,				December 31,
		2009				2008
Note payable to an individual, unsecured, accruing interest at 2% per annum, with monthly payments of $5,215 due May 1, 2010.		$	82,869			$	98,049
Note payable to former 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 $0 and $75,812, respectively (the “Seller Note”). This note is involved in the litigation with the USVD Sellers (See Note 7 — Commitments and Contingencies).			850,000				1,524,188
Notes payable to an individual, unsecured, accruing interest at 7% per annum, with monthly payments of $1,130 due May 1, 2011.			28,143				31,006
Note payable to executive officer and shareholders, unsecured, accruing interest at 7% per annum, with monthly payments of $968, due September 1, 2010.			16,945				16,945
Notes payable to shareholder, unsecured, accruing interest at 7% per annum, with monthly payments of $6,432 due June 1, 2010.			97,982				115,360
Subordinated Note Payable to Vicis Capital Master Fund, accruing interest at 10%, maturing September 30, 2010, subordinated to the Chatham senior note. Net of unamortized discount of $31,067 and $118,917, respectively (STN acquisition).			1,468,933				1,381,083
Senior note payable, Chatham Investment Fund III, LLC and Chatham Investment Fund III QP, LLC, accruing interest at the LIBOR rate plus 9.00%, payments of $83,333 beginning on the first of the month after 6 months from the closing date, with the balance due on the third anniversary of the closing date of September 23, 2008, net of unamortized discount of $1,928,037 and $2,658,050, respectively (STN acquisition), all classified as current.			5,401,613				4,380,916
Secured notes payable to Enterprise Fleet Services, accruing interest at 5% per annum, with monthly payments of $1,476, maturing June 1, 2010. Notes are secured by vehicles.			16,350				60,617
Secured notes payable to GMAC, accruing interest at 9.25% with monthly payments of $2,272, paid in full in June 2009 and refinanced as an operating lease. Notes are secured by vehicles.			—				82,673
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.			—				1,007
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.			30,388				30,468
Total long term debt			7,993,223				7,722,312
Less current portion			(6,395,386	)			(2,669,177	)
Long term portion		$	1,597,837			$	5,053,135

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 5 — Long Term Debt (Continued)

Principal maturities of long-term debt as of September 30, 2009 are as follows:

Years Ending December 31,		Gross
2009		$	6,395,386
2010			1,611,076
2011			14,022
2012			3,806
2013			—
			8,024,290
Less: Unamortized discounts			(31,067	)
Net of Discounts		$	7,993,223

Change in unamortized discount and loan costs of the Note –

For the nine months ended September 30, 2009, the discount on the above Notes changed for amortization of discounts in connection with the notes. The total discount on the Notes changed from $9,998,115 at inception to $3,848,016 at December 31, 2007, then to $2,852,779 at December 31, 2008, then to $31,067 at September 30, 2009. There was $3,006,498 of new discounts generated in 2008 in connection with valuing the Chatham Warrants issued with Chatham credit facility. A total of $3,711,578 was amortized to expense during the year ended December 31, 2008 and $730,014 was amortized to expense during the nine months ended September 30, 2009. Total amortization expense was $108,962 and $925,193 for the three months ended September 30, 2009 and 2008, respectively. Total amortization expense was $893,676 and $3,383,649 for the nine months ended September 30, 2009 and 2008, respectively. In addition to the amortization of discounts in connection with the notes as discussed above, amortization expense also included amortization of intangible assets which totaled $225,000 and $129,978 for the three months ended September 30, 2009 and 2008, respectively and $731,712 and $445,824 for the nine months ended September 30, 2009.

Note 6 — Commitments and Contingencies

Leases

The Company has entered into operating lease agreements for its corporate offices and equipment. Minimum lease obligations are as follows:

2009		$	557,543
2010			331,734
2011			212,427
2012			171,997
2013			—

Rental expense for operating leases for the three months ended September 30, 2009 and 2008, was approximately $149,000 and $119,000, respectively. Rental expense for operating leases for the nine months ended September 30, 2009 and 2008, was approximately $489,000 and $335,000, respectively.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 6 — Commitments and Contingencies (continued)

Liquidated Damages Under Registration Payment Arrangements

The Company has accrued $154,400 which is included in other current liabilities in the accompanying condensed consolidated balance sheets for September 30, 2009 and December 31, 2008 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 preferred shares.

Litigation

As previously disclosed, in 2007, the Company purchased USVD from the Michael P. Fischer Irrevocable Delaware Trust and the M. Scott Diamond Irrevocable Delaware Trust (the “USVD Sellers”) pursuant to a Membership Purchase Agreement between the Company and the USVD Sellers, dated September 26, 2007 (the “USVD Agreement”). The original purchase price was $15,429,242. As of September 30, 2009, the Company has paid to the USVD Sellers a total of $14,533,690, representing 94% of all sums payable under the USVD Agreement.

In addition, in connection with the acquisition of USVD, Messrs. Fischer and Diamond were provided employment agreements, pursuant to which they held the positions of CEO and COO, respectively at USVD. The employee agreements provided Messrs. Fischer and Diamond with annual base salaries of $105,000 and $145,000, respectively. As a result, until recently, the Company relied on Messrs. Fischer and Diamond to continue to operate USVD.

However, on May 12, 2009, Messrs. Fischer and Diamond notified the Company that they considered their employment to be “constructively terminated” as a result of the Company having failed to pay them, collectively, an EBITDA earn-out payment of approximately $289,000 they claim they were due on April 30, 2009. Since such time, Messrs. Fischer and Diamond have not shown up to work and they have ceased performing any employment duties.

As discussed further under “Business” and “Management’s Discussion and Analysis,” USVD’s revenues for the six months ended June 30, 2009, while under the direction of Messrs. Fischer & Diamond, were approximately $2,700,000 lower than its revenues in the same period in 2008. This decrease adversely impacted the Company’s liquidity and subsequently the Company’s largest equity investor, Vicis, provided an additional capital infusion. Also, the Company and its primary lender, Chatham, have made modifications to the Company’s credit facility.

Fortunately, USVD’s first quarter decreased earnings were offset by increased earnings provided by STN, as well as increased earnings at USVD in the months subsequent to the departure of Messrs. Fischer and Diamond under the direction of Brookside Technology Holdings Corp’s management and other existing USVD and STN senior managers, discussed further under “Business” and “Management’s Discussion and Analysis.” However, while the Company may have this offset from these combined earnings, Messrs. Fischer’s and Diamond’s earn-outs were to be based solely on USVD’s EBITDA. Given USVD’s performance under Messrs. Fischer’s and Diamond’s stewardship prior to May 12, 2009, it is presently unclear whether they would have earned any future earn-out payments subsequent to their alleged constructive terminations.

In addition to their alleged constructive termination, Messrs. Fischer and Diamond claim that their Restrictive Covenant Agreement entered into as part of their Employment Agreements signed with the Company at the time of the USVD acquisition are now null and void and that, accordingly, they are free to compete with the Company and USVD, and to solicit USVD employees. Subsequent to the departures of Messrs. Fischer and Diamond, on May 26, 2009, several USVD employees, mostly sales personnel, entered the USVD premises unescorted and removed Company and personal belongings in connection with their resignations from USVD and their new employment with a new company, which the Company believes is owned by Messrs. Fischer and Diamond and/or some of their family members, either directly or indirectly.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 6 — Commitments and Contingencies (continued)

In response to the actions of Messrs. Fischer and Diamond and certain former USVD employees, the Company has worked diligently to secure USVD and its assets, employees, vendors, partners and customers. USVD’s employees, vendors, partners and customers have reconfirmed their support and loyalty to USVD, despite the fact that many of them have been solicited by Messrs. Fischer and Diamond and certain former USVD employees.

On July 17, 2009, the USVD Sellers filed a civil action in the Circuit Court of Jefferson County, Kentucky, alleging that the Company breached the USVD Agreement by failing to pay the previously mentioned $289,000 EBITDA earn-out payment they claim they was due on April 30, 2009, in addition to $1,750,000 of other future payments they claim they are entitled to accelerate as a result of such alleged breach. The lawsuit calls for an acceleration of all money owed to the USVD Sellers including: the $850,000 Seller Note, the $289,000 accrued EBITDA earn-out and an additional $900,000 in Minimum Cash Payments (as defined by the employment agreements of Messrs. Fischer and Diamond) in connection with future estimations of earn-outs yet to be earned. The Company has a note payable – USVD Sellers included in its long-term debt of $850,000, as well as an accrual for the $289,000 accrued 2008 earn-out payment that the USVD Sellers, Messrs. Fischer and Diamond, claim is due to them.

On October 8, 2009 filed an answer and counter-claim to the USVD Sellers civil action discussed above. This answer and counter-claim outlines, among other things, the Company’s arguments for defense as well as the Company’s claims of breaches of fiduciary duty and other common law, contractual, quasi-contractual, and statutory claims against former employees of USVD. During their periods of employment, various employees of USVD who are now employees of a competitor, engaged in a variety of acts and omissions in breach of their legal duties to USVD and Brookside, including but not limited to (1) failure of the CEO and COO to fulfill their contractual duties under their Employment Agreements; (2) acts by these and other employees with fiduciary duties to act in the best interests of the company as opposed to their individual self-interests or the interests of third parties, in company matters; (3) destruction and/or seizure of proprietary documents and information belonging to USVD for the benefit of a competitor; and (4) failure by sales personnel to reimburse USVD for funds advanced on sales on behalf of USVD which were not consummated prior to their departures. The Company is continuing to analyze the forgoing civil action and continues to aggressively investigate the actions undertaken by of Messrs. Fischer and Diamond, as well as the former USVD employees, both before and after their resignations. The litigation is in its early stages, and it is premature to project its outcome. The Company continues to vigorously defend the Circuit Court action and to pursue all available defenses, claims and counter claims against the USVD Sellers, Messrs. Fischer and Diamond, and certain former USVD employees.

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 $964,927 and $1,732,305 at September 30, 2009 and December 31, 2008, respectively.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 8 — Series A 8% Convertible Preferred Stock

The Company is authorized to issue 50,000,000 shares of preferred stock with a par value of $0.001 per share. The Company’s preferred stock may be divided into such series as may be established by the Board of Directors. The Board of Directors may fix and determine the relative rights and preferences of the shares of any series established.

The conversion price of the Series A Stock and the exercise price of the Warrants are subject to adjustment in certain instances, including the issuance by the Company of securities with a lower conversion or exercise price, which occurred as part of the USVD financings and STN financings and acquisition. The Series A Stock has voting rights equivalent to the 1,319,171,600 shares of common stock into which it can convert. The Series A stockholders also must approve any change to the Company’s Articles of Incorporation.

Effective June 1, 2009, the Company entered into a Securities Purchase Agreement with Vicis Capital Master Fund, a sub-trust of Vicis Capital Series Master Trust, and the Company’s largest preferred stockholder (“Vicis”), pursuant to which Vicis invested an additional $1,000,000 in the Company and the Company issued to Vicis 1,000,000 shares of the Company’s Series A Convertible Preferred Stock and a warrant to purchase 100,000,000 shares of Common Stock at an exercise price of $0.01 per share. Pursuant to this event, all the outstanding warrants have been re-priced to $0.01 and all conversion prices on the Series A Stock have been reduced to $0.01. The warrant included a put provision inherent in the redemption provision included in the warrant agreements and recorded at issuance as a liability for “Derivative financial instruments at estimated fair value” on the Company’s balance sheet in accordance with the current authoritative guidance including EITF 00-19. In accordance with provisions of SFAS 133, the Company is required to adjust the carrying value of the above warrants to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrants the Company used the Black-Scholes model. The warrant included a redemption right, payable in cash upon the future occurrence of a change in control. As such, the Company recorded a derivative financial instrument at fair value of $1,925,571 in connection with this transaction.

Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the holders of the shares of Series A Stock shall be paid, before any payment shall be paid to the holders of common stock, or any other stock ranking on liquidation junior to the Series A Stock, an amount for each share of Series A Stock held by such holder equal to the sum of (1) the Stated Value thereof and (2) an amount equal to dividends accrued but unpaid thereon, computed to the date payment thereof is made available.

During the nine months ended September 30, 2009, a Series A stockholder converted 25,000 shares of Series A Stock to 2,571,307 shares of the Company’s common stock.

Note 9 — Cost of Sales

For the periods ended September 30, 2009 and 2008, costs of sales consisted of the following:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006								2006
		2009				2008				2009				2008
Equipment costs		$	1,063,545			$	2,474,018			$	4,001,617			$	6,188,871
Contract labor			—				17,322				24,225				131,743
Direct labor			341,339				259,876				1,005,158				748,761
Software assurance costs			174,890				283,052				174,891				286,875
Sales commissions and selling costs			146,028				42,310				407,201				68,411
Lite warranty costs			12,784				69,036				67,804				169,052
Other costs			4,886				29,914				35,308				62,620
		$	1,743,472			$	3,175,528			$	5,716,204			$	7,656,333

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 10 — Employee Benefit Plan

USVD, the Company’s subsidiary, 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 $12,491 and $35,649 for the three months ended September 30, 2009 and 2008, respectively. The Company made 401(k) matching contributions of $65,888 and $75,717 for the nine months ended September 30, 2009 and 2008, 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 $124,000 and $117,000 for the three months ended September 30, 2009 and 2008, respectively, and approximately $426,000 and $219,000 for the nine months ended September 30, 2009 and 2008, respectively. Such amounts have been included in employee compensation and benefits expense.

Note 11 — Acquisition of Standard Tel Networks, LLC

An initial preliminary allocation has been made to intangible assets as of the December 31, 2008. Management will determine the proper value of intangible assets acquired from STN and allocate any additional adjustments of the goodwill to intangible assets within twelve months after the acquisition date.

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, the Company adopted the Brookside Technology Holdings Corp. (formerly Cruisestock, Inc) 2007 Stock Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan is discretionary and allows for an aggregate of up to 100,000,000 shares of the Company’s common stock to be awarded through incentive and non-qualified stock options and stock appreciation rights. The Stock Incentive Plan is administered by the 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.

The Company recognized $18,605 and $53,333 compensation expense for options for the three months ended September 30, 2009 and 2008, respectively. The Company recognized $52,491, and $168,333 compensation expense for options for the nine months ended September 30, 2009 and 2008, respectively.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 12 — Stock-Based Compensation (continued)

A summary of the changes in the total stock options outstanding during the nine months ended September 30, 2009 is as follows:

						Weighted
						Average
		Options				Exercise Price
Outstanding at December 31, 2007			14,000,000			$	0.186
Cancelled during 2008			(14,000,000	)		$	0.186
Granted during 2008			19,200,000			$	0.03
Forfeited or expired			—				—
Exercised			—				—
Outstanding at December 31, 2008			19,200,000			$	0.03
Granted during 2009			2,000,000			$	0.01
Forfeited or expired			—				—
Exercised			—				—
Outstanding at September 30, 2009			21,200,000			$	0.03
Vested and exercisable at September 30, 2009			3,381,944			$	0.03

Total stock options vested as of September 30, 2009 is 3,381,944. The remaining vesting period is as follows:

		Number of Shares				Year Vested
			14,408,333				2009
			2,633,334				2010
			688,889				2011
			7,500				2012

The weighted average remaining term of the options is approximately 9.1 years at September 30, 2009. Options issued in 2008 and 2009 had an exercise price ranging from $0.01 to $0.05 per share. The grant date fair value for 2008 options were $0.01 to $0.05 per share. At September 30, 2009, there was $471,303 of total unrecognized compensation cost related to non-vested stock option awards that are expected to be recognized over a period of 2 years. The Company has stock options outstanding with an intrinsic value of $0 and $210,000 at September 30, 2009 and December 31, 2008, respectively.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 13 — Warrants

Warrants

The following is a summary of the warrants outstanding as of September 30, 2009.

		Outstanding				Exercise Price
Series A *			71,631,216			$	0.01
Series B			80,896,508			$	0.01
Series C			15,988,602			$	0.01
Series D **			25,080,000			$	0.01
Series E			61,273,835			$	0.01
Series F			350,000,000			$	0.01
Chatham			140,930,835			$	0.01
Total warrants			745,800,996

During the nine months ended September 30, 2009, a warrant holder converted through a cashless exercise of the warrants held, to 3,857,455 shares of common stock.

The Company has warrants, common stock options and Series A Stock that could potentially convert to 1,938,169,761 shares of common stock. On November 19, 2009, shareholders representing a majority of the Company’s shares entitled to vote at a meeting executed and delivered to the Company written consents in lieu of a meeting approving an increase in the Company’s authorized shares of Common Stock from 1,000,000,000 to 10,000,000,000.

Note 14 — Restatement of Prior Periods

The Company issued the following warrants in conjunction with various financing related activities:

						2008 Vicis				2009 Vicis
		Hilco				Financing				Financing
Financing		$	6,000,000			$	5,500,000			$	1,000,000
Total number of warrants			61,273,872				250,000,000				100,000,000
Exercise Price		$	0.137			$	0.03			$	0.01
Term of warrants (years)			5				5				5
Debt issuance costs		$	1,659,773			$	—			$	—
Face value of debt/equity		$	4,340,227			$	5,500,000			$	1,000,000
Fair value of derivative at inception		$	18,008,466			$	9,656,069			$	1,925,571
Financing expense recorded		$	12,348,466			$	4,156,069			$	925,571

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 14 — Restatement of Prior Periods (continued)

The above amounts have been classified as derivative financial instruments because of the put provisions inherent in the redemption provision included in the warrant agreements and recorded at issuance as a liability for “Derivative financial instruments at estimated fair value” on the Company’s balance sheet in accordance with the current authoritative guidance including EITF 00-19. In accordance with provisions of SFAS 133, the Company is required to adjust the carrying value of the above warrants to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrants, the Company used the Black-Scholes model. Changes in warrant liabilities for 2009 and 2008 were as follows:

		2008
		3/31/08				6/30/08				9/30/08				12/31/08
Derivative financial instrument at opening balance sheet date		$	7,605,601			$	3,448,910			$	1,385,780			$	11,967,175
Fair value of new derivative during the period			—				—				9,656,069				—
Change in estimated fair value of derivative financial instrument			(4,156,691	)			(2,063,130	)			925,326				49,288
Derivative financial instrument at closing balance sheet date		$	3,448,910			$	1,385,780			$	11,967,175			$	12,016,463

		2009
		3/31/09				6/30/09				9/30/09
Derivative financial instrument at opening balance sheet date		$	12,016,463			$	11,338,561			$	7,512,529
Fair value of new derivative during the period			—				1,925,571				—
Change in estimated fair value of derivative financial instrument			(677,902	)			(5,751,603	)			(3,892,627	)
Derivative financial instrument at closing balance sheet date		$	11,338,561			$	7,512,529			$	3,619,902

The determination of fair value includes significant estimates by management including volatility of the Company’s common stock, interest rates, and the probability of redemption or a future dilutive financing transaction among other items. The recorded value of the derivative financial instrument can fluctuate significantly based on fluctuations in the fair value of the Company’s common stock, as well as in the volatility of the stock price during the term used for observation and the term remaining for exercise of these warrants. The fluctuation in estimated fair value may be significant from period to period which in turn may have a significant impact on reported financial condition and results of operations.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 14 — Restatement of Prior Periods (continued)

In prior 10-K filings for the years ended 2007 and 2008 and related quarterly filings, and quarterly information filed for three months ended March 31, June 30, and September 30, 2009, the Company had incorrectly accounted for these warrants resulting in not recording the quarterly change in estimated fair value of derivative financial instruments. Accordingly the impact on the Company’s quarterly financial information is as follows:

		For the Three Months Ended 2008												Year Ended,
		3/31/08				6/30/08				9/30/08				12/31/08
Net loss, as previously reported		$	(1,798,087	)		$	(1,875,236	)		$	(784,983	)		$	(4,830,790	)
Net income (loss), as restated		$	1,943,661			$	(227,049	)		$	(6,281,322	)		$	(4,986,482	)
Total liabilities, as previously reported		$	15,911,754			$	18,243,852			$	14,300,178			$	13,799,003
Total liabilities, as restated		$	18,530,777			$	19,214,688			$	26,267,353			$	25,815,466
Total equity (deficit), as previously reported		$	1,765,075			$	(4,710	)		$	13,879,835			$	13,495,136
Total equity (deficit), as restated		$	(853,948	)		$	(975,546	)		$	1,912,660			$	1,478,673

		For the Three Months Ended 2009
		3/31/09				6/30/09				9/30/09
Net loss, as previously reported		$	(1,327,978	)		$	(1,032,224	)			N/A
Net income (loss), as restated		$	(650,076	)		$	3,793,808			$	2,393,765
Total liabilities, as previously reported		$	13,358,796			$	13,171,525				N/A
Total liabilities, as restated		$	24,697,357			$	20,684,054			$	16,748,118
Total equity (deficit), as previously reported		$	12,167,733			$	12,072,930				N/A
Total equity (deficit), as restated		$	829,172			$	4,560,401			$	6,984,987

Note 15 — Intangible Assets

Intangible assets represent amounts acquired in the acquisitions of USVD and STN and consist of the following as of September 30, 2009:

		Gross Carrying				Accumulated
		Amount				Amortization				Life (years)
Purchased customer contracts — USVD		$	600,000			$	600,000				1
Purchased customer contracts — STN			900,000				900,000				1
Non-compete agreements			100,000				100,000				3
		$	1,600,000			$	1,600,000
Nine months ended September 31, 2009 Amortization Expense						$	731,712

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 16 — Subsequent Event

On November 19, 2009, shareholders representing a majority of the Company’s shares entitled to vote at a meeting executed and delivered to the Company written consents in lieu of a meeting approving an increase in the Company’s authorized shares of Common Stock from 1,000,000,000 to 10,000,000,000 and to increase the aggregate shares available to be issued under the Stock Incentive Plan from 35,000,000 to 100,000,000.

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 consolidated financial statements and related notes for the periods ended December 31, 2008 and 2007 included in our Form 10-K, as filed with the Securities and Exchange Commission, as well as the information contained in the consolidated 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-K for the year ended December 31, 2008, and elsewhere in this report.

General

Organizational History and Operations

We are the holding company for Brookside Technology Partners, Inc, a Texas corporation (“Brookside Technology Partners”), US Voice & Data, LLC, an Indiana Limited Liability Company (“USVD”), Standard Tel Acquisitions, Inc., a California Corporation (“Acquisition Sub”), Trans-West Network Solutions, Inc., (“Trans-West”), a California Corporation and Standard Tel Networks, LLC, a California Limited Liability Company (“STN”) and all operations are conducted through these (five) wholly owned subsidiaries.

Collectively, the subsidiary companies are providers of converged business communications products and services from Mitel, Inter-tel (owned by Mitel), Nortel and NEC. The Company, is the 2^nd largest MITEL dealer in the United States, and is recognized by Mitel as a Diamond Dealer. 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. 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, the Company has offices that provide a national footprint. Headquartered in Huntington Beach, California, STN has additional offices in Sacramento and San Diego. Headquartered in Austin, Texas, Brookside Technology Partners serves the Texas market. Headquartered in Louisville, Kentucky, USVD serves the Kentucky and Southern Indiana markets, operating out of offices in Louisville, Lexington and Indianapolis. Combined, new implementations represent approximately 50% of the Company’s revenues with the remaining 50% generated by service, support, maintenance and other recurring revenues from our existing customer base.

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.

Subsequent to the Share Exchange, on July 6, 2007 (the “Effective Time”), Cruisestock changed its name to Brookside Technology Holdings Corp. and redomesticated in 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”).

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

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.

Increase in Authorized Shares

On August 4, 2008, the Company filed Articles of Amendment to its Articles of Incorporation (the “Amendment”) with the Florida Department of State increasing the number of shares of common stock that the Company has the authority to issue from Two Hundred and Fifty Million (250,000,000) shares to One Billion (1,000,000,000) shares. On November 19, 2009, shareholders representing a majority of the Company’s shares entitled to vote at a meeting executed and delivered to the Company written consents in lieu of a meeting approving an increase in the Company’s authorized shares of Common Stock from 1,000,000,000 to 10,000,000,000.

Vicis Equity Infusion

On July 3, 2008, 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 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”). The warrant included a put provision inherent in the redemption provision included in the warrant agreements and recorded at issuance as a liability for “Derivative financial instruments at estimated fair value” on the Company’s balance sheet in accordance with the current authoritative guidance including EITF 00-19. In accordance with provisions of SFAS 133, the Company is required to adjust the carrying value of the above warrants to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrants the company used the Black-Scholes model. The warrant included a redemption right, payable in cash upon the future occurrence of a change in control. As such, the Company recorded a derivative financial instrument at fair value of $9,656,069 in connection with this transaction.

Furthermore, pursuant to the Vicis Agreement, all of the 3,000,000 shares outstanding of the Company’s 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.

The Company accounted for these two transactions as one event for accounting purposes. The $5,500,000 ($2,500,000 in cash and $3,000,000 of principal of Series B Stock) was considered for investment in 5,500,000 shares of Series A Stock and 250,000,000 warrants to purchase common stock. Initially the $5,500,000 was allocated based on the relative fair value of the Series A Stock and the warrants issued. Subsequently the amount was restated with $5.5 million in Series A Stock being reduced to zero and the fair value of the warrant of $9,656,069 being established.

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 its warrants to purchase 61,273,835 shares of common stock of the Company. In addition, Vicis purchased and assumed from Dynamic Decisions (“DD”), and DD assigned to Vicis, all credit agreements, loans and promissory notes under which DD had loaned money to the Company. The Company consented to such assignments. The warrant included a put provision inherent in the redemption provision included in the warrant agreements and recorded at issuance as a liability for “Derivative financial instruments at estimated fair value” on the Company’s balance sheet in accordance with the current authoritative guidance including EITF 00-19. In accordance with provisions of SFAS 133, the Company is required to adjust the carrying value of the above warrants to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrants, the Company used the Black-Scholes model. The warrant included a redemption right, payable in cash upon the future occurrence of a change in control. As such, the Company recorded a derivative financial instrument at fair value of $18,008,466 in connection with this transaction on September 26, 2007.

All Warrants 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.

Acquisition of Standard Tel Networks, LLC

On September 23, 2008, Brookside Technology Holdings Corp. (the “Company), through its wholly owned subsidiary, Standard Tel Acquisitions, Inc. (“Acquisition Sub”), acquired Standard Tel Networks, LLC (“STN”), an independent distributor of high quality, turnkey converged voice and data business communications products and services with California offices in Sacramento, San Diego and headquartered in Huntington Beach. The acquisition was conducted pursuant to a previously-disclosed Stock and Membership Interest Purchase Agreement dated July 17, 2008, and was structured as the acquisition of (a) all of the stock of Trans-West Network Solutions, Inc. (“Trans-West”) from the shareholders of Trans-West (the “Trans-West Shareholders”) and (b) all of the membership interest of STN owned by ProLogic Communication, Inc. (“ProLogic” and collectively with the Trans-West Shareholders, the “Seller Parties”). As previously reported, Trans-West, a holding company with no operations, owns eighty percent (80%) of the membership interest of STN and ProLogic owned the other twenty percent (20%), and, accordingly, the Company now owns (directly, in part, and indirectly through Trans West, in other part) one hundred percent (100%) of STN.

Effective June 1, 2009, the Company entered into a Securities Purchase Agreement with Vicis, pursuant to which Vicis invested an additional $1,000,000 in the Company and the Company issued to Vicis 1,000,000 shares of the Company’s Series A Convertible Preferred Stock and a warrant to purchase 100,000,000 shares of Common Stock at an exercise price of $0.01 per share. The warrant included a put provision inherent in the redemption provision included in the warrant agreements and recorded at issuance as a liability for “Derivative financial instruments at estimated fair value” on the Company’s balance sheet in accordance with the current authoritative guidance including EITF 00-19. In accordance with provisions of SFAS 133, the Company is required to adjust the carrying value of the above warrants to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrants the company used the Black-Scholes model. The warrant included a redemption right, payable in cash upon the future occurrence of a change in control. As Such, the company recorded a derivative financial instrument at fair value of $1,925,571 in connection with this transaction.

Results of Operations

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the condensed consolidated 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.

Restatement of Prior Periods

On November 16, 2009, and as a result of comments the Company received from the SEC as a result of the SEC’s review of the Company’s Form 10-K for the year ended December 31, 2008 and Form 10-Q for the period ended June 30, 2009, the Company’s board of directors concluded that its previously issued financial statements for the years ended December 31, 2007 and 2008, and each interim quarter contained within such years, and for the quarters ended March 31, 2009 and June 30, 2009, should no longer be relied upon because of the forgoing error regarding the accounting of such warrants. The board of directors discussed the forgoing matters with the Company’s independent accountant.

Accordingly the impact on the Company’s quarterly financial information is as follows:

		For the Three Months Ended 2008
		3/31/08				6/30/08				9/30/08				12/31/08
Net loss, as previously reported		$	(1,798,087	)		$	(1,875,236	)		$	(784,983	)		$	(4,830,790	)
Net income (loss), as restated		$	1,943,661			$	(227,049	)		$	(6,281,322	)		$	(4,986,482	)
Total liabilities, as previously reported		$	15,911,754			$	18,243,852			$	14,300,178			$	13,799,003
Total liabilities, as restated		$	18,530,777			$	19,214,688			$	26,267,353			$	25,815,466
Total equity (deficit), as previously reported		$	1,765,075			$	(4,710	)		$	13,879,835			$	13,495,136
Total equity (deficit), as restated		$	(853,948	)		$	(975,546	)		$	1,912,660			$	1,478,673

		For the Three Months Ended 2009
		3/31/09				6/30/09				9/30/09
Net loss, as previously reported		$	(1,327,978	)		$	(1,032,224	)			N/A
Net income (loss), as restated		$	(650,076	)		$	3,793,808			$	2,393,765
Total liabilities, as previously reported		$	13,358,796			$	13,171,525				N/A
Total liabilities, as restated		$	24,697,357			$	20,684,054			$	16,748,118
Total equity (deficit), as previously reported		$	12,167,733			$	12,072,930				N/A
Total equity (deficit), as restated		$	829,172			$	4,560,401			$	6,984,987

Revenues, Cost of Sales and Gross Margins

Total revenues from operations for the quarter ended September 30, 2009 were $4,369,728 compared to $5,657,123 reported for the same period in 2008, representing a decrease of $1,287,395, or 23%. This decrease in revenues is primarily due to the decreased sales activity at USVD experienced in 2009 versus the comparable period in 2008. This decrease was partially offset by the acquisition of STN, which added $1,965,413 to the Company’s total revenues for the quarter ended September 30, 2009. While the Company believes that a portion of this decrease in earnings may be due to general market and economic conditions, however, as discussed further under “Legal Proceedings,” the Company has taken action and continues to aggressively investigate the actions of certain former employees of USVD undertaken both before and after their resignations from USVD. Since the departure of the former USVD employees, the Company has successfully hired sales and sales management personnel and transitioned USVD operations and administrative management to the Company’s management team.

Total revenues from operations for the nine months ended September 30, 2009 were $13,915,078 compared to $14,398,636 reported for the same period in 2008, representing a decrease of $483,558, or 3%. This decrease in revenues is due primarily to decreased sales activity at USVD in 2009 versus 2008. This decrease in revenues was partially offset by the acquisition of STN, which added $6,350,369 to the Company’s total revenues for the nine months ended September 30, 2009. While the Company believes that a portion of this decrease in earnings may be due to general market and economic conditions as discussed further under “Legal Proceedings,” the Company has taken action and continues to aggressively investigate the actions of certain former employees of USVD undertaken both before and after their resignations from USVD. In addition,

during the first quarter of 2009, USVD’s Kentucky region experienced ice storms and other harsh weather which caused lengthy power outages for two weeks, which impacted recurring and new sales business that resulted in less business activity for USVD and will not be recovered. The Company has successfully hired sales and sales management personnel and transitioned USVD operations and administrative management to the Company’s management team.

Cost of sales was $1,743,472 for the quarter ended September 30, 2009 compared to $3,175,528 for the quarter ended September 30, 2008, a decrease of $1,432,056 or 45%. This decrease was due to less cost of sales associated with the decrease in revenues for the Company discussed above. The decrease in cost of sales was partially offset by the increase in cost of sales, in conjunction with the increased revenues due to the acquisition of STN, which added cost of sales in the amount of $761,990. As a percentage of sales, cost of sales was 40% and 56% for the quarters ended September 30, 2009 and 2008, respectively. This decrease was primarily due to increased profit margin realized on sales consummated in the third quarter 2009 versus the comparative period in 2008. This improvement in cost of sales as a percentage of sales is primarily attributable to the Company’s multi-faceted and differentiated approach, “Teleficiency”™, a universal focus on higher margin, application specific value added business and technology solutions.

Cost of sales was $5,716,204 for the nine months ended September 30, 2009 compared to $7,656,333 for the nine months ended September 30, 2008, a decrease of $1,940,129 or 25%. The decrease was due to less cost of sales associated with the decrease in revenues for the Company discussed above. The decrease in cost of sales was partially offset by the increase in cost of sales, in conjunction with the increased revenues due to the acquisition of STN, which accounted for $2,353,697 of the increase. As a percentage of sales, cost of sales was 41% and 53% for the nine months ended September 30, 2009 and 2008, respectively. This decrease was primarily due to increased profit margin realized on sales consummated in the first nine months of 2009 versus the comparative period in 2008. This improvement in cost of sales as a percentage of sales is primarily attributable to the Company’s multi-faceted and differentiated approach, “Teleficiency”™, a universal focus on higher margin, application specific value added business and technology solutions.

Our gross margin was 60% for the quarter ended September 30, 2009 compared to 44% for the quarter ended September 30, 2008. The increase in gross margin as a percentage of sales is due primarily to the Company’s multi-faceted and differentiated approach, “Teleficiency”™, a universal focus on higher margin, application specific value added business and technology solutions.

Our gross margin was 59% for the nine months ended September 30, 2009 compared to 47% for the nine months ended September 30, 2008. The significant improvement in gross margin percentage is due primarily to the Company’s multi-faceted and differentiated approach, “Teleficiency”™, a universal focus on higher margin, application specific value added business and technology solutions.

General and Administrative Expenses

General and administrative expenses were $2,960,994 and $1,932,108 for the quarters ended September 30, 2009 and 2008, respectively. This represented an increase of $1,028,886 or 53%. This increase in general and administrative expenses in 2009 was due primarily to the acquisition of STN, which accounted for $1,214,891 of the increase. This was partially offset by the decrease in general and administrative expenses due to organizational sizing and direct cost cutting to reduce general and administrative expenses. The Company’s management continues to evaluate expenses in line with revenues to determine additional cost cutting.

General and administrative expenses were $8,911,386 and $5,793,094 for the nine months ended September 30, 2009 and 2008, respectively. This represented an increase of $3,118,292 or 54%. This increase in general and administrative expenses in 2009 was due primarily to the acquisition of STN, which accounted for $3,538,775 of the increase, partially offset by the decrease in general and administrative expenses due to organizational sizing and direct cost cutting to reduce general and administrative expenses of $420,483. The Company’s management continues to evaluate expenses in line with revenues to determine additional cost cutting.

Amortization Expense

The Company recognized $468,339, and $1,003,282 of amortization expense for the quarters ended September 30, 2009 and 2008, respectively, related to the accounting treatment of the warrants issued and amortization of intangible assets associated with the USVD and STN acquisitions. The decrease in amortization expense of $534,943 for the quarter ended September 30, 2009 versus the comparative period in 2008, is primarily due to the amortization of the warrants issued in conjunction with the USVD acquisition being fully amortized as of September 26, 2008.

The Company recognized $1,461,726 and $3,673,806 of amortization expense for the nine months ended September 30, 2009 and 2008, respectively, related to the accounting treatment of the warrants issued and amortization of intangible assets associated with the USVD and STN acquisitions. The decrease in amortization expense of $2,212,080 for the nine months ended September 30, 2009 versus the comparative period in 2008, is primarily due to the amortization of the warrants issued in conjunction with the USVD acquisition being fully amortized as of September 26, 2008.

Interest Expense

Interest expense was $663,478 and $874,568 for the quarters ended September 30, 2009 and 2008, respectively. This decrease of $211,090 was due primarily to the decrease on amortization of warrants due to the final amortization of the Hilco debt discount associated with the USVD acquisition in the amount being charged to interest expense in the third quarter 2008. This decrease was partially offset by additional debt incurred with the acquisition of STN on September 23, 2008.

Interest expense was $1,575,733 and $3,044,037 for the nine months ended September 30, 2009 and 2008, respectively. This decrease of $1,468,304 was due primarily to the effect of the debt restructuring incurred with the USVD acquisition to Series A Stock in June 2008 and the decrease on amortization of warrants due to the final amortization of the Hilco debt discount associated with the USVD acquisition in the amount being charged to interest expense in the third quarter 2008. This decrease was partially offset by the additional debt incurred with the acquisition of STN.

Gain (loss) on Change in Fair Value of Derivative Financial Instruments

Gain (loss) on change in fair value of derivative financial instruments was $3,892,627 and ($925,326) for the quarters ended September 30, 2009 and 2008, respectively. This is an increase in gain of $4,817,953. This is due to the decrease in fair value of the warrants pursuant to valuation using the Black-Scholes Model.

Gain (loss) on change in fair value of derivative financial instruments was $10,322,132 and $5,294,495 for the nine months ended September 30, 2009 and 2008, respectively. This is an increase in gain of $5,027,637. This is due to the decrease in fair value of the warrants pursuant to valuation using the Black-Scholes Model.

Finance Expense on Derivatives

Finance expense on derivatives was $0 and $4,156,069 for the quarter ended September 30, 2009 and 2008, respectively. This represents a decrease of $4,156,069. This is due to the 250,000,000 warrants issued in July 2008 resulting in an expense of $4,156,069 and no new issuance of derivatives financial instruments in the comparable period in 2009.

Finance expense on derivatives was $925,571 and $4,156,069 for the nine months ended September 30, 2009 and 2008, respectively, resulting in an increase of $3,230,498. This decrease is due to the 100,000,000 warrants issued in June 2009 which resulted in an finance expense on derivatives of $925,571 versus the 250,000,000 warrants issued in July 2008 resulting in an expense of $4,156,069.

Net Income/Net Loss
 

We realized net income of $2,393,765 for the quarter ended September 30, 2009 compared to a net loss of $6,281,322 for the quarter ended September 30, 2008. This represents an increase in net income of $8,675,087. This increase in net income is primarily due to the increase in gain (loss) on change in fair value of derivative financial instruments of $8,974,022 as discussed above, the decrease in amortization expense of $534,943, partially offset by the decrease in revenues of $1,287,395 and the increase in general and administrative expenses of $1,028,886.

We realized net income of $5,537,497 for the nine months ended September 30, 2009 compared to a net loss of $4,564,710 for the nine months ended September 30, 2008. This represents an increase in net income of $10,102,207. This increase in net income is primarily due to the increase in gain (loss) on change in fair value of derivative financial instruments of $8,258,135 as discussed above, the increase in gross profit of $1,456,571 and the decrease in amortization expense of $2,212,080 partially offset by the increase in general and administrative expense of $3,118,292.

Liquidity and Capital Resources

The Company has cash and cash equivalents of $329,913 at September 30, 2009. Additionally, effective August 13, 2009, the Company and its senior creditor, Chatham Credit Management III, LLC (“Chatham”), further updated its letter agreement dated May 29, 2009 pursuant to which, among other things, Chatham agreed, for the period July 31, 2009 through September 30, 2010 (“Agreement Period”) to suspend the Company’s compliance of the minimum fixed charge coverage ratio and maximum leverage ratio contained in the credit agreement. The Company and Chatham agreed to a temporary minimum earnings before interest, taxes, depreciation and amortization covenant (“Modified EBITDA Covenant”) for this Agreement Period. At September 30, 2009, the Company is not in compliance with this Modified EBITDA Covenant under this agreement. As a result, all principal due to Chatham has been reclassified as a current liability.

Additionally, effective June 1, 2009, the Company entered into a Securities Purchase Agreement with Vicis Capital Master Fund, a sub-trust of Vicis Capital Series Master Trust, and the Company’s largest preferred stockholder (“Vicis”), pursuant to which Vicis invested an additional $1,000,000 in the Company and the Company issued to Vicis 1,000,000 shares of the Company’s Series A Convertible Preferred Stock and a warrant to purchase 100,000,000 shares of Common Stock at an exercise price of $0.01 per share.

Although the Company had net income for the three months and nine months ended September 30, 2009 of approximately $2.4 million and $5.5 million, respectively, this was due primarily to the non-cash gain (loss) on change in fair value of derivative financial instruments as a result of the accounting treatment of derivative financial instruments at estimated fair value on the Company’s balance sheet in accordance with the current authoritative guidance including EITF 00-19. In addition, the Company has a retained deficit of approximately $12.6 million. For the nine months ended September 30, 2009, the Company had net cash used in operations of approximately $1.9 million. Historically, the Company has relied on borrowings and equity financings to maintain its operations. The Company believes it has enough cash to operate for the coming year with its cash on hand, cash to be generated from operations and the borrowing availability with its lenders. However, the recent economic downturn could have a material effect on its business operations. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

Management is focused on managing costs in line with estimated total revenues for the balance of fiscal 2009 and beyond, including contingencies for cost reductions if projected revenues are not fully realized. However, there can be no assurance that anticipated revenues will be realized or that the Company will successfully implement its plans. Additionally, the Company is in discussions with its senior and subordinated lender regarding obtaining additional financing to execute its business plan.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated 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 consolidated 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 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 when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectability is reasonably assured. Sales are recorded net of discounts, rebates, and returns.

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.

Revenue from contracts that contain multiple elements that are not accounted for under the percentage-of-completion method are accounted for in accordance with “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.

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), 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 September 30, 2009, 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 September 30, 2009 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. This is based on the following three events:

	(1)		On November 17, 2009, and as a result of comments the Company received from the SEC in connection with the SEC’s review of the Company’s Form 10-K for the year ended December 31, 2008 and Form 10-Q for the period ended June 30, 2009, the Company’s board of directors concluded that the Company’s previously issued financial statements for the years ended December 31, 2007 and 2008, and each interim quarter contained within such years, and for the quarters ended March 31, 2009 and June 30, 2009, should no longer be relied upon because of an error contained therein regarding the accounting of certain warrants issued in connection with certain financings, which warrants should have been accounted for as a liability under EITF 00-19 based on their fair value as of the date of their issuance because they contain put provisions requiring the Company to redeem the warrants under certain circumstances. The board of directors discussed the forgoing matters with its Chief Financial Officer and the Company’s independent accountant.
	(2)		As disclosed in Note 2 to the condensed consolidated financial statements, the Company was not in compliance with the leverage ratio imposed by the Chatham Senior Loan in the first quarter of 2009. The Company’s management and board of directors devoted a significant amount of time to the negotiation of a modification to the ratio requirement and to the impact the Company’s non-compliance was having on its liquidity. As further disclosed in Note 2 to the Financial Statements, effective August 13, 2009, among other things, Chatham agreed to suspend the Company’s obligation to comply with the leverage and debt coverage ratios for the period July 31, 2009 through September 30, 2010.

(3)

On May 12, 2009, Messers. Fischer and Diamond ceased working for the USVD, alleging that their employment was “constructively terminated” and that their non-competition agreements were null and void. Shortly thereafter, several other USVD employees resigned from USVD and went to work for a new company, which the Company believes is owned by Messers. Fischer & Diamond and/or some of their family members, either directly or indirectly. This new company shortly thereafter began soliciting the Company’s vendors and customers. As a result, management and the board of directors were required to personally devote a significant amount of time and effort to stabilize the situation at USVD.

As a result of the foregoing unique demands incurred in 2009, the audit committee and management were not able to perform in a complete manner the disclosure controls and procedures in order to determine that such disclosure controls and procedures were effective for the quarter ended September 30, 2009.

While management is making best efforts to restore the controls and processes during the fourth quarter, no assurances can be made at this stage that we will be in compliance with internal control procedures required by Sarbanes-Oxley for the year ending December 31, 2009.

Changes in Internal Control Over Financial Reporting

During the nine months ended September 30, 2009, the Company has 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

As previously disclosed, in 2007, the Company purchased USVD from the Michael P. Fischer Irrevocable Delaware Trust and the M. Scott Diamond Irrevocable Delaware Trust (the “USVD Sellers”) pursuant to a Membership Purchase Agreement between the Company and the USVD Sellers, dated September 26, 2007 (the “USVD Agreement”). The original purchase price was $15,429,242. As of September 30, 2009, the Company has paid to the USVD Sellers a total of $14,533,690, representing 94% of all sums payable under the USVD Agreement.

In addition, in connection with the acquisition of USVD, Messrs. Fischer and Diamond were provided employment agreements, pursuant to which they held the positions of CEO and COO, respectively at USVD. The employee agreements provided Messrs. Fischer and Diamond with annual base salaries of $105,000 and $145,000, respectively. As a result, until recently, the Company relied on Messrs. Fischer and Diamond to continue to operate USVD.

However, on May 12, 2009, Messrs. Fischer and Diamond notified the Company that they considered their employment to be “constructively terminated” as a result of the Company having failed to pay them, collectively, an EBITDA earn-out payment of approximately $289,000 they claim they were due on April 30, 2009. Since such time, Messrs. Fischer and Diamond have not shown up to work and they have ceased performing any employment duties.

As discussed further above under “Business” and “Management’s Discussion and Analysis,” USVD’s revenues, under the direction of Messrs. Fischer and Diamond, for the six months ended June 30, 2009 were approximately $2,700,000 lower than its revenues in the same period in 2008. This decrease adversely impacted the Company’s liquidity and subsequently the Company’s largest equity investor, Vicis, provided an additional capital infusion. Also, the Company and its primary lender, Chatham, have made modifications to the Company’s credit facility.

Fortunately, USVD’s first quarter decreased earnings were offset by increased earnings provided by STN, as well as increased earnings at USVD for the second quarter under the direction of Brookside Technology Holdings Corp’s management and other existing USVD and STN senior managers, discussed further above under “Business” and “Management’s Discussion and Analysis.” However, while the Company may have this offset from these combined strong earnings, Messrs. Fischer’s and Diamond’s earn-outs were to be based solely on USVD’s EBITDA. Given USVD’s performance under Messrs. Fischer’s and Diamond’s stewardship prior to May 12, 2009, it is presently unclear whether they would have earned any future earn-out payments subsequent to their alleged constructive terminations.

In addition to their alleged constructive termination, Messrs. Fischer and Diamond claim that their Restrictive Covenant Agreement entered into as part of their Employment Agreements signed with the Company at the time of the USVD acquisition are now null and void and that, accordingly, they are free to compete with the Company and USVD, and to solicit USVD employees. Subsequent to the departures of Messrs. Fischer and Diamond, on May 26, 2009, several USVD employees, mostly sales personnel, entered the USVD premises unescorted and removed Company and personal belongings in connection with their resignations from USVD and their new employment with a new company, which the Company believes is owned by Messrs. Fischer and Diamond and/or some of their family members, either directly or indirectly.

In response to the actions of Messrs. Fischer and Diamond and certain former USVD employees, the Company has worked diligently to secure USVD and its assets, employees, vendors, partners and customers. USVD’s employees, vendors, partners and customers have reconfirmed their support and loyalty to USVD, despite the fact that many of them have been solicited by Messrs. Fischer and Diamond and certain former USVD employees.

On July 17, 2009, the USVD Sellers filed a civil action in the Circuit Court of Jefferson County, Kentucky, alleging that the Company breached the USVD Agreement by failing to pay the previously mentioned $289,000 EBITDA earn-out payment they claim they was due on April 30, 2009, in addition to $1,750,000 of other future payments they claim they are entitled to accelerate as a result of such alleged breach. The lawsuit calls for an acceleration of all money owed to the USVD Sellers including: the $850,000 Seller Note, the $289,000 accrued EBITDA earn-out and an additional $900,000 of Minimum Cash Payments (as defined by the employment agreements of Messrs. Fischer and Diamond) in

connection with future estimations of earn-outs yet to be earned. The Company has a note payable – USVD Sellers included in its long-term debt of $850,000 as well as an accrual for the $289,000 accrued 2008 earn-out payment that the USVD Sellers, Messrs. Fischer and Diamond, claim is due to them.

On October 8, 2009 filed an answer and counter-claim to the USVD Sellers civil action discussed above. This answer and counter-claim outlines, among other things, the Company’s arguments for defense as well as the Company’s claims of breaches of fiduciary duty and other common law, contractual, quasi-contractual, and statutory claims against former employees of USVD. During their periods of employment, various employees of USVD who are now employees of a competitor, engaged in a variety of acts and omissions in breach of their legal duties to USVD and Brookside, including but not limited to (1) failure of the CEO and COO to fulfill their contractual duties under their Employment Agreements; (2) acts by these and other employees with fiduciary duties to act in the best interests of the company as opposed to their individual self-interests or the interests of third parties, in company matters; (3) destruction and/or seizure of proprietary documents and information belonging to USVD for the benefit of a competitor; and (4) failure by sales personnel to reimburse USVD for funds advanced on sales on behalf of USVD which were not consummated prior to their departures. The Company is continuing to analyze the forgoing civil action and continues to aggressively investigate the actions undertaken by of Messrs. Fischer and Diamond, as well as the former USVD employees, both before and after their resignations. The litigation is in its early stages, and it is premature to project its outcome. The Company continues to vigorously defend the Circuit Court action and to pursue all available defenses, claims and counter claims against the USVD Sellers, Messrs. Fischer and Diamond, and certain former USVD employees.

Item 1A. Risk Factors

No changes from prior disclosure.

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

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.

		Brookside Technology Holdings Corp
		By:		/s/ Bryan McGuire
		Bryan McGuire, Chief Financial Officer
		(Principal Financial Officer)
Dated: November 19, 2009