Seaniemac International, Ltd. - FORM 10-K

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EX-31.2 - Seaniemac International, Ltd.	v185322_ex31-2.htm
EX-31.1 - Seaniemac International, Ltd.	v185322_ex31-1.htm
EX-32.2 - Seaniemac International, Ltd.	v185322_ex32-2.htm
EX-32.1 - Seaniemac International, Ltd.	v185322_ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended December 31, 2009

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

Commission File Number: 333-134092

Compliance Systems Corporation

(Name of registrant as specified in its charter)

Nevada	20-4292198
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

50 Glen Street, Glen Cove, New York	11542
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (516) 674-4545

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

¨ Yes x No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates computed by reference to the closing sale price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, was $2,922,073, assuming that all stockholders, other than executive officers, directors and 5% stockholders of the registrant, are non-affiliates.

As of April 1, 2010, 276,011,662 shares of the common stock of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None

Introductory Comment - Use of Terminology

Throughout this Annual Report on Form 10-K, the terms the “Company,” “we,” “us” and “our” refers to Compliance Systems Corporation and, unless the context indicates otherwise, our subsidiaries, Call Compliance, Inc. (“Call Compliance”), Jasmin Communications Inc., Call Center Tools Inc., Call Compliance.com Inc. and Telephone Blocking Services Corporation, on a consolidated basis.

Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). To the extent that any statements made in this Form 10-K contain information that is not historical, these statements are essentially forward-looking. Forward-looking statements can be identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate” “expect,” “hope,” “intend,” “may,” “plan,” “potential,” “product,” “seek,” “should,” “will,” “would” and variations of such words. Forward-looking statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, without limitation:

•	our ability to raise capital to finance our growth and operations, when needed and terms advantageous to us;

•	our ability to locate and acquire appropriate business enterprises to supplement and enhance our revenue and cash flow;

•	the ability to manage growth, profitability and the marketability of our services;

•	general economic and business conditions;

•	the effect on our business of recent credit-tightening throughout the United States, especially within the construction and real estate markets;

•	the effect on our business of recently reported losses within the financial, banking and other industries and the effect of such losses on the income and financial condition of our current and potential clients;

•	the impact of developments and competition within the telephone solicitation industry;

•	adverse results of any legal proceedings;

•	the impact of current, pending or future legislation and regulation on the telephone solicitation industry;

•	our ability to maintain and enter into relationships with suppliers, vendors or contractors of acceptable quality of goods and services on terms advantageous to us;

•	the volatility of our operating results and financial condition;

•	our ability to attract and retain qualified senior management personnel; and

•	the other risks and uncertainties detailed in this Form 10-K and, from time to time, in our other filings with the Securities and Exchange Commission.

Readers of this Annual Report on Form 10-K should carefully consider such risks, uncertainties and other information, disclosures and discussions which contain cautionary statements identifying important factors that could cause our actual results to differ materially from those provided in forward-looking statements. Readers should not place undue reliance on forward-looking statements contained in this Form 10-K. We do not undertake any obligation to publicly update or revise any forward-looking statements we may make in this Form 10-K or elsewhere, whether as a result of new information, future events or otherwise.

PART I

Item 1.

Business.

Organizational Structure

Our predecessor, GSA Publications, Inc. (“GSA”), was incorporated on November 17, 2003 in Nevada. Our business predecessor, Compliance Systems Corporation (“CSC”), was incorporated on November 7, 2002 in Delaware pursuant to a corporate reorganization of several closely related companies that had commenced operations in December 2001. On February 10, 2006, CSC was merged with and into GSA, although CSC was treated as the surviving corporation for accounting purposes due to the fact that the prior owners of CSC obtained approximately 85% of the surviving corporation’s stock as a result of the merger. Following the effectiveness of the Merger, the surviving corporation changed its name to “Compliance Systems Corporation” and began operating the businesses previously conducted by CSC.

On February 5, 2010, the registrant, Compliance Systems Corporation (the “Company”), entered into an Agreement and Plan of Merger, dated as of February 5, 2010 (the “Merger Agreement”), with Execuserve Corp., a Virginia corporation (“Execuserve”) and CSC/Execuserve Acquisition Corp., a Virginia corporation and wholly-owned subsidiary of the Company. The Merger between Execuserve and CSC/Execuserve Acquisition Corp. became effective on February 9, 2010 with Execuserve being the surviving corporation becoming a wholly-owned by the Company.

As part of the Execuserve acquisition, Compliance Systems Corporation has realigned its organizational structure to account for the Execuserve acquisition and its operational management team. The Company's new Execuserve subsidiary division will be managed by its Chief Executive Officer (“CEO”) and President Jim Robinson. The Company's Call Compliance, Inc. (“CCI”) subsidiary will be led by Stefan Dunigan as its CEO and President. Dean Garfinkel will remain as Chairman of the Board of Directors and CEO of Compliance Systems Corporation and Barry Brookstein will continue as a member of the Board of Directors and as Secretary and Chief Financial Officer (“CFO”). Additionally, Tom Eley, the former CEO of Execuserve was appointed to the Board of Directors of the Company.

Our Business

We operate our principal businesses through two of our subsidiaries, Call Compliance, Inc. and Execuserve Corp.

Call Compliance, Inc.

We help telemarketing operators ensure compliance in the highly regulated, strictly enforced Do-Not-Call and other telemarketing guidelines environment. CCI designs, develops and deploys compliance products that we believe are effective, reliable, cost efficient and help alleviate many of the burdens placed upon telemarketers.

Our business is to provide compliance technologies, methodologies and services to the teleservices industry. We have developed a compliance technology called the TeleBlock® Call Blocking System which is a product that automatically screens and blocks outbound calls against federal, state, and in-house Do-Not-Call lists. A patent for TeleBlock was granted by the United States Patent and Trademark Office in December of 2001.

TeleBlock is made available via a platform managed by our alliance partner and primary distributor. Our TeleBlock platform(s) resides on the national Signal System 7/Internet Protocol (“IP”) network which is utilized by Telephone carriers to access the information required to set up and manage the routing of telephone calls. Using Signal System 7, telephone calls can be set up more efficiently and with greater security. Special services such as name display, toll-free service, and number portability, are easier to add and manage with Signal System 7.

Our Signal System 7/IP based deployment enables TeleBlock to be offered to subscribers via standard telephone company offerings, including, but not limited to, analog telephone lines, T1s (a dedicated phone connection supporting data rates of 1.544 Mbits per second) and PRIs (Primary Rate Interface), a class of voice and data service intended for larger users. TeleBlock also is offered to telephone subscribers via Voice over Internet Protocol (“VoIP”) switches and via a Virtual Private Network (“VPN”) connection by predictive dialer companies such as Stratasoft, TeleDirect, Marketel, Nobel and TouchStar, as well as in partnership with Application Service Providers (a business that provides computer-based services to customers over a network such as software development) (“ASPs”) such as Thunder and VanillaSoft. We believe delivering TeleBlock in this manner provides two significant advantages. First, we believe it allows for TeleBlock to be easily implemented by any off-shore telemarketing company that calls into the United States. Such offshore entities can use the internet to establish dial tone with TeleBlock almost immediately, as opposed to using their local telephone carrier which, based upon geography, may not be able to obtain a direct TeleBlock license. Currently, through our many VoIP distributors, there are contact centers utilizing TeleBlock in such countries as India, the Dominican Republic, the Philippines and Canada. Second, the VoIP telephone service gives domestic companies that have existing contracts with telephone carriers that do not license TeleBlock the ability to directly obtain the TeleBlock service. We are in talks with many other industry leaders to offer this VoIP version of TeleBlock that was first deployed through our alliance partner and primary distributor in November 2002. Since that time, we have been working closely with our alliance partner and primary distributor in an effort to enter into contracts with telephone carriers to provide their customers with TeleBlock on a commercial basis. To date, more than 40 telephone carriers and resellers, including AT&T, Qwest, Verizon Business, XO and Paetec, have licensed TeleBlock and offer it to their telemarketing customers. No assurance can be provided that any such discussions will result in new licenses for our Company, or that any licenses will result in our receipt of revenues or profits.

In May 2007, we launched the Enhanced DialerID® program, a TeleBlock enhancement service designed to ensure proper Caller ID telephone number delivery with Name Display for contact centers. Our current DialerID® service allows our subscribers to change their Caller ID Number, by campaign, right from the subscriber’s TeleBlock web GUI interface by manipulating the SS7 message that the serving Central Office switches transmit. Enhanced DialerID also allows subscribers to manage the name associated with the CallerID Number that their telephone systems and automated dialing systems transmit to their target consumers, ensuring the proper name display and maintaining compliance with certain Do-Not-Call rules. In addition, with this enhanced service, subscribers can request specific telephone numbers to use for each target market. By using our “Target Market” telephone numbers, contact centers will not only be in compliance with applicable law by ensuring the proper Name Display on called consumers telephones, but will benefit from an improved answer rate and increased credibility within their target markets.

We were granted patent protection in Greece for a modified version of the TeleBlock system in February 2006. We believe this patent protection applies throughout the European Union and anticipate that having this patent protection in place will enable us to market the TeleBlock technology throughout Europe, as the EU countries move to implement Do-Not-Call programs similar to those in the United States.

The Company produces four online guides: the USA DNC Regulatory Guide, the State Registration Guide, the Charitable Fundraising Regulatory Guide and Canadian DNC Regulatory Guide. The Regulatory Guide is an up-to-date compilation of all United States Federal and state Do-Not-Call regulations. The Registration Guide assists telemarketers in completing state commercial registration forms as required by each state. These guides are marketed and sold by the Company in conjunction with and co-branded by the American Teleservices Association (“ATA”), the Newspaper Association of America (“NAA”) and the American Resort Development Association (“ARDA”). In December 2008, the Company introduced the Canadian Regulatory Guide, an up-to-date compilation of all Canadian Do-Not-Call regulations for Canadian telemarketers. This guide is presently marketed and sold by the ATA and the Canadian Resort Development Association (“CRDA”). The Charitable Fundraising Guide made its debut in March 2009 and was launched in conjunction with the law firm of McMurray Cooke Peterson and Shuster. This guide is currently being offered by the ATA and ARDA. We expect to target market this new guide through additional association agreements.

In 2005, we entered the emerging world of VoIP communications (the technology used to transmit voice conversations over a data network using the Internet Protocol). In order to accomplish this, our wholly owned subsidiary, Jasmin Communications, Inc., doing business as Citadel Telephone Company (“Citadel”), entered into a wholesale reseller agreement by which it is able to sell TeleBlock-enabled dial tone, via VoIP, worldwide. Our VoIP service is available at www.citadeltel.com. The Citadel TeleBlock service provides us with yet another avenue by which TeleBlock can be offered to the teleservices industry. Citadel is currently providing US dial tone with TeleBlock throughout the USA and in countries such as India, Mexico, the Dominican Republic and Canada. We recently launched TeleBlock Office through Citadel. TeleBlock Office delivers a powerful tool for teleservices employees who work remotely or agents who are representing a company's products and services. This "Office in a Box" solution provides all the capabilities that are needed for a home-office user such as voice mail, follow me services and TeleBlock. We offer this service, utilizing VoIP technology, for one low monthly subscription fee per user.

The Patented TeleBlock Service

TeleBlock is a Do-Not-Call system that automatically blocks outbound calls to phone numbers registered with state and federally mandated Do Not-Call lists, the end-user’s (the telemarketer’s) own in-house proprietary Do-Not-Call list, and other third party Do Not Call lists. The system blocks these calls centrally, allowing for multiple offices and/or outsourced call centers to efficiently manage their Do-Not-Call lists. The basic TeleBlock system blocks these calls in the appropriate telephone company’s central office. The system is a value-added feature treatment applied to the telemarketer’s telephone lines (whether they are Plain Old Telephone Service (“POTS”) lines, T1’s or T3’s. The system functions independently of the telemarketers’ telephone equipment. TeleBlock is compatible with all key systems, Private Branch Exchanges (“PBXs”), predictive dialers, voice-messaging systems, fax broadcast equipment, etc.

Our TeleBlock process automatically blocks a call by interfacing with a telemarketer who dials a number appearing on any of the applicable Do-Not-Call lists, and instantaneously providing a recorded “blocked number” message. Other available features include standard or customized Special Information Tone (“SIT”) tones for predictive dialers; “telemarketer-specific” customized messages, and the ability of the system to transfer a “blocked” caller to an Interaction Voice Response (“IVR”) system or other department in the telemarketing organization. TeleBlock’s capabilities regarding customized SIT tones allows for the identifiable disposition of calls within a predictive dialer environment. The TeleBlock system provides for the customization of Carrier Line Identification Display (“CLID”) messaging (a method of identifying the originating calling party in the headers of a stored voice mail message) via DialerID, either in stand-alone mode or in conjunction with Campaign List Manager.

A web-based Graphical User Interface (“GUI”) allows telemarketers to manage and administer all of the lists against which they wish to block calls. Available administrative features of TeleBlock include: number override (to allow certain numbers on lists to be called); full editing capabilities (additions/deletions/updates); searching capability; and a reporting module with standard and customizable reports. The system also allows the administrator to create and change passwords, display Automatic Number Identification (“ANI”)/T1 authentication code tables, modify CLID messaging DialerID and to change lists in real time based upon ANI/T1’s utilizing Campaign List Manager.

The TeleBlock system reviews each outgoing call made by a telemarketer and compares it against state and federal Do-Not-Call lists, the specific customer’s in-house Do-Not-Call list, as well as an “override” (allow) list. Based upon this comparison, the call is either blocked or processed like a normal call.

Sales Channels And Revenue Sources

All of our TeleBlock business is now hosted by our alliance partner and primary distributor. Historically, we distributed our products and services through two distributors. Both of these distributors offered TeleBlock service to their customers, which are telephone companies. Our alliance partner and primary distributor is a wholesale telecommunications services provider.

While there are other distributors available to us should the need arise in the future, management has made a business decision that it is not in our best interest to enter into any additional distributor relationships at this time. The Company believes that its relationship with our alliance partner and primary distributor is strong and the risks associated with having them as the sole distributor are minimal due to their size and financial strength. Our contract with them provides for annual renewal. We believe that our relationship with our alliance partner and primary distributor will continue to be positive in the future as our relationship is mutually beneficial. Our primary distributor has contractual agreements with its customers (the telephone carriers) to provide TeleBlock, and our primary distributor’s customers, in turn, have contractual obligations with their customers (telemarketers) and therefore rely upon our primary distributor to provide this service. If our primary distributor chose not to renew our contract, we would attempt to enter into an agreement with another company that could perform the same services. At present, we have identified three other suitable distributors all of whom, we believe, could provide similar levels of service.

By leveraging our Alliance Agreement with our primary distributor, which calls for them to host and manage the TeleBlock platform and enable interconnection to and from various distribution models, we believe we are best positioned to efficiently sell licenses and connectivity. We own the database, which is maintained on equipment we own at a co-location facility and continually updated by us. (Our primary distributor receives a contractually determined amount on a per query basis as compensation for providing its services.) With our primary distributor providing the backbone of this process, we have accomplished the dissemination of TeleBlock access without having to build or adapt new infrastructure. Our TeleBlock service is sold to end-user telemarketers in a variety of ways, all of which produce revenue to us:

•

The telephone carrier channel model which supports the sales efforts of existing sales channels of telephone carriers, such as AT&T, Verizon Business, Paetec Communications and Qwest. Our distributor, on our behalf, offers our TeleBlock product as a value-add for any of its telephone company customers. The service is, in turn, provided to end-user telemarketers, which use a telephone to solicit for goods or services. The telephone carrier charges its customers a query (transaction) fee for each call attempt made from any telephone line that has the TeleBlock feature enabled. Our distributor, on our behalf, charges the telephone carrier monthly for all call attempts made by all of its customers. To date, more than 40 telephone carriers and resellers, including AT&T, Lightpath, Qwest, Verizon Business, XO, and Paetec have licensed TeleBlock and offer it to their customers who telemarket.

•

Direct sales targeting strategic prospects that rely upon the telephone to sell their goods and services. Typically, these efforts are geared toward enterprise customers that have offices throughout the country. Our direct sales efforts assist these companies in implementing the TeleBlock service by locating the right distributor (telephone carrier) for their specific needs and geography. These customers receive our service from their carrier and we receive revenue from the carrier as described above.

•

TeleBlock is also offered by predictive dialer companies (i.e., companies that manufacture hardware and software systems that aid telemarketing entities in efficiently and cost-effectively managing their outbound calls) – examples include TouchStar, Stratasoft, TeleDirect, Marketel and Nobel. Predictive dialer access to TeleBlock is accomplished by connecting the predictive dialer to our primary distributor’s platform using a secure VPN connection. The dialer manufacturer charges its customers a query (transaction) fee for each call attempt made from its equipment that has the TeleBlock feature enabled. Our distributor, on our behalf, charges the manufacturer monthly for all call attempts made by all of their customers.

•

TeleBlock is also offered by hosted “Sales Force Automation” and “Customer Relationship Management” ASPs such as Thunder and VanillaSoft. These Web-based software services embed access to the IP-based TeleBlock service directly into their online systems. Users of these ASP systems can then make telephone calls directly from the Web-based GUI interface and have each such call screened and blocked, via IP, against all Do-Not-Call lists via TeleBlock. These companies charges their customers a query (transaction) fee for each call attempt made from their equipment that has the TeleBlock feature enabled. Our distributor, on our behalf, charges monthly for all call attempts made by all of their customers.

The Industry and Competition

We believe our patent protection prevents any telephone company from providing the same service that blocks call against Do-Not-Call lists. However, there is one company that provides a service that is in some ways similar to TeleBlock, and there are other companies that provide what is known in the industry as database “scrubbing” services.

Gryphon Networks (“Gryphon”) of Norwood, Massachusetts, offers a product similar to our DialBlock® technology product. We believe our TeleBlock product is different from the Gryphon Do-Not-Call compliance product since the Gryphon product requires its users to dial an access code, followed by a PIN number, to make use of the system. Once this is completed, the user completes a session of telemarketing, and the numbers dialed during this session are screened and blocked against Do-Not-Call numbers via a system maintained by Gryphon. We believe the Gryphon system does not reside, like TeleBlock, on the Signal System 7/IP network, so the screening/blocking does not take place via the user’s telephone carrier. Instead, the screening/blocking process is completed by an “off-network” system created and managed by Gryphon. With the Gryphon system, each individual user must log in (via the access code and PIN number) in order for the screening to take place; accordingly, there is potential for individual callers to bypass the log in process.

There also are many companies that “scrub” lists for telemarketers. Scrubbing is another word for database merging and purging, as applied to the removal of Do-Not-Call numbers from prospect lists. We believe scrubbing does not achieve the 100% compliance required under state and federal Do-Not-Call laws. The American Teleservices Association (“ATA”) has adopted a set of standards to be used by its members which standards include the requirement of utilizing a failsafe method to ensure compliance with DNC rules. Under these standards, unlike blocking, scrubbing can only be considered failsafe when regular testing procedures are implemented.

TeleBlock enables telemarketers to meet the compliance demands of the agencies enforcing Do-Not-Call rules. We believe TeleBlock leverages the reliability of existing telecommunications technology to create the only Do-Not-Call compliance system that screens and blocks outbound calls via a telemarketer’s telephone carrier. We believe traditional database scrubbing techniques lack the centralization and standardization necessary to achieve 100% Do-Not-Call compliance. Based upon a sampling of our customers that we know scrub their call data before utilizing TeleBlock, we consistently block between 0.5% and 3.0% of scrubbed calls. As an example, assuming a company makes one million calls per month, and has a Do-Not-Call scrubbing error rate of even 0.1%, that company faces a potential annual exposure of over $130 million in fines at the federal level alone. Utilizing TeleBlock, telemarketers could eliminate this exposure as TeleBlock’s error rate is 0%. Accordingly, we anticipate that Do-Not-Call compliance will be of paramount importance for any company that telemarkets.

Certain companies may have products and provide services which indirectly compete with TeleBlock. Such indirect competitors include list brokers (companies that sell phone lists), scrubbing companies (companies that clean phone lists of duplicates, bad numbers and Do-Not-Call numbers), computer telephony providers (companies that provide automated dialing equipment), systems integrators (companies that offer contact management software) and hardware and software suppliers (companies that sell scrubbing software and equipment).

Many of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. As a result, certain of these competitors may be able to develop and expand their product and service offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisitions and other opportunities more readily, devote greater resources to the marketing and sale of their services and adopt more aggressive pricing policies than we can. We cannot be sure that we will compete successfully with our existing competitors or with any new competitors.

Our Strategy

Notwithstanding the problems and issues confronting us during these difficult economic times, the Company is attempting to execute a plan that will position it to take full advantage of the economic turnaround. While certain revenue streams have not been significantly impacted by the economic downturn, we need to further expand our client base, continue to increase our presence in the call center industry, increase our product availability through various sales channels and broaden our base of product offerings. We believe this may be accomplished in part by the acquisition of synergistic companies. Over the next 12 months, we will be working towards achieving these objectives by:

•

Continuing to sell TeleBlock through traditional wire line telephone carriers. We continue to provide the TeleBlock service to our existing telephone carriers and to pursue with our alliance partner and primary distributor, other teleservices providers in an effort to expand our carrier footprint nationally. Expanding this channel is essential to maintaining the maximum commercial availability of our core product offering, TeleBlock. During the first quarter 2009, AT&T Business Solutions added the TeleBlock call blocking service to its outbound business voice services, although it was not commercially available until the Fall 2009. This provides a network-based call screening and blocking feature to help telemarketers avoid calling numbers listed on various Do Not Call lists.

•

Expanding TeleBlock’s reach into other countries that enact DNC-type legislation. We continue to monitor various trends around the world with respect to do-not-call legislation. As these regulations are enacted in other countries, we are adjusting our marketing strategies accordingly. We are presently distributing our TeleBlock product in Canada via a number of Canadian distributors since the production of the Canada DNC list late last year, and we continue to explore the means of bringing TeleBlock to India and Australia for use in such countries.

•

Increasing TeleBlock sales through expansion of Voice over IP (“VoIP”) which allows TeleBlock usage anywhere in the world and in those areas where we lack distributors locally. In 2006, we entered the world of VoIP communications through one of our subsidiaries, Jasmin Communications, Inc., doing business as Citadel Telephone Company (“Citadel”). Citadel has launched our product offering and is selling our services to new and existing clients. In order to offer telephone services to the worldwide market, we transferred our Citadel services to a new robust pre-pay platform, which will enable us to offer our VoIP services to high volume customers worldwide without credit risk. We continue to offer TeleBlock Office along with the TeleBlock service for one low monthly subscription fee.

•

Increasing TeleBlock sales through our strategic alliance with predictive dialer companies. Predictive dialer companies are companies that use a computerized system to automatically dial batches of telephone numbers for connection to agents assigned to sales or other campaigns. We have marketing agreements with several predictive dialer companies that are deploying TeleBlock in the world-wide market. A second co-location facility was added to enhance our ability to support these distributors. We continue to support this revenue channel by pursuing new marketing agreements with additional Predictive Dialer and Customer Relationship Management companies. Because these dialers communicate directly with the TeleBlock system, and are not carrier dependent, this channel allows us to continue to expand the sales of our products internationally. This enables us to provide DNC blocking services for foreign based companies calling into the United States and calling within their own country.

•	Integration of TeleBlock into an IP PBX telephone system. One of the leading IP PBX telephone manufacturers, ShoreTel, Inc. has integrated TeleBlock into its telephone system product line. This is the first telephone system manufacturer’s product line to be fully integrated with TeleBlock.

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Increasing our online sales by the addition of other online products. Our online guide offerings have increased by the December 2008 release of the Canadian Regulatory Guide, which is co-branded with various trade organizations, one of which is the Canadian Resort Development Association. This guide provides us with a very credible presence in the Canadian and resort markets. Our online series of guides was further expanded with the March 2009 release of our Charitable Fundraising Regulatory Guide, which is presently co-branded with the American Teleservices Association and the American Resort Development Association. Unlike our existing guides that are focused on Do-Not-Call related regulations, the Charitable Fundraising Regulatory Guide is directed towards fundraising professionals. We believe that this release will meaningfully add to our revenues and will provide our company with access to a new and significant market for our core suite of products,

•

Deployment of value added services. During the 2007 fourth quarter, we launched Enhanced Dialer ID, thereby providing our call center clients telephone numbers for caller ID, in an effort to assist them with their target marketing efforts and to improve their call centers’ answer rates. Revenues from this product have not been adversely affected by the recent economic downturn, and, in fact, are expected to increase as we have had significant interest from the market for this product. We anticipate that we will continue to add features to our systems as deemed necessary to accommodate our customers’ needs and to maintain our competitive position. We expect to launch a new web GUI during the first quarter of 2010 that will provide our Enhanced DialerID corporate clients web access to their records.

• Growing through strategic acquisitions. On February 5, 2010, we entered into an Agreement and Plan of Merger, dated as of February 5, 2010 (the “Merger Agreement”), with Execuserve Corp., a Virginia corporation. We believe this strategic acquisition enables us to offer a broader product offering to our existing customer base. We believe the Execuserve product suite is synergistic to our current platform and provides us further opportunities to expand. The Execuserve business is further discussed below.

Research and Development

We have not spent any money on research and development during the last two years.

Government Regulation

Teleservices companies are confronted with a patchwork of state and federal statutes and regulations that govern virtually every element of their operations. These rules are largely focused on outbound calls (i.e., calls originating with the marketer being made to consumers), but increasingly, inbound calls (i.e., originating with the consumer) are falling within the regulatory purview as well.

At the federal level, the Federal Communications Commission (the “FCC”) has issued regulations in response to Congressional passage of the Telephone Consumer Protection Act in 1991. The Telemarketing and Consumer Fraud Act and Abuse Protection Act of 1994 (the “Act”), issued by the FCC, required the Federal Trade Commission (the “FTC”) to develop regulations to prevent fraudulent and abusive practices by telemarketers. It further required the FTC to develop rules against practices by telemarketers that a reasonable telemarketer would consider coercive or abusive of a consumer’s right to privacy, restrictions on the hours of the day and night when unsolicited calls can be made to consumers, as well as disclosure requirements. This Act provides for fines of up to $11,000 per violation of any provision developed by the FTC. The FTC, in response to this legislation, issued comprehensive regulations called the Telemarketing Sales Rule that were substantially amended in 2002. These rules govern virtually every aspect of the telemarketing process, including the creation of a national DNC program administered and enforced by the FTC, the use of predictive dialers, identification and payment disclosures, prohibitions against misrepresentations, and many other areas.

Even though comprehensive federal regulations are in place, all states have additional and/or different rules and regulations that impact the teleservices industry as well. Most importantly, there are 13 states that still operate separate Do-Not-Call lists. In addition, the majority of states have requirements governing commercial registration of telemarketers, as well as rules governing a multitude of areas that are more restrictive than comparable federal rules.

On February 15, 2008, President Bush signed into law two bills concerning the National Do-Not-Call Registry. The “Do-Not-Call Improvement Act of 2007,” prohibits the automatic removal of telephone numbers registered on the Federal “Do-Not-Call” registry. Previously, telephone numbers were removed from the registry after five years. The second bill, the “Do-Not-Call Registry Fee Extension Act of 2007,” extends permanently the authority of the Federal Trade Commission to charge fees to telemarketers required to access the Federal “Do-Not-Call” registry and specifies the fees to be charged. This legislation should strengthen the need for compliant technology solutions such as TeleBlock.

There have been numerous actions and settlements against telemarketers for violations of Federal and state Do-Not-Call legislation. These actions have been brought by various states and both the Federal Trade Commission (the “FTC”) and the Federal Communications Commission (the “FCC”). In late 2007, FTC assessed $7.7 million in penalties to companies not following the requirements of the national Do-Not-Call legislation. Most recently, and for the first time, a single action has been brought against a satellite cable company by the FTC in conjunction with four states for violations of Federal and state Do-Not-Call legislation.

Execuserve Corp.

The business of Execuserve Corp. is to provide organizations, who are hiring employees, with tests and other evaluation tools and services to assess and compare job candidates. We have developed a proprietary behavioral assessment test called Hire-Intelligence™ which applies adaptive testing techniques to probe each job candidate who takes the test for potential behavioral strengths and weaknesses relevant to the job for which they are being considered.

The Hire-Intelligence test is also applied to a client’s best performing employees to create a benchmark of job behaviors against which job candidates are compared. In this way job candidates who take the Hire-Intelligence assessment can be stack-ranked against each other. In addition to this quantitative evaluation of job candidates, the adaptive test function of Hire-Intelligence results in a very rich set of qualitative results which offer hiring companies deep insights into the potential on-the-job behaviors of job candidates.

In addition to Hire-Intelligence, we have developed or licensed additional employment tests and services. These include skills tests, literacy tests for reading and writing, and a listening comprehension test.

Based on Execuserve’s heritage as a search company that used video interviewing to pre-screen job candidates, we have developed an online automated video interview technology called Video-View. Job candidates login with a webcam and answer a customized question set which is recorded for review by the hiring company.

Sales Channels And Revenue Sources

Execuserve sells its products and service primarily through two channels:

Directly to hiring companies. We sell our products and services directly to Human Resources departments and Hiring Managers of companies who are hiring employees. We call on companies of all sizes. Based on the volume of hiring and the internal staffing capabilities of these sales prospects, we offer either full service or self-service solutions, priced on either a pay-as-you-go or license (subscription) basis.

Online eCommerce sales. Execuserve has developed and markets a number of online portals which offer selected products and services to companies with hiring needs who wish to evaluate and compare job candidates in-house on a self-service basis. Two of these portals, hire-choice.com and video-view.com, employ a credits-based purchase model. Users buy credits online through an eCommerce transaction, which can then be applied to purchase tests and other services as needed.

The Industry and Competition

The job candidate assessment industry is made up largely of small and mid-sized privately held companies. Financial information about these competitors, therefore, is not readily available.

We believe privately held Profiles International is the largest company in the assessment industry. Profiles offers a number of assessment products, which are sold primarily through resellers. The majority of these resellers are Human Resources (“HR”) consultants. Profiles also sells their assessment products and services directly to larger companies.

Our Strategy

As Execuserve becomes integrated into the Company, we believe our strategic opportunities will be expanded, allowing us to pursue a growth strategy. Starting from a fairly small core base of loyal users, we need to further expand our client base, target specific industries which can realize a high return on investment in better hiring through effective job candidate evaluation, increase our product availability through various sales channels and broaden our base of product offerings. Over the next 12 months, we will be working towards achieving these objectives by:

•	Continuing to sell Execuserve products and services directly to hiring organizations. We continue to sell our full service and self-service offerings directly to prospects identified through our ongoing marketing and lead generation efforts.

•

Developing offerings specifically designed to meet the hiring needs of targeted industries and job categories. A number of industries have significant issues with high turnover and employee attrition. These industries can realize a high return on investment in job candidate assessment tools that can positively impact turnover and attrition. In addition, improved hiring in certain job categories can directly impact the revenue and profits of the hiring organization. Execuserve is working to identify these opportunities and develop proven solutions to improve hiring.

•

Identifying and forming reseller channel relationships with selected organizations. A number of organizations sell to or work with Human Resources departments, hiring manager, or job candidates. These entities have the potential to become reseller channels for our products and services. We will identify these potential resellers and develop offerings which will provide them with a revenue opportunity.

•

Continuing to develop our online eCommerce offerings. Small and mid-sized businesses which hire between one and fifty employees a year most often do not have formal Human Resources departments, nor have the resources to employ HR consultants or pay annual license fees for assessment services. We will continue to develop and deploy our eCommerce offerings to this market.

Research and Development

We have an ongoing program of evaluating methodologies for the evaluation of job candidates, and for the delivery of these methodologies. Current research is primarily focused on how job candidate evaluation tools can be integrated, and delivered over the internet.

Government Regulation

Job candidate evaluation companies must comply with relevant federal, state and local employment law to ensure that their methodologies do not discriminate against individuals based on prohibited attributes.

The Constitution prohibits discrimination by federal and state governments. Private sector discrimination is not directly constrained by the Constitution, but has become subject to a growing body of federal and state law. Federal law prohibits discrimination in a number of activities, including recruiting, hiring, job evaluations, promotion policies, training, compensation and disciplinary action. State laws often extend protection to additional categories or employers.

In the USA, discrimination in employment is prohibited by a collection of state and federal laws, as well as by ordinances of counties and municipalities. Only discrimination based on certain characteristics, known as protected categories, is illegal. Protected categories include race, sex, pregnancy, religion, national origin, disability, age, military service or affiliation, anticipated military reserve deployment, bankruptcy, genetic information and citizenship status.

In cases of alleged discrimination where an employment test has been used, the plaintiff must show “adverse effect”, i.e., proof of the discriminatory effects of the test. For this reason, job candidate evaluation companies have their tests evaluated by experts to ensure there is no bias that could inadvertently lead to an adverse effect. The Hire-Intelligence assessment test has been evaluated for adverse effect, and none has been found.

Employees

As of March 31, 2010, we have seven employees. Of these seven, Call Compliance employs three individuals and Execuserve employs the remaining four.

Item 1A.

Risk Factors.

Disclosure under Item 1A is not required of smaller reporting companies.

Item 1B.

Unresolved Staff Comments.

Disclosure under Item 1B is not required of smaller reporting companies.

Item 2.

Properties.

In January 2005, the lease for our executive offices at 90 Pratt Oval, Glen Cove, New York 11542 was assigned to the Company. This space was originally leased to Automated Systems Nationwide Network, Inc., a company owned by Dean Garfinkel, our Chairman, President and Chief Executive Officer. The initial term of the lease expired on August 1, 2006; however, we elected to exercise the five-year renewal option contained in the lease. The renewal term expires July 31, 2011 and requires annual lease payments, real estate taxes and common charges.

The leased premises consist of 9,100 square feet. We sublet approximately 3,800 square feet to an unrelated third party through December 15, 2008. The sublease was on a month-to-month basis at a monthly rental of $2,643.

On April 13, 2010, the Company and the lessor of its office space in Glen Cove, New York mutually terminated the office space agreement between the two parties effective December 31, 2009. The agreed upon terms of the lease termination were as follows:

The Company would pay $1,000 a month for 10.5 months starting April 15, 2010,

The Company would provide the lessor with 1,675,000 5-year warrants with an exercise price of $.02 a share,

The Company is relieved of $39,000 in CAM expenses and real estate taxes owed to the lessor,

The Company has forgiven the $10,600 security deposit held with the lessor, and

The Company is relieved of future lease obligations effective January 1, 2010 through July 31, 2011, the former maturity date of the lease.

Its executive officers relocated to 50 Glen Street, Glen Cove NY 11542. The office will be used for administration and finance for all wholly owned subsidiaries. The Company leases 1,000 Sq Feet, with a 24 month term effective January 25, 2010. The Company is committed to pay $15,600 during the first year of the lease term, and $16,350 during second year of the lease term. The Company also has access to the storage room in the basement of the building based upon the two year agreement with the following terms: $1,200 for the first year and $1,320 for the second year.

One of the Company’s subsidiaries, Call Compliance, Inc., relocated to 111 Nesconset Highway, Suite 220, Hauppauge, NY 11788. The Company leases 700 Sq Feet, with a 11.5 month term effective 1/15/2010. The Company is committed to pay $9,117 during the lease term.

One of the Company’s subsidiaries, Execuserve Corp., relocated to 6688 Main Street, Gloucester, VA 23061. The Company leases 1,000 Sq Feet, with a 18 month term effective 3/1/2010. The Company is committed to pay $10,800 during the lease term.

We estimate our future minimum annual lease payments, payable monthly, to be as follows:

	Estimated Minimum
Year	Annual Lease Payment
2010	$	30,917
2011		18,870

Item 3.

Legal Proceedings.

We may become a party to various legal proceedings arising in the ordinary course of our business, but we are not currently a party to any legal proceeding that we believe would have a material adverse effect on our financial position or results of operations.

Item 4.

Submission of Matters to a Vote of Security Holders.

Not applicable.

PART II

Item 5.

Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market

Our common stock is traded over-the-counter and has been available for quotation on the OTC Bulletin Board under the trading symbol “COPI.OB” since May 9, 2007; however, in April 2010, our symbol was appended with an “E” modifier to indicate FINRA’s belief that we are not in compliance with FINRA’s eligibility requirements, as discussed below. The following table sets forth the range of high and low bid prices for our common stock for the periods indicated as derived from reports furnished by the OTC Bulletin Board. The information reflects inter-dealer prices, without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.

	High		Low
Quarter Ended	Bid Price		Bid Price
March 31, 2008	$	0.107	$	0.015
June 30, 2008		0.030		0.009
September 30, 2008		0.023		0.007
December 31, 2008		0.016		0.003

March 31, 2009	$	0.005	$	0.005
June 30, 2009		0.019		0.015
September 30, 2009		0.020		0.016
December 31, 2009		0.009		0.009

We failed to file timely this Annual Report on Form 10-K, which was due on April 15, 2010. Because this was our first late filing of a periodic report under the Exchange Act, FINRA appended our symbol with an “E” modifier to indicate its belief that we are not in compliance with FINRA’s eligibility requirements and advised us that if we were to fail to file this Annual Report on Form 10-K within the 30-day grace period provided by FINRA, we would become ineligible for continued listing on the OTCBB. Since we have filed this Annual Report on Form 10-K within the applicable grace period, we expect that the “E” modifier we will be removed from our symbol after we file this Annual Report on Form 10-K and FINRA determines that we remain eligible for continued listing on the OTCBB.

Holders

As of April 2, 2010, we had 131 stockholders of record, and an unknown number of additional holders whose stock is held in “street name.”

Dividends

No dividends have been declared or paid on our common stock, and we do not anticipate that any dividends will be declared or paid in the foreseeable future. Dividends on our common stock are subordinated to dividend and liquidation rights of the holders of the Series B Senior Convertible Voting Non-Redeemable Preferred Stock and the rights of Agile Opportunity Fund, LLC (“Agile”) to interest payments and repayment of principal when due under the two Secured Convertible Notes (collectively, the “Agile Debentures”) we sold to Agile in March 2008 (the “Agile March 2008 Debenture”) and September 2008 (the “Agile September 2008 Debenture”), each in the principal amount of $300,000 and maturing in November 2009. These debentures were converted into new notes in February 2010.

Securities Authorized for Issuance under Equity Compensation Plans

The following table shows information as of December 31, 2009 with respect to each equity compensation plan and individual compensation arrangements under which our equity securities are authorized for issuance to employees or non-employees.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (A)		Weighted-average exercise price of outstanding options, warrants and rights (B)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A)) (C)
Equity compensation plans approved by security holders		0		N/A		N/A

Equity compensation plans not approved by security holders		45,000,000	$	0.026		0

Total		45,000,000	$	0.026		0

On January 4, 2008, our board of directors granted options to purchase an aggregate 45 million shares of our common stock to four employees, including our Chief Executive Officer (20 million underlying shares) and Chief Financial Officer (10 million underlying shares).

Each of such options has an exercise price of $0.026 per share, the per share closing market price of our common stock on the date of grant. The options are terminable on the earlier of:

(i)	the first anniversary of the optionee's death;

(ii)	the date of the termination of the optionee's employment or other relationship with the Company for cause;

(iii)

the first anniversary of the date (A) on which the optionee's employment or other relationship with the Company is terminated without cause (except if such termination be by reason of death or permanent and total disability of the optionee); or (B) the optionee voluntarily terminates his employment or other relationship with the Company;

(iv)	the first anniversary of the date of Optionee's permanent and total disability, within the meaning of such term in Section 22(e) of the Internal Revenue Code; or

(v)	January 4, 2013.

Item 6.

Selected Financial Data.

Disclosure under Item 6 is not required of smaller reporting companies.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview and Recent Developments

In October, 2008, the Company entered into a non-binding memorandum of understanding (“MOU”) with a wholesale Voice-over-Internet-Protocol (“VoIP”) transport company, began its due diligence, negotiated and drafted definitive documents, and retained auditors for preparation of the acquisition target company’s financial statements. The MOU contemplated the Company acquiring the transport company for a combination of cash, promissory notes and securities of the Company. Completion of the acquisition was anticipated to occur by the end of the first quarter of 2009, having expended funds to complete the due diligence and audit of the acquisition company along with working towards the finalization of the documents. Ultimately, the transaction was not entered into by the Company.

As anticipated, the Company drew down the remainder of its $600,000 credit facility with Agile Opportunity Fund, LLC by borrowing $300,000 in September 2008, and utilized these funds to finance operations through the end of 2008, including costs of approximately $70,000 related to the proposed acquisition of the VoIP company, as well as significant sales and marketing expenditures that were made in anticipation of the 2008 commercial release of TeleBlock by the country’s largest telephone carrier. Unfortunately, the timetable was pushed back into 2009 and as a consequence the Company’s sales and marketing initiatives were curtailed accordingly.

The full effects of the economic downturn on revenues were realized in the first two months of 2009, as revenues for that period as compared to 2008 contracted by approximately 30%. While the decrease in revenues is similar to decreases in revenues across many industries, a major portion of the Company’s decrease is attributable to reduced telemarketing efforts within the time share industry, a major contributor to the Company’s revenues. During 2009, the Company’s revenues declined significantly, but the Company was also able to reduce operating expenses significantly.

In response to the financial difficulties encountered as a result of these turbulent times, a number of cost-cutting measures have been implemented to give the Company the time needed to obtain sufficient financing to continue operating while other options are pursued and explored. Two positions have been eliminated - one in sales and one in accounting. Additionally, the Company has negotiated, and received, 60 day credit terms from several of its material suppliers, vendors and creditors, and also reduced and/or eliminated several other expenses. Finally, the Company’s two executive officers and former controller have deferred their February and March 2009 salaries. The officers continued to defer part of their salaries in 2009 and all dividends on B shares were suspended during 2009. Certain interest has been accrued but not paid.

These measures, however, in and of themselves, were not sufficient to cover the Company’s short-term cash flow shortfall. On March 31, 2009, an agreement with an existing lender was modified, increasing funding up to $750,000 at the lender’s discretion, of which the Company never exceeded $350,000 of the $750,000 limit. The loan modification grants a security interest in the Company’s assets and the lender also received two classes of warrants, both of which have an exercise price of $0.05 per share. Additionally, the chief financial officer has loaned the company $50,000, the interim necessary funds that were needed to continue operations until the negotiations with the lender were completed.

On September 21, 2009, the Company sold and issued the Agile September 2009 Debenture in the principal amount of $100,000. Interest is accruing on the Agile September 2009 Debenture at 30% per annum, with interest payable monthly at a rate of 15% per annum. All of the Agile Debentures were converted into new notes dated February 2010.

On November 23, 2009, the Company sold and issued the Agile November 2009 Debenture in the original principal amount of $80,000. The Agile November 2009 Debenture is to bear interest at the rate of 15% per annum, payable monthly, although the Agile November 2009 Debenture further provides that, in addition to interest, Agile is entitled to an additional payment, at maturity or whenever principal is paid, such that Agile’s annualized return on the amount of principal payment so paid equals 30%. All of the Agile Debentures were converted into new notes dated February 2010.

During the first quarter 2009, AT&T Business Solutions added the TeleBlock call blocking service to its outbound business voice services. This provides a network-based call screening and blocking feature to help telemarketers avoid calling numbers listed on various Do Not Call lists. Ultimately, this service was not commercially available until the Fall of 2009.

Critical Accounting Policies

The Company’s consolidated financial statements and related public information are based on the application of generally accepted accounting principles in the United States (“GAAP”). The Company’s significant accounting policies are summarized in Note 2 to its annual consolidated financial statements. While all of these significant accounting policies impact its financial condition and results of operations, the Company views certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements. The Company’s critical accounting policies are discussed below.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. The Company believes its use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. It bases its estimates on historical experience and on various assumptions that management believes are reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions.

Revenue Recognition

The Company earns a fee for each telephone solicitor’s call attempt (whether or not the call is completed) which generates a query to a data base of Do-Not-Call telephone numbers. Through its principal subsidiary, the Company has an annually renewable contract with its data base distributor to perform the following functions:

•

Provide connectivity to the telephone companies and access data base information from the data base that the Company manages, updates and maintains, as required to operate the telephone call processing platform. This platform is where the telephone call queries are routed from the telemarketers over various telephone carrier networks.

•	Contract with telephone carriers to sell our TeleBlock service to their end users.

•	Provide billing and collection services.

As compensation for the distributor’s services, the Company pays the distributor contractually determined amounts on a per query basis. The distributor submits monthly remittances together with the related monthly activity reports. The Company has a contractual right to audit such reports. Revenue is accrued based upon the remittances and reports submitted. Any adjustments to revenue resulting from these audits are recorded when earned if significant. Historically, these adjustments have not been significant. In the event that such adjustments do become material in the future, it is possible that, at times, the Company may have to revise previously reported interim results. The telephone carriers in turn sell the TeleBlock service to their customers. The carriers bill their customers for TeleBlock and assume all credit risk with regard to their customers. The Company has no credit risk with respect to the end-users.

Impairment of Long-Lived Assets

Long-lived assets, including our property, equipment, capitalized software and patents are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets used in operations, an impairment loss is only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted cash flows, including estimated net proceeds if the Company were to sell the long-lived asset. When applicable, the Company measures the impairment loss based on the difference between the carrying amount and estimated fair value.

The Company periodically reviews its long-lived assets, in light of our history of operating losses, but under the methodology described above, it have not been required to record any impairment losses. Should applicable external factors such as competition, governmental regulations or other market conditions change in such a way as to be materially adverse to its business, impairment losses might be required in the future.

Results of Operations for Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

Management believes the following selected revenue and expense data, the percentage relationship between revenues and major categories in our consolidated statements of operations and the percentage change in the dollar amounts of each of the items presented is important in evaluating the performance of its business operations.

	Year Ended December 31,
	2009						2008						2009 vs. 2008
				Percentage						Percentage			Amount			Percentage
				of						of			Increase			Increase
	Amount			Revenues			Amount			Revenues			(Decrease)			(Decrease)
Revenues	$	1,230,236			100.0	%	$	1,857,242			100.0	%	$	(627,006	)		(33.8	) %
Gross margin		650,322			52.9			927,073			49.9			(176,751	)		(29.9	)
Selling, general and administrative expenses		1,749,635			142.2			2,142,180			115.3			(392,545	)		(18.3	)
Interest expense		266,025			21.6			143,431			7.7			122,594			85.5
Amortization of loan costs and related financing expense		157,263			12.8			75,687			4.1			81,576			107.8
Operating loss		(1,522,601	)		(123.8	)		(1,434,225	)		(77.2	)		88,376			6.2
Gain on extinguishment of debt, net		—			—			8,525			0.5			(8,525	)		(100.0	)
Net loss		(1,522,601	)		(123.8	)		(1,425,700	)		(76.7	)		96,901			6.8
Preferred dividends		150,000			12.2			150,000			8.1			—			—
Loss attributable to common stockholders		(1,672,601	)		(136.0	)		(1,575,700	)		(84.8	)		96,901			6.1

For the year ended December 31, 2009, revenues were $1,230,236 compared to revenues of $1,857,242 for the corresponding period in 2008, a decrease of $627,006 or 33.8%. This decrease was principally the result of a revenue decrease of $642,326 from the Company’s principal TeleBlock distributor due to a loss of 147.4 million call counts, or 42.9%, for the Company’s TeleBlock service between the comparable periods. Although TeleBlock revenues have decreased across all industries, a major portion of the Company’s decrease in TeleBlock revenues is attributable to reduced telemarketing efforts within the time share industry, a major contributor to the Company’s revenues. These decreases were partially offset by an increase of $62,300 in revenue from Enhanced Call ID. Revenues from the Company’s principal TeleBlock distributor comprised 82.1% and 87.6% of the Company’s annual revenues for 2009 and 2008, respectively. There also were decreases in revenues from the Company’s VoIP services, declining database management fees from the Company’s TeleBlock subscribers, lower commissions and other incidental revenue of $46,980.

The Company’s key TeleBlock distributor was sold in May 2009. The Company does not believe that the change in ownership of the distributor will have any material adverse effect on the Company’s revenues or financial condition.

For the year ended December 31, 2009, cost of revenues totaled $579,914, a decrease of $350,255, or 37.7%, when compared to cost of revenues of $930,169 for the same period last year. Fees payable to the Company’s principal distributor decreased by $248,250 as a result of the lower calls hosted on their database. Production and back-up site hosting fees and costs related to decreased revenues from the Company’s VoIP, as well as software amortization expense, decreased by a total of $107,873. Increased costs of revenues, including costs associated with the Company’s online registration guide and enhanced caller ID, partially offset these decreases by an aggregate of $5,868.

As a percentage of revenues, cost of revenues for the 2009 year decreased to 47.1% from 50.1% for the 2008 year. This decrease reflects a decline in TeleBlock revenues when compared to total revenues as well as decreased software amortization expense and lower production and back-up site hosting fees that are attributable to the TeleBlock platform. As a percentage of revenues, cost of revenues related to our primary distributor-sourced revenues was 49.2% in 2009 and 52.8% in 2008.

For the year ended December 31, 2009, selling, general, and administrative expenses totaled $1,749,635 and were $392,545, or 18.3%, lower than selling, general, and administrative expenses of $2,142,180 for the same period last year. Salaries and benefits decreased by $166,214, attributable to the January 2008 grant of options to purchase 45 million shares of Company common stock to the Company’s two executive officers and two other employees that were valued at $162,000 as well as salary reductions in 2009 of $124,214 primarily due to the elimination of two employees. Consulting and accounting fees decreased by $63,744 and $48,182, respectively, and was due to financial and internal control requirements performed during 2008 that did not recur in 2009. In addition, the Company reduced investment banking fees by $71,500 and stock transfer fees by $19,806 between the 2008 and 2009 periods. Further, there were additional decreases in employee travel and related expenses of $31,902, net rent expense of $9,913, investor relations fees of $12,833, advertising expenses of $24,724, equipment rental of $16,987 and insurance of $21,679 between the 2008 and 2009 periods. These decreases in expenses were partly offset by a $120,000 increase in salaries to the Company’s two executive officers during the first half of 2009; these officers had voluntarily reduced their salaries by one-half for a one-year period ending in July 2008. The Company also incurred higher marketing consultant fees of $5,000, higher commissions of $15,891 related to increased CNAM revenues, and higher utility expenses of $6,870. Other selling, general and administrative expenses increased by a net aggregate amount of $19,145.

As a percentage of revenues, selling, general, and administrative expenses for the year were 142.2% in 2009 and 115.3% in 2008, reflecting a decrease in expenses that is less than the decrease in revenues. The increase in this percentage is principally due to significant declines in revenues during 2009. Selling, general and administrative expenses also decreased, but not to the extent of revenues.

Interest expense for the year ended December 31, 2009 was $266,025, a $122,594, or 85.5%, increase from interest expense of $143,431 for the same period last year. This increase reflects additional interest of $103,783 on the Agile Debentures that were sold and issued in May and September 2008 and September and November 2009 as well as higher interest of $17,520 on the Nascap Restated Note as the principal outstanding increased to $350,000 from $150,000 in April 2009. In addition, the Company incurred interest of $7,594 during 2009 on the Brookstein Note that was entered into early in 2009. These increases were offset by a decrease of $6,303 in other interest expense. As a percentage of revenues, interest expense for the year ended December 31, 2009 increased to 21.6% from 7.7% compared to the same period last year.

The Company’s annual loan cost amortization and related financing expense, including loan penalties and amortization of loan discount, increased by $81,576, or 101.8%, to $157,263 for the year ended December 31, 2009 from 75,687 for the 2008 year. Deferred loan costs and loan discount amortized during the 2009 and 2008 periods are related to the debentures that were sold and issued to Agile in May and September 2008 and September and November 2009. As a percentage of revenues, loan cost amortization and related financing expense for the year ended December 31, 2009 increased to 12.8% from 4.1% when compared to the same period last year.

The Company assesses its current prospects for future profitability by separating its statement of operations into two principal components: (a) its business operations, represented by the gross margin to selling, general and administrative expense shortfall and (b) its total business financing expense, represented by the total of interest expense and loan cost amortization and other financing charges. Total business financing expense increased during 2009 by $195,645, or 85.9%, to $423,288 in the 2009 year from $227,643 in the 2008 year. As a percentage of revenues, total business financing expense increased for the 2009 year by 22.1 percentage points to 34.4% in 2009 from 12.3% in 2008. The Agile Debentures that were sold and issued in May and September 2008 and September and November 2009 increased this year’s total business financing expense by $226,377 for the 2009 period when compared to 2008.

For the reasons set forth above, the Company’s 2009 net loss increased by $96,901, or 6.8%, to $1,522,601 in 2009 quarter from $1,425,700 in 2008. As a percentage of revenues, the net loss increased by 47.0 percentage points to 123.8% in 2009 from 76.8% in 2008.

Dividends of $150,000 were accrued on the Series B Preferred Stock during 2009 and 2008 and are taken into account when computing loss per common share. As a percentage of revenues, preferred dividends were 12.2% and 8.1% for the 2009 and 2008 years, respectively. The dividends were not paid during 2009 as Nevada law prohibited such payment.

For the year ended December 31, 2009 and 2008, the Company’s annual effective tax rate was estimated to be 0%. Accordingly, no tax benefit or cost was recognized in either of such periods. The Company believes that future taxable losses, as well as those incurred from February 10, 2006 (the date on which the Company was no longer considered a subchapter S corporation for federal tax purposes) to December 31, 2009, will be available to offset subsequent future taxable income, if any.

Liquidity and Capital Resources

Cash used in operating activities of $491,455 and $882,845 for the 2009 and 2008 years, respectively, was comprised of the net loss, reduced by non-cash items of $392,798 and $476,987, plus or minus the effect of changes in assets and liabilities. The net loss as adjusted for non-cash items was $1,129,803 for the year ended December 31, 2009, compared to $948,713 for the same period in 2008. This increase of $181,090 was due to a higher net loss of $96,901, the 2008 issuance of non-qualified stock options valued at $162,000 that were not a factor in 2009 and decreased depreciation and amortization charges of $72,581. These increases were offset by higher interest and penalties that were effectively financed of $81,616, increased loan cost amortization costs of $58,821 and the 2008 debt extinguishment gain of $8,525. The changes in assets and liabilities increased the Company’s net cash used in operating activities by $655,848 and $65,868 in 2009 and 2008, respectively.

Cash used in investing activities was $1,436 for the year ended December 31, 2009 and $56,284 for the year ended December 31, 2008, an decrease of $54,848, principally due to lower expenditures for computer equipment and software enhancements in 2009 compared to the prior year.

Cash provided by financing activities was $310,864 during the year ended December 31, 2009 and was $226,269 during the 2008 comparable period, resulting in an increase of $84,595. During 2009, the Company received an additional $200,000 in borrowings from an existing lender and a director, officer and shareholder loaned the Company $50,000. In addition, the Company sold and issued to Agile convertible debentures totaling $180,000 during 2009. These increases in cash were partially offset by debt repayments of $97,914 and payments of deferred loan costs on the Agile September and November 2009 Debentures of $21,222. Cash provided by financing activities during 2008 was attributable to the issuance of the Initial Agile Debenture for $600,000. This increase was partially offset by the payment of dividends of $150,000 on the Company’s Series B preferred stock, payment of deferred loan and acquisition costs of $105,500 and debt repayments totaling $118,231.

The net decrease in cash was $182,027 and $712,860 for the years ended December 31, 2009 and 2008, respectively.

The Company’s working capital deficits were $2,147,255 and $840,977 as of December 31, 2009 and 2008, respectively. Current assets decreased by $219,288, or 42.0%, due to a decrease in cash of $182,027 and a decrease in prepaid expenses of $89,141, partially offset by increases in accounts receivable of $51,880. Current liabilities increased by $1,086,992, or 79.7%, and were principally due to an increase in accounts payable and accrued expenses of $428,669, the deferral of accrued officer’s salary totaling $335,000, an increase of $304,982 attributable to the Agile September and November 2009 Debentures and the accrual of interest due Agile on all of its debentures and the amortization of loan discounts attributable to the Agile debentures. In addition, there was an increase in short-term and demand notes payable of $68,341. The decrease of $50,000 in current maturities of long-term debt partially offset the increase in current liabilities.

On May 6, 2008, the Company obtained new financing primarily to fund operations and, as required, in connection with possible acquisitions of companies that would diversify and broaden the Company’s service offerings and product base. This new financing consisted of the sale and issuance on May 6, 2008 of the Initial Original Agile Debenture in the principal amount of $300,000 and the commitment for the sale and issuance of the Additional Original Agile September 2009 Debenture in the principal amount of $300,000. The Additional Original Agile September 2008 Debenture was sold and issued to Agile on September 2, 2008. Interest is accruing on the Agile debentures at 30% per annum, with interest payable monthly at a rate of 15% per annum. The Company was unable to retire the Agile 2008 Original Debentures that matured on November 6, 2009. On such maturity date, the Company owed Agile a total of $738,625 that was comprised of principal in the amount of $600,000 and accrued interest of $138,625. The Company has received a three month extension on the Agile 2008 Original Debentures All of the Agile Debentures were rolled into new notes dated February 2010.

The Company’s loan from Nascap was modified in March 2009, increasing funding up to $750,000 at the lender’s discretion. The original loan amount was $150,000. In connection with the loan modification, the Company agreed to grant Nascap 40 Class A and 40 Class B warrants for each dollar of principal outstanding under the loan facility on such date between April 1, and June 30, 2009 on which such principal amount was the greatest. The greatest amount of principal outstanding under the loan facility was $350,000. These warrants each have an exercise price of $0.05 per share. The warrants were granted on June 30, 2009 and consisted of 7 million Class A warrants and 7 million Class B warrants.

Agreements with two additional lenders were modified on June 24, 2009. The Company’s chief financial officer had loaned the Company an aggregate of $50,000 during the 2009 first fiscal quarter, and a second lender loaned the Company $150,000 in April 2006. Both notes continue to bear interest at 18% per annum, payable monthly in arrears. The stated maturity date on the modified notes is now January 1, 2011. These notes were originally demand notes. As consideration for entering into the loan modification agreements, the note holders were granted an aggregate of 4 million Class A warrants and 4 million Class B warrants. Each of these warrants entitles its holder to purchase one share of Company common stock at a purchase price of $0.05 per Warrant Share and expires on June 23, 2014.

The Company has been deferring a portion of the salaries of Garfinkel and Brookstein, its principal executive officers. During the fourth quarter of 2009, Garfinkel deferred $55,000 of his salary and Brookstein deferred $50,000 of his salary. In June of 2009, the Company agreed to grant five-year warrants (each, a “Fourth Quarter 2009 Deferred Salary Warrant”) to purchase shares (each, a “Fourth Quarter 2009 Deferred Salary Warrant Share”) of Company Common Stock at $0.05 per Fourth Quarter 2009 Deferred Salary Warrant Share. Under this agreement, for every $1 of salary deferred during a fiscal quarter, the Company is obligated to issue 40 Fourth Quarter 2009 Deferred Salary Warrants. Accordingly, as of December 31, 2009, Garfinkel was granted 2.2 million Fourth Quarter 2009 Deferred Salary Warrants and Brookstein was granted 2 million Fourth Quarter 2009 Deferred Salary Warrants. The Company believes the grants of these Fourth Quarter 2009 Deferred Salary Warrants were exempt from the registration requirements of the Securities Act, by reason of the exemption from registration granted under Section 4(2) of the Securities Act, due to the fact that the grants were conducted pursuant to transactions not involving any public offering.

The Company has failed to pay dividends on the 1.25 million outstanding shares of its Series B Senior Subordinated Convertible Voting Preferred Stock (the “Series B Preferred Stock”) that were payable on the last day of each month during the fourth fiscal quarter of 2009. Dividends on the Series B Preferred Stock may only be paid out of funds legally available for such purpose. Under Nevada law, generally, a corporation’s distribution to stockholders may only be made if, after giving effect to such distribution, (i) the corporation would be able to pay its debts as they become due in the usual course of action and (ii) the corporation’s total assets equal or exceed the sum of the corporation’s liabilities plus the amount that would be needed, if the corporation was to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose rights are superior to those receiving the distribution.

All of the outstanding shares of Series B Preferred Stock are held by Brookstein and Spirits. Although the Company has been and currently is unable to pay the Series B Preferred Stock dividends when due, the dividends have been and are continuing to be accrued until such time as the monthly dividends can lawfully be paid under Nevada law. For the fourth fiscal quarter of 2009, the amount of dividends not paid on the Series B Preferred Stock totaled $37,500, consisting of $15,000 due Brookstein and $22,500 due Spirits. To compensate the holders of the outstanding Series B Preferred Stock for the failure to pay dividends when due, in June 2009, the Company agreed to grant five-year warrants (each, a “Dividend Accrual Warrant”) to purchase shares (each, a “Dividend Accrual Warrant Share”) of Company Common Stock to such holders at $0.05 per Dividend Accrual Warrant Share, at the rate of 40 Deferred Accrual Warrants for every $1 of dividend accrued during the fiscal quarter. Accordingly, the Company granted 600,000 Dividend Accrual Warrants to Brookstein and 900,000 Dividend Accrual Warrants to Spirits. The Company believes the grants of these Dividend Accrual Warrants were exempt from the registration requirements of the Securities Act, by reason of the exemption from registration granted under Section 4(2) of the Securities Act, due to the fact that the grants were conducted pursuant to transactions not involving any public offering.

As noted previously, the Company has failed to pay Series B Preferred Stock dividends when due. The Company anticipates that it will be necessary to continue to defer these dividend payments for each of Brookstein and Spirits through the first six months of 2010. The amount of deferred dividends for the first six month of 2010 will total $75,000: $30,000 due to Brookstein, and $45,000 due to Spirits. Brookstein and Spirits have each agreed to such non-payments, subject to their each receiving five-year warrants (each, a “First Half 2010 Series B Deferred Dividend Warrant”) to purchase shares (each, a “First Half 2010 Series B Deferred Dividend Warrant Share”) of Company Common Stock to such holders at $0.01 per First Half 2010 Series B Deferred Dividend Warrant Share. The First Half 2010 Series B Deferred Dividend Warrants were granted as of January 1, 2010: 3 million to Brookstein, 4.5 million to Spirits. The Company believes the grants of these First Half 2010 Series B Deferred Dividend Warrants were exempt from the registration requirements of the Securities Act, by reason of the exemption from registration granted under Section 4(2) of the Securities Act, due to the fact that the grants were conducted pursuant to transactions not involving any public offering.

During the fourth quarter of 2009, we failed to pay interest on the promissory notes we previously issued to Brookstein, Ponzio and Nascap. The Company’s obligations under these notes were secured by the security interests which Brookstein, Ponzio and Nascap subordinated to the security interest we granted to Agile in connection with the issuance of the Agile A&R Debenture. The principal amounts of such notes and the amounts of interest not paid during the fourth quarter of 2009 are as follows:

Name of Noteholder	Principal Amounts of Note		Interest Not Paid
Barry M. Brookstein	$	50,000	$	2,250
Henry A. Ponzio	$	150,000	$	6,750
Nascap Corp.	$	350,000	$	10,500

To compensate Brookstein, Ponzio and Nascap for the failure to pay interest on their promissory notes during the fourth quarter of 2009, the Company granted to such noteholders warrants (each, a “Fourth Quarter 2009 Deferred Interest Payment Warrant”) to purchase shares of Common Stock at the rate of 40 Fourth Quarter 2009 Deferred Interest Payment Warrants for every $1 of interest not paid. The Fourth Quarter 2009 Deferred Interest Payment Warrants have terms substantially identical to the Fourth Quarter 2009 Deferred Salary Warrants and Dividend Accrual Warrants.

As noted previously, the Company has been deferring a portion of the salaries of Garfinkel and Brookstein, its principal executive officers. The Company anticipates that it will be necessary to continue to defer these executive officers’ salaries through the first six months of 2010. The amount of deferred salary for the first six months of 2010 for each of the executive officers will total $120,000. Garfinkel and Brookstein each agreed to such deferments, subject to their each receiving five-year warrants (each, a “First Half 2010 Deferred Salary Warrant”) to purchase 12 million shares (each, a “First Half 2010 Deferred Salary Warrant Share”) of Company Common Stock at $0.01 per First Half 2010 Deferred Salary Warrant Share. The First Half 2010 Deferred Salary Warrants were granted as of January 1, 2010. The Company believes the grants of these Deferred Salary Warrants were exempt from the registration requirements of the Securities Act, by reason of the exemption from registration granted under Section 4(2) of the Securities Act, due to the fact that the grants were conducted pursuant to transactions not involving any public offering.

As noted previously, the Company has failed to pay interest due on the promissory notes payable to Brookstein, Ponzio and Nascap. The Company anticipates that it will be necessary to continue to fail to timely pay interest on these promissory notes through the first six months of 2010. The amount of interest that will become payable on the promissory notes for the first six months of 2010 will total $39,000; $4,500 due to Brookstein, $13,500 due to Ponzio and $21,000 due to Nascap. Brookstein, Ponzio and Nascap each agreed to such non-payments, subject to their each receiving five-year warrants (each, a “First Half 2010 Deferred Salary Warrant”) to purchase an aggregate of 4.6 million shares (each, a “First Half 2010 Deferred Interest Warrant Share”) of Company Common Stock at $0.01 per First Half 2010 Deferred Interest Warrant Share. The First Half 2010 Deferred Interest Warrants were granted as of January 1, 2010; 450,000 to Brookstein, 1.35 million to Ponzio and 2.1 million to Nascap. The Company believes the grants of these First Half 2010 Deferred Interest Warrants were exempt from the registration requirements of the Securities Act, by reason of the exemption from registration granted under Section 4(2) of the Securities Act, due to the fact that the grants were conducted pursuant to transactions not involving any public offering.

The Company has a substantial payable due its outside counsel, the law firm of Moritt Hock Hamroff & Horowitz, LLP (“Moritt Hock”). In consideration for Moritt Hock agreeing to provide services in the future, for which Moritt Hock will continue to charge its customary fees, the Company has granted to Moritt Hock 7.5 million five-year warrants (each, a “Moritt Hock Warrant”), each Moritt Hock Warrant entitling its holder to purchase one share of Company Common Stock at a purchase price of $0.01. The Company believes the grant of the Moritt Hock Warrants were exempt from the registration requirements of the Securities Act, by reason of the exemption from registration granted under Section 4(2) of the Securities Act, due to the fact that the grant was conducted pursuant to transactions not involving any public offering.

The Company’s primary need for cash during the next twelve months is to fund payments of operating costs. In addition, the Company is presently in negotiations to obtain additional financing to fund operations.

Going Concern

The Company’s continued losses raise substantial doubt about its ability to continue as a going concern. Operating losses have resulted from a shortfall of sales revenues to cover the Company’s operating and marketing expenditures during the implementation of the Company’s operating plan, which targets significant sales growth and is long-range in nature. The Company’s ability to operate as a going concern is dependent upon its ability to increase revenues, control costs and operate profitably. The Company (i) has and continues to seek reductions in its operating expenses and (ii) has retained an investment banker to explore acquisition opportunities that may diversify the Company’s existing range of products and services, as well as to assist the Company in obtaining additional financing as required. There is no assurance that the Company will be successful in attaining these objectives or that attaining such objectives will result in operating profits, positive cash flows or an overall improvement in the Company’s financial position.

Historically, the Company has relied upon private financing to fund its operations and expects to continue to do so. The current economic environment is impacting the Company’s ability to obtain any needed financing. No assurance can be given that financing will be available when needed or, if available, such financing will be on terms beneficial to the Company.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Disclosure under Item 7A is not required of smaller reporting companies.

Item 8.

Financial Statements and Supplementary Data.

We set forth below a list of our audited financial statements included in this Annual Report on Form 10-K and their location.

Item		Page *
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets at December 31, 2009 and 2008		F-2
Consolidated Statements of Operations for the Years Ended December 31, 2009 and 2008		F-3
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2009 and 2008		F-4
Consolidated Statement of Cash Flows for the Years Ended December 31, 2009 and 2008		F-5
Notes to Consolidated Financial Statements		F-6

* Page F-1 follows page 38 to this Annual Report on Form 10-K.

Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A(T).

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management conducted an evaluation, with the participation of its Chief Executive Officer (CEO) and its Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation the CEO and CFO concluded that our disclosure controls and procedures were not effective in reporting, on a timely basis, information required to be disclosed by us in the reports we file or submit under the Exchange Act, because of material weaknesses in internal control over financial reporting as of December 31, 2009, as described below.

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for the preparation of our financial statements and related information. Management uses its best judgment to ensure that the financial statements present fairly, in material respects, our financial position and results of operations in conformity with generally accepted accounting principles.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision of management, including the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission published in 1992 and subsequent guidance prepared by the Commission specifically for smaller public companies. Based on that evaluation, our management concluded that our internal control over financial reporting not effective as of December 31, 2009 because of the existence of material weaknesses as described below.

A material weakness in internal control over financial reporting is defined by Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 5 as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

We identified two material weaknesses relating to financial reporting functions:

On January 1, 2010, the Controller, who performs all of the financial reporting functions and has been with the Company for many years, voluntarily left for another employment opportunity. Because of the timing of her departure, management did not have time to find a replacement with sufficient SEC/public company reporting experience as well as a background of the Company’s processes and transactions to perform the year-end preparation and compilation of the financial statements. Thus, material adjustments to the financial information were made to correct mistakes.

Because of the small size of the Company, the Company has always experienced issues related to segregation of duties, its allocation of functions to individual employees. The Company has optimized its allocation of functions based on its limited staff, but further cuts in the current year have exacerbated this issue. In the past, while identified by management as a deficiency in control, segregation of duties has not been considered a material weakness because the former Controller had built many controls and reconciliations into her own work flow to check herself since she knew that it was not likely that someone else would catch a mistake, since there is no one else available at the Company to review her work. However, as a result of her departure at such a critical time, despite the fact that these controls and reconciliations were documented as part of the control activities in process documentation, the new Controller did not have sufficient time to fully understand all of the different types of transactions the Company engages in and the information flow, consequently, not all of these built-in controls were maintained during the preparation and compilation period, resulting in adjustments to the financial information.

Management has already made efforts to remediate and correct these issues by hiring an outside consultant with substantial SEC/public company reporting experience to assist in the drafting of the reporting documents and manage the reporting process. Moreover, management believes that over time, the current Controller will grasp all of the nuances of the Company’s transactions and be fully able to prepare and compile the financial information once he has had further experience at the Company and re-instituted some of the former Controller checks and reconciliations.

Notwithstanding the above, management believes that the consolidated financial statements included in this Annual Report on Form 10-K, fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in accordance with generally accepted accounting principles.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of our Company; and (3) unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements are prevented or timely detected.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

This annual report does not include an attestation report of Holtz Rubinstein Reminick LLP, our registered public accounting firm regarding internal control over financial reporting. Management's Report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only Management's Report in this annual report.

As noted above, management is disclosing material weaknesses in internal control over financial reporting that resulted from employment changes which occurred in the first fiscal quarter of 2010. These changes have materially affected our internal control over financial reporting as of December 31, 2009 because they affected our ability to prepare the year-end financial information in a timely and accurate way.

Changes in Internal Controls Over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during our last fiscal quarter to which this Annual Report on Form 10-K relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We are committed to improving our financial organization. As part of this commitment, we intend to continue to educate our management personnel to comply with U.S. GAAP and SEC disclosure requirements and to increase management oversight of accounting and reporting functions in the future.

Item 9B.

Other Information.

None.

PART III

Item 10.

Directors, Executive Officers and Corporate Governance.

Directors and Executive Officers

As part of the Execuserve acquisition, Compliance Systems Corporation has realigned its organizational structure to account for the Execuserve acquisition and its operational management team. The Company's new Execuserve subsidiary division will be managed by its CEO and President Jim Robinson. The Company's Call Compliance, Inc. subsidiary will be led by Stefan Dunigan as its CEO and President. Dean Garfinkel will remain as Chairman of the Board of Directors and CEO of Compliance Systems Corporation and Barry Brookstein will continue as a member of the Board of Directors and as Secretary and CFO. Additionally, Tom Eley, the former CEO of Execuserve will be appointed to the Board of Directors of the Company.

The following table sets forth the names and positions of our executive officers and directors. Our directors are elected at our annual meeting of stockholders and serve for one year or until successors are elected and qualify. The Board appoints the Company’s officers, and their terms of office are at the discretion of the Board, except to the extent governed by an employment contract.

As of April 24, 2010, our directors and executive officers, their age, principal positions, the dates of their initial election or appointment as directors or executive officers, and the expiration of their terms are as follows:

Name	Age	Principal Positions	Periods Served
Dean Garfinkel	51	Chairman of the Board, Chief Executive Officer and President	February 2006 to Present
Barry Brookstein	68	Chief Financial Officer and Director	February 2006 to Present
Tom Eley	74	Director	February 2010 to Present

Our directors and executive officers are not directors or executive officers of any other company that files reports with the Commission, nor have they been involved in any bankruptcy proceedings, criminal proceedings, any proceeding involving any possibility of enjoining or suspending our directors and officers from engaging in any business, securities or banking activities, and have not been found to have violated, nor been accused of having violated, any federal or state securities or commodities laws.

The following is a brief description of the background of our directors and executive officers, as furnished by such directors and executive officers.

Dean Garfinkel currently serves as Chairman of the Board of Directors and CEO of Compliance Systems Corporation. Mr. Garfinkel served prior to February 2010 as CSC’s and each of its subsidiaries’ Chairman of the Board and Chief Executive Officer from such entities’ formation through CSC’s merger with and into our company in February 2006. Since the 2006 merger, he has served as our and each of our subsidiaries’ Chairman of the Board, President and Chief Executive Officer. Mr. Garfinkel served as Chief Executive Officer and a director of ASN Voice & Data Corp., a telecommunications company he founded in 1991, which specialized in providing voice and data systems for the financial sector. Mr. Garfinkel also has served as a communications consultant to Fortune 500 companies and other businesses for over 20 years. Mr. Garfinkel also has served, since 2004, on the Executive Board of Directors of the American Teleservices Association, a trade association.

Barry Brookstein served as CSC’s and each of its subsidiaries’ Chief Financial Officer from such entities’ formation through CSC’s merger with and into our company in February 2006. Since the 2006 merger, he has served as our and each of our subsidiaries’ Chief Financial Officer, Treasurer and director. Prior to joining CSC, Mr. Brookstein devoted his full-time to his accounting practice. Mr. Brookstein also currently devotes a portion of his time to his private accounting practice. Mr. Brookstein is a graduate of Pace University and has over 40 years of experience in public accounting.

Tom Eley has been appointed to the Board of Directors of Compliance Systems Corporation. Mr. Eley has over 30 years of sales and management experience, having served as Vice President and General Manager of European Operations for Paradyne Corporation and Vice President of U.S. Sales for MDSI, a Schlumberger Company. Previously, Mr. Eley held various sales management positions with IBM and Control Data Corporation. He holds a Bachelor of Science degree in Physics from the College of William and Mary and is a graduate of the IBM Systems Research Institute.

Significant Employees

As of April 24, 2010, our other significant personnel, their ages, positions, the dates of employment, are as follows:

Name	Age	Principal Positions	Periods Served
Stephan Dunigan	38	CEO and President – Call Compliance Inc.	February 2010 to Present
Jim Robinson	52	CEO and President – Execuserve Corp.	February 2010 to Present

Stefan Dunigan CEO and President of CCI from February 2010 to present. From 2001 to February 2010 Mr. Dunigan was the Company’s VP of Operations. From 1999 to 2001, Mr. Dunigan was Director of Operations for ASN Voice & Data Corp. Mr. Dunigan’s principal responsibilities include the development and implementation of the systems necessary to successfully launch and administer our wide array of compliance services and solutions. Additionally, Mr. Dunigan is pro-actively involved in product enhancement and both end-user and telephone carrier support, among other duties. Mr. Dunigan brings nearly ten years of hands-on experience with all facets of the public telecommunication network, and is considered an expert in broadband delivery and design.

Jim Robinson, President & CEO of Execuserve Corp. from February 2010 to Present, Mr. Robinson holds an MBA from the University of California, Berkeley and has extensive management and consulting experience. He managed a team with worldwide product, sales and support responsibilities at AMF before becoming an independent business consultant in 1996. Jim has worked with Execuserve Corp. since 2007.

Section 16(a) Compliance by Officers and Directors

We do not have a class of securities registered under Section 12(b) or Section 12(g) of the Exchange Act in 2007 and, as such, our officers, directors and 10% stockholders were, and current are, not subject to the reporting requirements of Section 16(a).

Code of Ethics

On February 10, 2006, our Board of Directors adopted a written Code of Ethics designed to deter wrongdoing and promote honest and ethical conduct, full, fair and accurate disclosure, compliance with laws, prompt internal reporting and accountability to adherence to the Code of Ethics. Our Code of Ethics applies to all of our employees and directors, including our Chief Executive Officer, Chief Financial Officer and Controller. This Code of Ethics was filed as an exhibit to the Registration Statement on Form SB-2 filed with the SEC on May 12, 2006.

Committees

Our Board of Director serves as the audit committee. Our board does not have an outside director as a financial expert due to the lack of capital needed to attract a qualified expert. Absent his positions as an executive officer, director and principal stockholder, our board believes that Mr. Brookstein would qualify as a financial expert.

We do not have a nominating committee or a method in place for the consideration of director-nominees. Our Board of Directors will consider any appropriately qualified person for directorship with our company. Stockholders wishing to submit the name of an appropriately qualified person for a directorship should direct any such submission to our secretary at our principal offices.

Item 11.

Executive Compensation.

General

The following table sets forth, with respect to our fiscal years ended December 31, 2009 and 2008, all compensation earned by or paid to all persons who served as our chief executive officer at any time during our fiscal year ended December 31, 2009 and such other executive officer and other employees of our company who were employed by our company as of the close of business on December 31, 2009 and whose total annual salary and bonus earned during our fiscal year ended December 31, 20098 exceeded $100,000.

SUMMARY COMPENSATION TABLE

					Option			All Other
Name and Principal Position	Year	Salary			Awards			Compensation			Total
Dean Garfinkel, Chairman of	2009	$	55,000		$	520	(2)	$	20,448	(4)	$	75,968
the Board and Chief	2008	$	180,000	(1)	$	72,000	(2)	$	26,841	(3)	$	278,841
Executive Officer

Barry Brookstein, Chief	2009	$	90,000		$	480	(5)	$	18,594	(8)	$	109,074
Financial Officer	2008	$	180,000	(7)	$	36,000	(5)	$	14,007	(6)	$	230,007

Stefan Dunigan,	2009	$	120,000			0		$	8,813	(11)	$	128,813
CEO and President –	2008	$	120,000			36,000	(9)	$	8,915	(10)	$	164,915

(1)	Excludes $60,000 in deferred compensation that was paid during 2008.

(2)

Represents the three grants for salary deferral during 2009 for a total of 7,400,000 five-year stock purchase warrants at an exercise price of $0.05 per share. Represents the grant on January 4, 2008 of a five-year option to purchase 20 million shares of our common stock, at an exercise price of $0.026 per share. Reference the footnotes to the financial which discloses the assumptions made in valuing these options and warrants.

(3)	Mr. Garfinkel received a $12,000 car lease allowance and $14,841 for insurance, repairs and gas in 2008.

(4)	Mr. Garfinkel received a $12,000 car lease allowance and $8,448 for insurance, repairs and gas in 2009.

(5)

Represents the three grants for salary deferral during 2009 for a total of 6,800,000 five-year stock purchase warrants at an exercise price of $0.05 per share. Represents the grant on January 4, 2008 of a five-year option to purchase ten million shares of our common stock, at an exercise price of $0.026 per share. Reference the footnotes to the financial which discloses the assumptions made in valuing these options and warrants.

(6)	Mr. Brookstein received a $12,000 car lease allowance and $2,007 for insurance, repairs and gas in 2008.

(7)	Mr. Brookstein deferred $120,000 of salary which was subsequently exchanged for Series C Preferred Stock.

(8)	Mr. Brookstein received a $12,000 car lease allowance and $6,594 for insurance, repairs and gas in 2009.

(9)	Represents the grant on January 4, 2008 of a five-year option to purchase 10 million shares of our common stock, at an exercise price of $0.026 per share. Reference the footnotes to the financial which discloses the assumptions made in valuing these options and warrants.

(10)	Mr. Dunigan received $8,915 for an automobile lease and gas in 2008.

(11)	Mr. Dunigan received $8,813 for an automobile lease and gas in 2009.

(12)	Mr. Dunigan was promoted to CEO and President of Call Compliance Inc. effective February 2010

Employment Agreements with Executive Officers

Call Compliance Inc. entered into 5-year employment agreements, effective as of December 1, 2001, with each of Dean Garfinkel, our Chairman of the Board, Chief Executive Officer and President, and Barry Brookstein, our Chief Financial Officer, Secretary, Treasurer and director. Messrs. Garfinkel and Brookstein’s employment contracts were extended for five years and currently expire on November 30, 2011. Under the terms of their respective employment agreements, Mr. Garfinkel receives a base salary of $240,000 per year and Mr. Brookstein receives a base salary of $240,000 per year. Each officer is entitled to an annual bonus from the bonus pool, the amount to be determined in the sole discretion of the Board, and an allowance for an automobile of up to $1,000 per month plus reimbursement for maintenance, insurance and gasoline also to be determined in the sole discretion of the Board. Each employment agreement provides for health insurance and other standard benefits and contains certain non-competition prohibitions which require that each officer not engage in any business activities which directly compete with our business while he or she is employed by us, or is one of our principal stockholders.

As described above, Messrs. Garfinkel and Brookstein’s respective employment agreements provide for an annual bonus from a bonus pool, with the amount of each bonus to be determined in the sole discretion of the Board. The bonus pool shall be equal to a percentage of our pre-tax profits, if any, after the service of any debt on a calendar year basis, starting with 25% of the first $10 million in pretax earnings, and 10% of any pretax earnings in excess of $10 million. For the fiscal years ended December 31, 2009 and 2008, no bonuses were awarded. At present, Messrs. Garfinkel and Brookstein’s employment agreements are guaranteed by the Company, as the parent company of Call Compliance, Inc.

Deferred salary from 2007 was paid in equal amounts during the first six months of 2008.

Salaries were also deferred during 2009 for Mr. Brookstein ($150,000) and Mr. Garfinkel (185,000). The officers also deferred 100% of the salaries for the first 6 months of 2010.

Mr. Dunigan does not have an employment agreement with the Company.

Outstanding Equity Awards at Fiscal Year-End

The following tables set forth, for each person listed in the Summary Compensation Table set forth in the “General” subsection above, as of April 2, 2009:

•	with respect to each option award -

•

the number of shares of our common stock issuable upon exercise of outstanding options that have been earned, separately identified by those exercisable and unexercisable;

•

the number of shares of our common stock issuable upon exercise of outstanding options that have not been earned;

•

the exercise price of such option; and

•

the expiration date of such option; and

•	with respect to each stock award -

•

the number of shares of our common stock that have been earned but have not vested;

•

the market value of the shares of our common stock that have been earned but have not vested;

•

the total number of shares of our common stock awarded under any equity incentive plan that have not vested and have not been earned; and

•

the aggregate market or pay-out value of our common stock awarded under any equity incentive plan that have not vested and have not been earned.

Option Awards and Warrant Awards

Number of

Equity Incentive

Securities

Plan Awards:

Underlying

Number of

Unexercised

Securities Underlying

Option

Options

Unexercised

Exercise

Expiration

Name

Exercisable

Unexercisable

Unearned Options

Price

Date

Dean Garfinkel

40,219,514

0.031

1/14/2013

Barry Brookstein

36,540,000

0.030

1/14/2013

Stefan Dunigan

10,000,000

0.026

1/14/2013

Stock Awards

							Equity Incentive
							Plan Awards:
					Number		Market or
	Number of		Market Value		of Unearned		Pay-Out Value of
	Shares That		of Shares That		Shares That		Unearned Shares
Name	Have Not Vested		Have Not Vested		Have Not Vested		Have Not Vested
Dean Garfinkel		0	$	—		0	$	—
Barry Brookstein		0		—		0		—
Stefan Dunigan		0		—		0		—

Board of Directors Policy on Executive Compensation

Executive Compensation

Our executive compensation philosophy is to provide competitive levels of compensation by recognizing the need for multi-discipline management responsibilities, achievement of our company’s overall performance goals, individual initiative and achievement, and allowing our company to attract and retain management with the skills critical to its long-term success. Management compensation is intended to be set at levels that we believe is consistent with that provided in comparable companies. Our company’s compensation programs are designed to motivate executive officers to meet annual corporate performance goals and to enhance long-term stockholder value. Our company's executive compensation has four major components: base salary, performance incentive, incentive stock options and other compensation.

Executive Base Salaries

Base salaries are determined by evaluating the various responsibilities for the position held, the experience of the individual and by comparing compensation levels for similar positions at companies within our principal industry. We review our executives’ base salaries and determine increases based upon an officer’s contribution to corporate performance, current economic trends and competitive market conditions.

Performance Incentives

We utilize performance incentives based upon criteria relating to performance in special projects undertaken during the past fiscal year, contribution to the development of new products, marketing strategies, manufacturing efficiencies, revenues, income and other operating goals to augment the base salaries received by executive officers.

Incentive Stock Options

Our company uses stock options as a means to attract, retain and encourage management and to align the interests of executive officers with the long-term interest of our company’s stockholders.

Benefits and Other Compensation

Our company offers health to its executive officers, which are similar to the benefits offered to all of its employees. Our company also provides an automobile allowance to its two senior executive officers as additional compensation.

Retirement and Post Retirement Benefits

Our company does not offer a post-retirement health plan to its executive officers or employees.

Director Compensation

Directors do not receive any cash compensation for their service as members of our Board of Directors, but they are reimbursed for reasonable out-of-pocket expenses incurred in connection with their duties as directors. Upon establishing a stock option plan, which we have not done as of the date of filing this Form 10-K, we anticipate that directors will be granted options to purchase common stock thereunder.

Compensation Committee Interlocks And Insider Participation

The Board does not have a compensation committee, and none of our executive officers has served as a director or member of the compensation committee of any other entity whose executive officers served on our Board.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

We currently have outstanding four classes of voting securities: our common stock, Series A Senior Convertible Voting Non-Redeemable Preferred Stock (the “Series A Preferred Stock”), Series B Senior Subordinated Convertible Voting Redeemable Preferred Stock (the “Series B Preferred Stock”) and Series C Senior Subordinated Convertible Voting Redeemable Preferred Stock (the “Series C Preferred Stock” and, collectively with the Series A Preferred Stock and Series B Preferred Stock, the “Preferred Stock”). The Company has irrevocably waived its right to redeem the Series C Preferred Stock. Each share of Preferred Stock currently entitles its holder to cast 100 votes on each matter voted upon by our stockholders.

The following tables set forth information with respect to the beneficial ownership of shares of each class of our voting securities as of April 24, 2010, by:

•	each person known by us to beneficially own 5% or more of the outstanding shares of such class of stock, based on filings with the Securities and Exchange Commission and certain other information,

•	each of our current “named executive officers” and directors, and

•	all of our current executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and investment power. In addition, under SEC rules, a person is deemed to be the beneficial owner of securities which may be acquired by such person upon the exercise of options and warrants or the conversion of convertible securities within 60 days from the date on which beneficial ownership is to be determined.

The term “named executive officers” is defined in the SEC rules as those persons who are required to be listed in the Summary Compensation Table provided under Item 10 of this Annual Report on Form 10-K.

Except as otherwise indicated in the notes to the following table,

•	we believe that all shares are beneficially owned, and investment and voting power is held by, the persons named as owners, and

•	the address for each beneficial owner listed in the table is c/o Compliance Systems Corporation, 50 Glen Street, Glen Cove NY 11542

Series A Senior Convertible Voting Non-Redeemable Preferred Stock

	Amount and Nature of			Percentage
Name and Address of Stockholder	Beneficial Ownership			of Class
Barry Brookstein (1)		200,000	(2)		8.7	%

All executive officers and directors as a group (two persons)		200,000	(2)		8.7	%

(1)	Mr. Brookstein is our Chief Financial Officer and a member of our board of directors.

(2)	Does not include 262,500 shares of Series A Preferred Stock pledged to Mr. Brookstein to secure loans made by Mr. Brookstein to the pledgors.

Series B Senior Subordinated Convertible Voting Redeemable Preferred Stock

	Amount and Nature of			Percentage
Name and Address of Stockholder	Beneficial Ownership			of Class
Barry Brookstein (1)		1,250,000	(2)		100.0	%

All executive officers and directors as a group (two persons)		1,250,000	(2)		100.0	%

(1)	Mr. Brookstein is our Chief Financial Officer and a member of our board of directors.

(2)	Includes 750,000 shares of Series B Preferred Stock owned by a company in which Mr. Brookstein serves as an executive officer and director and holds a majority of its outstanding stockholder voting power.

Series C Senior Subordinated Convertible Voting Redeemable Preferred Stock

	Amount and Nature of			Percentage
Name and Address of Stockholder	Beneficial Ownership			of Class
Barry Brookstein (1)		857,593	(2)		46.9	%
Dean Garfinkel (3)		466,750			25.5	%

All executive officers and directors as a group (two persons)		1,324,343	(2)		72.4	%

(1)	Mr. Brookstein is our Chief Financial Officer and a member of our board of directors.

(2)	Includes (a) 450,601 shares of Series C Preferred Stock owned by a company in which Mr. Brookstein serves as an executive officer and director and holds a majority of its outstanding stockholder voting power.

(3)	Mr. Garfinkel is our Chairman of the Board, Chief Executive Officer and President.

Common Stock

	Amount and Nature of			Percentage
Name and Address of Stockholder	Beneficial Ownership			of Class
Barry Brookstein (1)		286,795,131	(2)(10)		52.1	%
Dean Garfinkel (3)		94,625,127	(4)(10)		26.1
Stefan Dunigan (5)		18,319,514	(6)		6.2
Summit Trading LLC (7)		38,666,667			14.0
Agile Opportunity Fund (8)		207,647,000	(9)		87.1

All executive officers and directors as a group (two persons)		381,420,258	(2)(4)		59.9	%

(1)	Mr. Brookstein is our Chief Financial Officer and a member of our board of directors.

(2)

Includes (a) 63,512 shares of our common stock owned by Mr. Brookstein’s minor children for which Mr. Brookstein has custodial control, (b) 10,000,000 shares of our common stock issuable upon exercise of an option granted to Mr. Brookstein in January 2008, which shares are purchasable within the next 60 days, (c) 20,000,000 shares of our common stock issuable upon conversion of the 200,000 shares of Series A Preferred Stock beneficially owned by Mr. Brookstein, which shares are convertible within the next 60 days, (d) 125,000,000 shares of our common stock issuable upon conversion of the 1,250,000 shares of Series B Preferred Stock beneficially owned by Mr. Brookstein, which shares are convertible within the next 60 days, and (e) 85,759,300 shares of our common stock issuable upon conversion of the 857,593 shares of Series C Preferred Stock beneficially owned by Mr. Brookstein, which shares are convertible within the next 60 days.

(3)	Mr. Garfinkel is our Chairman of the Board, Chief Executive Officer and President.

(4)

Includes (a) 95,268 shares of our common stock owned by Mr. Garfinkel’s minor children for which Mr. Garfinkel has custodial control, (b) 20,000,000 shares of our common stock issuable upon exercise of an option granted to Mr. Garfinkel in January 2008, which shares are purchasable within the next 60 days, and (c) 46,675,000 shares of our common stock issuable upon conversion of the 466,750 shares of Series C Preferred Stock beneficially owned by Mr. Garfinkel, which shares are convertible within the next 60 days.

(5)	Mr. Dunigan is our Vice President of Operations.

(6)

Includes (a) 7,500,000 shares of common stock issuable upon conversion of 75,000 shares of Series A Preferred Stock, which are shares convertible within the next 60 days, and (b) 10 million shares of our common stock issuable upon exercise of an option granted to Mr. Dunigan in January 2008, which option is currently exercisable.

(7)	The mailing address for Summit Trading Limited is 120 Flagler Avenue, New Smyrna Beach, Florida 32169.

(8)	The address for Agile Opportunity Fund LLC is 1175 Walt Whitman Road – Suite 100A, Melville, New York 11747.

(9)

Includes 207,647,000 million shares issuable upon conversion of debentures aggregating to $1,765,000 in principal amount owned of record by the beneficial owner, which debentures are currently convertible into such shares. Does not include shares issuable upon conversion of interest that is accrued or may accrue under the debentures.

(10) Dean Garfinkel, our chairman of the board, president and chief executive officer, and Barry Brookstein, our chief financial officer, have entered into "Rule 10b5-1 plans" pursuant to which they each initiated binding, irrevocable sell orders, with respect to up to 1.5 million shares of our common stock owned by each of them, at a price at or above $0.05 per share. The sale period began October 1, 2008 and terminated on September 30, 2009. No sales were made under this plan..

Dean R. Garfinkel, our chairman of the board, president and chief executive officer, and Barry M. Brookstein, our chief financial officer, have entered into "Rule 10b5-1 plans," each dated as of September 9, 2009, pursuant to which they each initiated binding, irrevocable sell orders, with respect to up to 3.0 million shares of our common stock owned by each of them, at a price at or above $0.05 per share. The sale period began September 1, 2009 and terminates on August 31, 2010. No sales have been made to date as the market price of our common stock remains below the threshold sale price under their Rule 10b5-1 plans. Under these 10b5-1 plans, Messrs. Garfinkel and Brookstein are prohibited from exercising any subsequent influence over how, when or whether to effectuate any sale of their shares.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Certain Relationships and Related Transactions

On March 3, 2009, one the Company’s senior executive officers and principal stockholders loaned the Company $50,000, due on demand, with interest at 18%. On June 24, 2009, this note was exchanged for a secured note with a stated maturity date of January 1, 2011. The note bears interest at 18%. As of December 31, 2009 accrued and unpaid interest totaled $2,250.

The Company has failed to pay dividends on the 1.25 million outstanding shares of its Series B Senior Subordinated Convertible Voting Preferred Stock (the “Series B Preferred Stock”) that were payable on the last day of each month during 2009. Dividends on the Series B Preferred Stock may only be paid out of funds legally available for such purpose. Under Nevada law, generally, a corporation’s distribution to stockholders may only be made if, after giving effect to such distribution, (i) the corporation would be able to pay its debts as they become due in the usual course of action and (ii) the corporation’s total assets equal or exceed the sum of the corporation’s liabilities plus the amount that would be needed, if the corporation was to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose rights are superior to those receiving the distribution.

All of the outstanding shares of Series B Preferred Stock are held by Barry M. Brookstein, the chief financial officer and principal stockholder, and Spirits Management, Inc. (“Spirits”), an entity controlled by Brookstein. Although the Company has been and currently is unable to pay the Series B Preferred Stock dividends when due, the dividends have been and are continuing to be accrued until such time as the monthly dividends can lawfully be paid under Nevada law. As of December 31, 2009, the amount of dividends not paid on the Series B Preferred Stock totaled $150,000, consisting of $60,000 due Brookstein and $90,000 due Spirits. To compensate the holders of the outstanding Series B Preferred Stock for the failure to pay dividends when due, the Company has agreed to grant five-year warrants (each, a “Dividend Accrual Warrant”) to purchase shares (each, a “Dividend Accrual Warrant Share”) of Company common stock to such holders at $0.05 per Dividend Accrual Warrant Share. The holders are to be granted, as of the last day of each fiscal quarter, 40 Deferred Accrual Warrants for every $1 of dividend accrued during the prior three month period. Accordingly, the Company granted 1.2 million Dividend Accrual Warrants to Brookstein and 1.8 million Dividend Accrual Warrants to Spirits as of June 30, 2009 and granted 600,000 Dividend Accrual Warrants to Brookstein and 900,000 Dividend Accrual Warrants to Spirits as of September 30, 2009 for dividends accrued during the third quarter 2009, 2009 and granted 600,000 Dividend Accrual Warrants to Brookstein and 900,000 Dividend Accrual Warrants to Spirits as of September 30, 2009 for dividends accrued during the fourth quarter 2009.

During the year ended December 31, 2008, the Company paid dividends of $150,000 on its outstanding Series B Preferred Stock.

Item 14.

Principal Accounting Fees and Services.

Holtz Rubinstein Reminick LLP (“Holtz Rubinstein”) has served as our independent certified public accountants since October 2007.

Principal Accountant Fees and Services

The following table sets forth the fees billed by our independent certified public accountants for the years ended December 31, 2009 and 2008 for the categories of services indicated.

	Fiscal Year Ended December 31,
Category	2009		2008
Audit fees (1)	$	67,500	$	67,500
Audit-related fees (2)		0		0
Tax fees (3)		0		0

(1)	Consists of fees billed for the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.

(2)	Consists of assurance and related services that are reasonably related to the performance of the audit and reviews of our financial statements and are not included in “audit fees” in this table.

(3)	Consists of professional services rendered for tax compliance, tax advice and tax planning. The nature of these tax services is tax preparation.

Audit Committee Approval

We do not have an audit committee of our board of directors. We believe that each member of our board has the expertise and experience to adequately serve our stockholders’ interests while serving as directors. Since we are not required to maintain an audit committee and our full board acts in the capacity of an audit committee, we have not elected to designate any member of our board as an “audit committee financial expert.”

Pre-Approval Policy

We understand the need for Holtz Rubenstein to maintain objectivity and independence in its audit of our financial statements. To minimize relationships that could appear to impair the objectivity of Holtz Rubenstein, our board of directors has restricted the non-audit services that Holtz Rubenstein may provide to us and has determined that we would obtain even these non-audit services from Holtz Rubenstein only when the services offered by Holtz Rubenstein are more effective or economical than services available from other service providers.

Our board of directors has adopted policies and procedures for pre-approving all non-audit work performed by Holtz Rubenstein or any other accounting firms we may retain. Specifically, under these policies and procedures, our board shall pre-approve the use of Holtz Rubenstein for detailed, specific types of services within the following categories of non-audit services: merger and acquisition due diligence and related accounting services; tax services; internal control reviews; and reviews and procedures that we request Holtz Rubenstein to undertake to provide assurances of accuracy on matters not required by laws or regulations. In each case, the policies and procedures require our board to set specific annual limits on the amounts of such services which we would obtain from Holtz Rubenstein and require management to report the specific engagements to the board and to obtain specific pre-approval from the board for all engagements.

Board of Directors Approval of Audit-Related Activities

Management is responsible for the preparation and integrity of our financial statements, as well as establishing appropriate internal controls and financial reporting processes. Holtz Rubenstein is responsible for performing an independent audit of our financial statements and issuing a report on such financial statements. Our board’s responsibility is to monitor and oversee these processes.

Our board reviewed the audited financial statements of our company for the year ended December 31, 2009 and met with both other members of management and the independent auditors, separately and together, to discuss such financial statements. Management and the auditors have represented to us that the financial statements were prepared in accordance with generally accepted accounting principles in the United States. Our board also received written disclosures and a letter from our auditors regarding their independence from us, as required by [Independence Standards Board Standard No. 1,] and discussed with the auditors their independence with respect to all services that our auditors rendered to us. Our board also discussed with the auditors any matters required to be discussed by Statement on Auditing Standards No. 61. Based upon these reviews and discussions, our board authorized and directed that the audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2009.

PART IV

Item 15.

Exhibits, Financial Statements

Financial Statements

The financial statements and schedules included in this Annual Report on Form 10-K are listed in Item 8 and commence following page 38.

Exhibits

The following exhibits are being filed as part of this Annual Report on Form 10-K.

Exhibit
Number		Exhibit Description
3.1		Composite of Articles of Incorporation of Compliance Systems Corporation, as amended to date.
3.2		Bylaws of Compliance Systems Corporation (f/k/a GSA publications, Inc.), as amended to date. [Incorporated by reference to Exhibit 3.2(iii) to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.1		United States Patent, dated December 11, 2001. [Incorporated by reference to Exhibit 10.1 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.3		Patent License Agreement, dated April 11, 2002, between Call Compliance, Inc. and Illuminet, Inc. [Incorporated by reference to Exhibit 10.4 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.4		CCI Alliance Agreement, dated April 11, 2002, between Call Compliance, Inc. and Illuminet, Inc. [Incorporated by reference to Exhibit 10.5 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.5		Addendum to Promissory Note, dated July 25, 2005, between Call Compliance, Inc. and Barry Brookstein. [Incorporated by reference to Exhibit 10.6 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.6		Lease Agreement, dated May 10, 2002, between Call Compliance, Inc. and Spirits Management, Inc. [Incorporated by reference to Exhibit 99.1 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.7		Non-Negotiable Promissory Note, dated December 1, 2002, between Call Compliance, Inc. and Spirits Management, Inc. [Incorporated by reference to Exhibit 10.7 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.8		Non-Negotiable Promissory Note, dated December 1, 2002, between Call Compliance, Inc. and Telmax Co., Inc. [Incorporated by reference to Exhibit 10.9 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.9		Non-Negotiable Promissory Note, dated December 1, 2002, between Call Compliance, Inc. and Phone Tel New Corp. [Incorporated by reference to Exhibit 10.10 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.10		Guaranty, dated December 1, 2002, among Call Compliance, Inc., Call Compliance.com, Inc. and Telmax Co., Inc. [Incorporated by reference to Exhibit 10.11 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.11		Guaranty, dated December 1, 2002, among Call Compliance, Inc., Call Compliance.com, Inc. and PhoneTel New Corp. [Incorporated by reference to Exhibit 10.12 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.12		Guaranty, dated December 1, 2002, among Call Compliance, Inc., Call Compliance.com, Inc. and Tele-Serv, Inc. [Incorporated by reference to Exhibit 10.13 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.13		Guaranty, dated December 1, 2002, among Call Compliance, Inc., Call Compliance.com, Inc. and Spirits Management, Inc. [Incorporated by reference to Exhibit 10.14 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]

10.14		Patent Security Agreement, dated as of 2003 [sic], between Compliance Systems Corporation and Call Compliance.Com, Inc. [Incorporated by reference to Exhibit 10.21 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.15		Promissory Agreement, dated July 15, 2004, among Call Compliance, Inc., Tele-Serv, Inc. and Compliance Systems Corporation. [Incorporated by reference to Exhibit 10.23 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.16		Promissory Agreement, dated July 15, 2004, among Call Compliance, Inc., Telmax Co., Inc. and Compliance Systems Corporation. [Incorporated by reference to Exhibit 10.24 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.17		Promissory Agreement, dated July 15, 2004, among Call Compliance, Inc., PhoneTel New Corp. and Compliance Systems Corporation. [Incorporated by reference to Exhibit 10.25 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.18		Promissory Agreement, dated July 15, 2004, among Call Compliance, Inc., Spirits Management, Inc. and Compliance Systems Corporation. [Incorporated by reference to Exhibit 10.26 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.19		Lease Agreement, dated October 18, 2004, between DELL Financial Services L.P. and Call Compliance, Inc. [Incorporated by reference to Exhibit 99.2 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.20		Assignment of Lease with Consent of Landlord, dated January 26, 2005, between Automated Systems Nationwide Network, Inc. and Call Compliance, Inc. [Incorporated by reference to Exhibit 99.3 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.21		Sublease Modification Agreement, dated January 26, 2005, between Automated Systems Nationwide Network, Inc. and Intellidyne LLC. [Incorporated by reference to Exhibit 99.4 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.22		Addendum to Promissory Agreement, dated July 25, 2005, between Compliance Systems Corporation and Barry Brookstein. [Incorporated by reference to Exhibit 10.27 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.23		Addendum to Promissory Agreement, dated July 26, 2005, between Compliance Systems Corporation and Spirits Management, Inc. [Incorporated by reference to Exhibit 10.28 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.24		Non-Negotiable Promissory Note, dated July 1, 2005, between Compliance Systems Corporation and Alison Garfinkel. [Incorporated by reference to Exhibit 10.29 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.25		Non-Negotiable Promissory Note, dated July 1, 2005, between Compliance Systems Corporation and Dean Garfinkel. [Incorporated by reference to Exhibit 10.30 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.26		Promissory Note, dated August 1, 2005, between Compliance Systems Corporation and Brad Friedman. [Incorporated by reference to Exhibit 10.31 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.27		Separation, Mutual Release and Stock Purchase Agreement, dated September 20, 2005, among Alison Garfinkel, Compliance Systems Corp and Call Compliance, Inc. [Incorporated by reference to Exhibit 99.5 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.28		Employment Agreement dated September 30, 2005 between Call Compliance, Inc. and Barry Brookstein. [Incorporated by reference to Exhibit 10.35 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.29		First Amendment to Employment Agreement dated December 1, 2001, dated September 30, 2005, between Call Compliance, Inc. and Barry Brookstein. [Incorporated by reference to Exhibit 10.35 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.30		Employment Agreement dated September 30, 2005 between Call Compliance, Inc. and Dean Garfinkel. [Incorporated by reference to Exhibit 10.36 to Amendment Number 1 to our Registration Statement on Form SB-2/A, filed with the SEC on August 11, 2006.]
10.31		First Amendment to Employment Agreement dated December 1, 2001, dated September 30, 2005, between Call Compliance, Inc. and Dean Garfinkel. [Incorporated by reference to Exhibit 10.36 to Amendment Number 1 to our Registration Statement on Form SB-2/A, filed with the SEC on August 11, 2006.]

10.32		Promissory Note, dated October 28, 2005, between Compliance Systems Corporation and Henry A. Ponzio. [Incorporated by reference to Exhibit 10.34 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.33		Secured Convertible Debenture, dated November 30, 2005, issued to Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.37 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.34		Securities Purchase Agreement, dated November 30, 2005, between Compliance Systems Corporation and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.38 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.35		Investor Registration Rights Agreement, dated November 30, 2005, between Compliance Systems Corporation and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.39 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.36		Debenture, dated November 30, 2005, issued to Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.40 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.37		Pledge and Escrow Agreement, dated November 30, 2005, between Compliance Systems Corporation and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.41 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.38		Security Agreement, dated November 30, 2005, between Compliance Systems Corporation and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.42 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.39		Lock-up Agreement, dated November 30, 2005, between Compliance Systems Corporation and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.43 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.40		Stock Purchase Agreement, dated November 30, 2005, between Compliance Systems Corporation and certain stockholders listed therein. [Incorporated by reference to Exhibit 10.45 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.41		Securities Purchase Agreement, dated March 8, 2006, between Compliance Systems Corporation and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.47 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.42		Secured Convertible Debenture, dated March 8, 2006, issued to Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.48 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.43		Pledge and Escrow Agreement, dated March 8, 2006, among Compliance Systems Corporation, Montgomery Equity Partners, Ltd. and David Gonzalez, Esq. [Incorporated by reference to Exhibit 10.49 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.44		Investor Registration Rights Agreement, dated March 8, 2006, between Compliance Systems Corporation and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.50 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.45		Insider Pledge and Escrow Agreement, dated March 8, 2006, among Compliance Systems Corporation, Montgomery Equity Partners, Ltd. and David Gonzalez, Esq. [Incorporated by reference to Exhibit 10.51 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.46		Insider Pledge and Escrow Agreement, dated March 8, 2006, among Compliance Systems Corporation, Montgomery Equity Partners, Ltd. and David Gonzalez, Esq. [Incorporated by reference to Exhibit 10.52 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.47		Security Agreement, dated March 8, 2006, between Compliance Systems Corporation and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.53 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.48		Security Agreement, dated March 8, 2006, between Telephone Blocking Services Corporation and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.54 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.49		Security Agreement, dated March 8, 2006, between CallCenter Tools, Inc. and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.55 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]

10.50		Security Agreement, dated March 8, 2006, between Jasmin Communications, Inc. and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.56 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.51		Security Agreement, dated March 8, 2006, between Call Compliance.com, Inc. and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.57 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.52		Security Agreement, dated March 8, 2006, between Call Compliance, Inc. and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.58 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.53		Termination Agreement, dated March 7, 2006, between Call Compliance, Inc. and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.59 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.54		Irrevocable Transfer Agent Instructions, dated March 8, 2006, by and between Call Compliance Systems Corporation and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.60 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.55		$150,000 Promissory Note, dated September 30, 2006, issued by Call Compliance.com, Inc. to Nascap Corp. [Incorporated by reference to Exhibit 10.61 to Amendment Number 2 to our Registration Statement on Form SB-2/A, filed with the SEC on November 2, 2006.]
10.56		Security Agreement, dated March 8, 2006 by and between Call Compliance, Inc. and Nascap Corp. [Incorporated by reference to Exhibit 10.62 to Amendment Number 2 to our Registration Statement on Form SB-2/A, filed with the SEC on November 2, 2006.]
10.57		Guaranty Agreement, dated September 30, 2006, by Compliance Systems Corporation in favor of Nascap Corp. [Incorporated by reference to Exhibit 10.63 to Amendment Number 2 to our Registration Statement on Form SB-2/A, filed with the SEC on November 2, 2006.]
10.58		Consent, dated September 30, 2006, of Montgomery Equity Partners, Ltd. to the issuance by Call Compliance, Inc. of a $150,000 Promissory Note to Nascap Corp. [Incorporated by reference to Exhibit 10.64 to Amendment Number 2 to our Registration Statement on Form SB-2/A, filed with the SEC on November 2, 2006.]
10.59		Subordination Agreement, dated September 30, 2006, by Montgomery Equity Partners, Ltd. in favor of Nascap Corp. [Incorporated by reference to Exhibit 10.65 to Amendment Number 2 to our Registration Statement on Form SB-2/A, filed with the SEC on November 2, 2006.]
10.60		Agreement, dated January 3, 2006, between Compliance Systems Corporation and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.66 to Amendment Number 3 to our Registration Statement on Form SB-2/A, filed with the SEC on January 11, 2007.]
10.61		Security Agreement, dated March 10, 2006, between the Compliance Systems Corporation and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K (Date of Report: March 10, 2006), filed with the SEC on March 10, 2006.]
10.62		Form of Subsidiary Security Agreement, dated March 10, 2006, between our subsidiaries and Montgomery Equity Partners, Ltd. [Incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K (Date of Report: March 10, 2006), filed with the SEC on March 10, 2006.]
10.63		Securities Purchase Agreement, dated March 16, 2007, between Compliance Systems Corporation and Cornell Capital Partners, LP. [Incorporated by reference to Exhibit 10.15 to our Current Report on Form 8-K (Date of Report: March 16, 2007), filed with the SEC on March 23, 2007.]
10.64		Investor Registration Rights Agreement, dated March 16, 2007, between Compliance Systems Corporation and Cornell Capital Partners, LP. [Incorporated by reference to Exhibit 10.25 to our Current Report on Form 8-K (Date of Report: March 16, 2007), filed with the SEC on March 23, 2007.]
10.65		Secured Convertible Debenture, dated March 16, 2007, issued to Cornell Capital Partners, LP. . [Incorporated by reference to Exhibit 10.35 to our Current Report on Form 8-K (Date of Report: March 16, 2007), filed with the SEC on March 23, 2007.]
10.66		Letter Agreement, effective as of December 6, 2007, among Compliance Systems Corporation and YA Global Investments, LLC and Montgomery Equity Partners, LP. [Incorporated by reference to Exhibit 10.67 to our Current Report on Form 8-K (Date of Report: December 12, 2007), filed with the SEC on December 12, 2007.]
10.67		Letter Agreement, effective as of December 1, 2007, between Compliance Systems Corporation and The Investor Relations Group Inc. [Incorporated by reference to Exhibit 10.68 to our Current Report on Form 8-K (Date of Report: December 12, 2007), filed with the SEC on December 12, 2007.]

10.68		Pledge and Escrow Agreement, dated March 16, 2007, among Compliance Systems Corporation, Cornell Capital Partners, LP and David Gonzalez, Esq. [Incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K (Date of Report: March 16, 2007), filed with the SEC on March 23, 2007.]
10.69		Irrevocable Transfer Agent Instructions, dated March 16, 2007, among Compliance systems Corporation, Cornell Capital Partners, LP and Continental Stock Transfer & Trust Company. [Incorporated by reference to Exhibit 10.8 to our Current Report on Form 8-K (Date of Report: March 16, 2007), filed with the SEC on March 23, 2007.]
10.70		Amended and Restated Irrevocable Transfer Agent Instructions, dated March 16, 2007, among Compliance Systems Corporation, Cornell Capital Partners, LP and Continental Stock Transfer & Trust Company. [Incorporated by reference to Exhibit 10.9 to our Current Report on Form 8-K (Date of Report: March 16, 2007), filed with the SEC on March 23, 2007.]
10.71		Form of Debentures sold in September 2007. [Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007, filed with the SEC on November 14, 2007.]
10.72		Letter of Compliance Systems Corporation, dated August 7, 2007, addressed to Cornell Capital Partners, LP. [Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007, filed with the SEC on November 14, 2007.]
10.73		Form of Option Agreement, dated as of January 4, 2008, with respect to options granted by Compliance Systems Corporation to Dean Garfinkel (20,000,000 shares) and Barry M. Brookstein (10,000,000 shares). [Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (Date of Report: January 4, 2008), filed with the SEC on February 15, 2008.]
10.74		Securities Purchase Agreement dated as of May 6, 2008, between Compliance Systems Corporation and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.75		Secured Convertible Debenture of Compliance Systems Corporation, dated May 6, 2008, in the principal amount of $300,000 and payable to Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.76		Security Agreement dated as of May 6, 2008, between Compliance Systems Corporation and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.77		Limited Non-Recourse Guaranty Agreement dated as of May 6, 2008, between Dean Garfinkel and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.78		Limited Non-Recourse Guaranty Agreement dated as of May 6, 2008, between Barry Brookstein and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.79		Limited Non-Recourse Guaranty Agreement, dated as of May 6, 2008, between Spirits Management, Inc. and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.6 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.80		Stock Pledge Agreement, dated as of May 6, 2008, between (sic) Agile Opportunity Fund, LLC, Dean Garfinkel and Barry Brookstein. [Incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.81		Warrant Certificate of Compliance Systems Corporation, dated as of May 6, 2008, registered in the name of Cresta Capital Strategies, LLC. [Incorporated by reference to Exhibit 10.8 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.82		Secured Convertible Debenture of Compliance Systems Corporation, dated September 2, 2008, in the principal amount of $300,000 and payable to Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K (Date of Report: September 2, 2008), filed with the SEC on September 5, 2008.]
10.83		Warrant Certificate of Compliance Systems Corporation, dated as of September 2, 2008, registered in the name of Cresta Capital Strategies, LLC. [Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K (Date of Report: September 2, 2008), filed with the SEC on September 5, 2008.]

10.84		Consulting Agreement, executed as of December 1, 2008, between Compliance Systems Corporation and Summit Trading Limited. [Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (Date of Report: December 1, 2008), filed with the SEC on December 5, 2008.]
10.85		Agreement to Amend and Restate Secured Convertible Debentures, dated as of January 31, 2009, between Compliance Systems Corporation and Agile Opportunity Fund, LLC [Incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.86		Amended and Restated Secured Convertible Debenture of Compliance Systems Corporation, dated May 6, 2008, in the principal amount of $300,000 and payable to Agile Opportunity Fund, LLC [Incorporated by reference to Exhibit 10.6 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.87		Amended and Restated Secured Convertible Debenture of Compliance Systems Corporation, dated September 2, 2008, in the principal amount of $300,000 and payable to Agile Opportunity Fund, LLC[Incorporated by reference to Exhibit 10.7 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.88		Waiver and Standstill Agreement, dated as of January 26, 2009, between Compliance Systems Corporation, Call Compliance, Inc. and Nascap Corp [Incorporated by reference to Exhibit 10.8 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.89		Loan Modification Agreement, dated as of March 31, 2009, among Compliance Systems Corporation, Call Compliance, Inc. and Nascap Corporation [Incorporated by reference to Exhibit 10.12 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.90		Amended and Restated Promissory Note of Call Compliance, Inc., dated March 31, 2009, in the principal amount of up to $750,000 and payable to Nascap Corporation [Incorporated by reference to Exhibit 10.13 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.91		Form of Class A Warrant Certificate of Compliance Systems Corporation registered in the name of Nascap Corp. [Incorporated by reference to Exhibit B to the Loan Modification Agreement made Exhibit 10.12 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.92		Form of Class B Warrant Certificate of Compliance Systems Corporation registered in the name of Nascap Corp. [Incorporated by reference to Exhibit C to the Loan Modification Agreement made Exhibit 10.12 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.93		Promissory Note of Call Compliance, Inc., dated as of March 3, 2009, in the principal amount of $50,000 and payable to Barry Brookstein [Incorporated by reference to Exhibit 10.16 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.94		Corporate Guaranty, dated March 3, 2009, of Compliance Systems Corporation in favor of Barry Brookstein [Incorporated by reference to Exhibit 10.17 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.95		Promissory Note of Compliance Systems Corporation, dated as of March 2, 2009, in the principal amount of $24,750 and payable to Pretect, Inc [Incorporated by reference to Exhibit 10.18 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.96		Agreement and Plan of Merger, dated as of February 9, 2010, with Execuserve Corp, CSC/Execuserve Acquisition Corp, W.Thomas Eley, James A. Robinson, Jr., and Robin Rennockl [Incorporated by reference to Exhibit 10.18 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 5, 2010].

10.97		Purchase of Software and Intellectual Property, dated April 7, 2010, from Thomas Joseph Koty in exchange for Restricted shares and warrants [Incorporated by reference to Exhibit 10.18 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.98		Cancellation of Lease, dated April 13, 2010, [Incorporated by reference to Exhibit 10.18 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
14.1		Code of Ethics. [Incorporated by reference to Exhibit 14.1 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
16.1		Letter of BP Audit Group, PLLC, dated October 10, 2007, addressed to the SEC. [Incorporated by reference to Exhibit 16.1 to our Current Report on Form 8-K (Date of Report: October 4, 2007), filed with the SEC on October 10, 2007.]
21.1		Subsidiaries. [Incorporated by reference to Exhibit 21.1 to our Annual Report on Form 10-KSB for the year ended December 31, 2007, filed with the SEC on March 28, 2008.]
31.1		Rule 13a-14(a)/15d-14(a) Certification of Dean Garfinkel.
31.2		Rule 13a-14(a)/15d-14(a) Certification of Barry M. Brookstein
32.1		Section 1350 Certification of Dean Garfinkel.
32.2		Section 1350 Certification of Barry M. Brookstein.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Compliance System Corporation and Subsidiaries:

We have audited the accompanying consolidated balance sheets of Compliance System Corporation and Subsidiaries (the "Company") as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ deficiency, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered continued losses from operations since inception, and as of December 31, 2009, had stockholders’ and working capital deficiencies of $2,297,933 and $2,147,255, respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Holtz Rubenstein Reminick LLP

Melville, New York

May 17, 2010

F-1

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
	2009			2008
ASSETS:
Current assets:
Cash	$	26,195		$	208,222
Accounts receivable, net		134,774			82,895
Prepaid expenses and other current assets		142,172			231,312
Total current assets		303,141			522,429

Property, equipment and capitalized software costs, net		71,048			98,225

Deferred loan costs, net		11,560			66,411
Patents, net		18,785			20,285
Security deposits		10,600			18,100

Total Assets	$	415,134		$	725,450

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY:
Current liabilities:
Short-term and demand notes payable	$	379,265		$	310,925
Accounts payable and accrued expenses		842,924			414,255
Accrued officers’ compensation		335,000			—
Secured convertible debenture and accrued interest thereon		892,275			587,293
Current maturities of long-term debt		933			50,933
Total current liabilities		2,450,396			1,363,406

Long-term debt, less current maturities		209,000			—
Deferred service revenue and other deferred credits		53,670			57,006

Total liabilities		2,713,067			1,420,412

Commitments and contingencies

Stockholders’ deficiency:
Convertible Preferred Stock, $0.001 par value:
Series A: 2,500,000 shares authorized, 2,293,750 and 2,500,000 shares issued and outstanding, respectively		2,294			2,500
Series B: 1,500,000 shares authorized, 1,250,000 shares issued and outstanding		1,250			1,250
Series C: 2,000,000 shares authorized, 1,828,569 shares issued and outstanding		1,829			1,829
Common stock, $.001 par value; 2,000,000,000 shares authorized, 194,611,662 and 169,286,662 shares issued and outstanding, respectively		194,612			169,287
Additional paid-in capital		5,738,510			5,843,999
Accumulated deficit		(8,236,428	)		(6,713,827	)
Total stockholders’ deficiency		(2,297,933	)		(694,962	)

Total liabilities and stockholders’ deficiency	$	415,134		$	725,450

See accompanying notes to consolidated financial statements.

F-2

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2009			2008
Revenues	$	1,230,236		$	1,857,242
Cost of revenues		579,914			930,169

Gross margin		650,322			927,073

Operating expenses:
Selling, general and administrative expenses		1,749,635			2,142,180
Interest expense		266,025			143,431
Amortization of loan costs and related financing expense		157,263			75,687

Total operating expenses		2,172,923			2,361,298

Operating loss		(1,522,601	)		(1,434,225	)

Gain on extinguishment of debt, net		—			8,525

Net loss		(1,522,601	)		(1,425,700	)

Preferred dividends		150,000			150,000

Loss attributable to common shareholders	$	(1,672,601	)	$	(1,575,700	)

Basic and diluted per share data:
Loss per share	$	(.01	)	$	(.01	)

Weighted average shares outstanding		176,066,525			137,575,649

See accompanying notes to consolidated financial statements.

F-3

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ (DEFICIENCY) EQUITY

Years Ended December 31, 2009 and 2008

	Preferred Stock																		Total
	Series A			Series B		Series C			Shares		Amount		Additional Paid-In Capital			Accumulated Deficiency			Shareholders’ Equity (Deficiency)

Balances, January 1 ,2008	$	2,500		$	1,250	$	1,886			128,149,238	$	128,149	$	5,588,900		$	(5,288,127	)	$	434,558

Cashless exercise of warrants		—			—		—			2,756,757		2,757		(2,757	)		—			—
Common stock issued for services		—			—		—			27,666,667		27,667		162,333			—			190,000
Common stock issued to secured convertible debenture purchaser		—			—		—			5,000,000		5,000		89,000			—			94,000
Conversion of 57,140 shares of Series C Preferred Stock to common stock		—			—		(57	)		5,714,000		5,714		(5,657	)		—			—
Stock based compensation value		—			—		—			—		—		162,000			—			162,000
Warrant issuance value		—			—		—			—		—		180			—			180
Preferred dividends		—			—		—			—		—		(150,000	)		—			(150,000	)
Net loss		—			—		—			—		—		—			(1,425,700	)		(1,425,700	)
Balances, December 31, 2008		2,500			1,250		1,829			169,286,662		169,287		5,843,999			(6,713,827	)		(694,962	)

Common stock issued for services		—			—		—			100,000		100		4,900			—			5,000
Common stock issued to secured convertible debenture purchaser		—			—		—			4,600,000		4,600		57,200			—			61,800
Warrant issuance value		—			—		—			—		—		2,830			—			2,830
Conversion of 206,250 shares of Series A Preferred Stock to common stock		(206	)							20,625,000		20,625		(20,419	)		—			—
Preferred Dividends		—			—		—			—		—		(150,000	)		—			(150,000	)
Net loss		—			—		—			—		—		—			(1,522,601	)		(1,522,601	)
Balances, December 31, 2009	$	2,294		$	1,250	$	1,829			194,611,662	$	194,612	$	5,738,510		$	(8,236,428	)	$	(2,297,933	)

See accompanying notes to consolidated financial statements.

F-4

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,522,601	)	$	(1,425,700	)
Adjustments to reconcile net loss to net cash used by operating activities:
(Gain) on extinguishment of debt		—			(8,525	)
Depreciation of property and equipment		36,113			108,694
Amortization of deferred charges and intangibles		228,764			169,943
Value of warrants expensed		1,430			—
Interest/penalty accrued and not paid or imputed on related party transactions		126,491			44,875
Stock based compensation		—			162,000
Changes in assets and liabilities:
Accounts receivable		(51,879	)		10,504
Prepaid expenses and other current assets		50,114			35,182
Accounts payable and accrued expenses		308,419			81,093
Accrued officers’ compensation		335,000			(60,000	)
Deferred credits		(3,336	)		(911	)
Total adjustments		1,031,116			542,855
Net cash used by operating activities		(491,485	)		(882,845	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits and other		7,500			—
Payments for property, equipment and capitalized software		(8,936	)		(56,284	)
Net cash used by investing activities		(1,436	)		(56,284	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred loan costs		(21,222	)		(105,500	)
Proceeds from issuance of secured convertible debentures		180,000			600,000
Net increases in short-term and demand loans		152,086			(32,263	)
Proceeds from related party loans		50,000			—
Preferred stock dividends		—			(150,000	)
Repayments of long-term debt		(50,000	)		(85,968	)
Net cash provided by financing activities		310,864			226,269

NET DECREASE IN CASH		(182,027	)		(712,860	)
CASH – beginning of year		208,222			921,082
CASH – end of year	$	26,165		$	208,222

SUPPLEMENTAL INFORMATION:
Interest paid	$	139,533		$	124,442

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services	$	5,000		$	190,000
Value of common stock issued to secured convertible debenture purchaser	$	61,800		$	94,000
Conversion of Series A Preferred Stock to common stock	$	206,250		$	57,140
Insurance premiums financed	$	31,004		$	32,279
Preferred Dividends declared and approved, but not paid	$	150,000		$	—
Issuance of promissory note to vendor	$	24,750		$	—
Value of warrants issued to debt holders	$	1,400		$	—
Cashless exercise of stock warrants	$	—		$	2,757
Value of warrants issued to investment banker	$	—		$	180

See accompanying notes to consolidated financial statements.

F-5

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.	Organization, Business Description and Going Concern

A.	Organization and Business Description

Compliance Systems Corporation (the “Company”) was incorporated in Nevada on November 17, 2003 under the name “GSA Publications, Inc.” (“GSA”). On February 10, 2006, the Company’s business predecessor, Compliance Systems Corporation, a corporation incorporated in Delaware on November 7, 2002 (“CSC”) pursuant to a corporate reorganization of several closely related companies that had commenced operations in December 2001, was merged with and into GSA (the “CSC/GSA Merger”). CSC was treated as the surviving corporation of the CSC/GSA Merger for accounting purposes due to the fact that the prior owners of CSC acquired approximately 85% of the surviving corporation’s stock as a result of the CSC/GSA Merger. Following the effectiveness of the CSC/GSA Merger, the surviving corporation changed its name to “Compliance Systems Corporation” and, directly and through the Company’s wholly-owned subsidiaries, began operating the businesses previously conducted by CSC. Unless the context otherwise implies, the term “Company” in these financial statements includes Company and its wholly-owned subsidiaries on a consolidated basis.

The Company, with headquarters in Glen Cove, New York, is in the business of providing tools to assist telemarketing companies in complying with federal and state “Do-Not-Call” laws and regulations collectively (“DNC regulations”). The Company’s patented TeleBlock technology allows telemarketers to automatically screen and block outbound calls in real-time against federal, state, third-party and in-house do-not-call lists. In addition, the Company markets various on-line guides, providing up-to-the-minute e-mail alerts of new and proposed telemarketing legislation as well as access to regularly updated information regarding DNC regulations governing the domestic and Canadian teleservices industries. The Company also offers consultation services to telemarketing companies focusing on their technologies, procedures and policies to determine whether the telemarketer is in compliance with the various telemarketing laws and regulations. Under generally accepted accounting principles, the Company operates in a single business segment.

B.	Liquidity and Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered continued losses from operations since its inception. At December 31, 2009, the Company had stockholders’ and working capital deficiencies of $2,297,933 and $2,147,255, respectively. The Company’s stockholders’ and working capital deficiencies at December 31, 2008 were $694,962 and $840,977, respectively. Between May and September 2008, the Company sold secured convertible debentures in the aggregate principal amount of $600,000 and 5,000,000 shares of the common stock, par value $0.001 per share (the “Common Stock”), of the Company for total gross proceeds of $600,000. Additional secured convertible debentures were sold between September and November 2009 in the aggregate principal amount of $180,000 and 4,600,000 shares of the Common Stock of the Company for total gross proceeds of $180,000. The Company’s debt holder also extended the maturity date based on new notes issued in February 2010 for the secured convertible debentures sold during 2008. The 2008 debentures were originally scheduled to mature on November 6, 2009.

The prolonged trend of net losses incurred over the last seven fiscal years raise substantial doubt about the Company’s ability to continue as a going concern. Such continuation is dependent upon the Company’s ability to obtain additional financing, increase revenues, control costs and operate profitably. To this end, the Company has retained an investment banking firm to explore acquisition opportunities that may diversify the Company’s existing range of services, as well as to assist the Company in obtaining additional financing as required. There is no assurance that the Company will be successful in attaining these objectives or that attaining such objectives will result in operating profits, positive cash flows or an overall improvement in the Company’s financial position in future periods. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

F-6

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

2.	Summary of Significant Accounting Policies

A.	Use of Estimates

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

Cash

At certain times, bank balances may exceed coverage provided by the Federal Deposit Insurance Corporation, however, due to the size and strength of the financial institutions where such balances are held, such exposure to loss is considered minimal.

C.	Accounts Receivable

Accounts receivable historically have not required any significant write-offs for credit losses. Based on management’s evaluation of collectibility, an allowance for doubtful accounts of approximately $8,710 and $8,950 at December 31, 2009 and 2008, respectively, has been provided applicable to certain peripheral service and commission receivables. For the Company’s TeleBlock services, the Company’s end-users remit their payments to telephone carriers as part of their monthly payments. The telephone carriers are billed for the applicable portion of these payments pursuant to contractual arrangements with a very large connectivity and database provider, such database including among other things the Do-Not-Call lists. Monthly remittances are made to the Company by this connectivity and database provider. Based on the financial strength of this provider, the Company does not provide an allowance for doubtful accounts for these receivables.

D.	Property, Equipment, Depreciation and Amortization

Fixed assets are stated at cost less accumulated depreciation. These assets, including assets acquired under capital leases, are depreciated on a straight-line basis over their estimated useful lives (generally two to five years). Leasehold improvements are amortized over 39 to 55 months. Depreciation and amortization expenses are classified according to their applicable operating expense categories on the consolidated statements of operations. Repairs and maintenance are expensed as incurred. Renewals and betterments are capitalized. When fixed assets are retired or disposed of, the related cost and accumulated depreciation or amortization are removed from the accounts and any gain or loss is recognized in operations.

E.	Capitalized Software Cost and Amortization

Included in fixed assets is the capitalized cost of internal-use software, including software used to upgrade and enhance processes supporting the Company’s business. The Company capitalizes costs incurred during the application development stage related to the development of internal-use software and amortizes these costs over the estimated useful life of five years. Costs incurred related to design or maintenance of internal-use software is expensed as incurred.

F.	Amortization of Deferred Loan and Related Costs

Loan costs of $62,680 were incurred in connection with the sale and issuance in May 2008 of a convertible debenture (the “Initial Agile Debenture”) in the principal amount of $300,000 to Agile Opportunity Fund, LLC (“Agile”). These deferred loan costs are being amortized to loan cost amortization over the eighteen month term of the Initial Agile Debenture. Additional loan costs of $43,000 were incurred in connection with the sale and issuance in September 2008 of a second convertible debenture (the “Additional Agile Debenture”) in the principal amount of $300,000 to Agile. These additional deferred loan costs are being amortized over fourteen months, the term of the Additional Agile Debenture. As the Agile Initial Debenture and/or Agile Additional Debenture (Collectively, the “Agile Debentures”) are converted into Common Stock, if ever, the proportionate amounts of unamortized loan costs related to the amounts of the Agile Debentures so converted will be expensed. Loan cost amortization charged to expense with respect to the Agile Debentures was $39,269 and $66,411 for the twelve months ended December 31, 2008 and 2009, respectively. These costs were fully amortized as of December 31, 2009.

F-7

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Additional loan costs were incurred in connection with the sale and issuance in September and November 2009 convertible debentures (2009 Debentures) in the principal amount of $180,000 to Agile Opportunity Fund, LLC (“Agile”). The Company incurred loan costs of $15,722 on the May 2009 debenture in the amount of $100,000 that matured on March 21, 2010. Additional loan costs of $5,500 were incurred on the November 2009 debenture that matures on May 22, 2010. These deferred loan costs totaling $21,220 are being amortized over the respective terms of the debentures. Loan cost amortization charged to expense with respect to the 2009 Debentures was $9,662 for the twelve months ended December 31, 2009. The balance of $11,560 will be charged to expense in 2010.

Patents

The Company owns the TeleBlock Do-Not-Call blocking patent, which is recorded at cost and is being amortized over its expected 15-year life on a straight-line basis. The Company also has an approved registration for its patent in Europe, which is being amortized over 17.75 years through September 2024. The weighted average expected life of the patents at December 31, 2009 is approximately 13.5 years.

H.	Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate such review include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets used in operations, impairment losses only are recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted cash flows. Impairment losses are measured as the difference between the carrying amount and estimated fair value. Long-lived assets are considered held for sale under applicable criteria. No assets were held for sale at December 31, 2009 and 2008. There are no impairment charges in the accompanying financial statements.

I.	Deferred Service Revenue, Sub-Lease Income and Other Deferred Credits

Deferred revenue applicable to annual regulatory guide and registration guide service contracts is recorded when payments are received, generally by credit card, and is amortized ratably to income over the service period, typically twelve months. Deferred sub-lease revenue is recognized over the one-year term of the applicable sub-lease. Deferred rent expense, applicable to the Company’s renewed premises lease, represents the excess of straight-line rent expense over rental payments made.

J.	Share Based Payment Arrangements

The Company accounts for share based payment arrangements in accordance with guidance provided by the Financial Accounting Standards Board Accounting Standards Codification (“ASC”). This guidance addresses all forms of share-based payment awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights, as well as share grants and other awards issued to employees and non-employees under free-standing arrangements. These awards are recorded at costs that are measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest and will result in a charge to operations.

Revenues

The Company earns a fee for each telephone solicitor’s call attempt which generates a query to a database of “Do Not Call” telephone numbers. These inquiries are first routed through telephone carriers and then to a database distributor and the volume of queries is tracked by the distributor and such data is available to the Company for monitoring. Distributors submit monthly remittances together with the related monthly activity reports. The Company has the contractual right to audit such reports. The Company records its revenues based on the remittances and reports submitted. Any applicable adjustments, which historically have not been significant, are recorded when billed, upon resolution of the difference with the distributor.

F-8

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

L.	Cost of Revenues

The Company’s cost of revenues is comprised of fees paid to distributors of its patented technology and its database administrators as well as depreciation of the capitalized costs of software used to maintain the databases.

M.	Advertising

All advertising costs are expensed as incurred. Such costs were $216,991 and $243,692 for the years ended December 31, 2009 and 2008, respectively.

N.	Income Taxes

The Company's policy for recording interest and penalties associated with audits is to record such items as a component of income before income taxes. Penalties are recorded in other expense and interest paid or received is recorded in interest expense or interest income, respectively, in the statement of operations. There were no amounts accrued for penalties or interest as of or during the years ended December 31, 2009 and 2008. The Company does not expect its unrecognized tax benefit position to change during the next twelve months. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its current position.

Net operating losses (“NOLs”) may be utilized under certain conditions as a deduction against future income to offset against future taxes. Internal Revenue Code (“IRC”) Section 382 and the regulations promulgated under IRC Section 382 limit the utilization of NOLs due to ownership changes. If it is determined that a change in control has taken place, utilization of the Company’s NOLs will be subject to severe limitations in future periods, which would have an effect of eliminating the future tax benefits of the NOLs. Income tax benefits resulting from net losses incurred for the twelve months ended December 31, 2009 and 2008 were not recognized as the Company’s annual effective tax rate for both periods was estimated to be 0%.

The Company sustained taxable losses of approximately $1,224,000 and $1,394,000 for the years ended December 31, 2009 and 2008, respectively.

O.	Loss Per Share

Basic and diluted loss per common share is computed on a historical basis by dividing net loss by the weighted average number of common shares actually outstanding. Due to losses, 46,139,514 shares of Common Stock issuable upon exercise of outstanding warrants and 45 million shares of Common Stock issuable upon exercise of outstanding options, as well as an aggregate of 537,231,900 shares of Common Stock issuable upon the conversion of outstanding Preferred Stock, are anti-dilutive, and accordingly, are not included in the calculation of diluted loss per share.

P.	Fair Value of Financial Instruments

The carrying amounts of cash, accounts receivable, current liabilities and long-term debt reported on the balance sheet approximate their fair value. The fair value of accounts receivable and current liabilities approximate their book value due to the short maturity of those items. With respect to long-term debt, the Company believes the fair value approximates book value based on the level of credit risk assumed by the applicable lender.

F-9

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Q.	Recent Accounting Pronouncements

In March 2008, FASB issued accounting guidance which amends and expands the disclosure requirements for derivative instruments to require qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The guidance is effective for the Company beginning with the Company’s fiscal year ending December 31, 2009. The Company is required to increase disclosures in the financial statements related to derivative instruments held by the Company, if any.

In April 2008, FASB issued accounting guidance for determining the useful lives of intangible assets. The factors that should be considered in developing renewal or extension assumptions used to determine the useful life of an intangible asset were outlined. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The adoption of the guidance by the Company did not have a material effect on the Company’s financial statements.

In June 2008, FASB issued guidance for determining 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. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The adoption of this guidance by the Company did not have a material effect on the Company’s financial statements.

In June 2008, the Emerging Issues Task Force (“EITF”) provided guidance on how to determine if certain instruments (or embedded features) are considered indexed to a company’s own stock, including instruments similar to warrants issued by a company to purchase its stock. This guidance requires companies to use a two-step approach to evaluate an instrument’s contingent exercise and settlement provisions in determining whether the instrument should be indexed to its own stock. Although it is effective for fiscal years beginning after December 15, 2008, the guidance provides that any outstanding instrument at the adoption date is required to be restated for accounting purposes through a cumulative adjustment to retained earnings as of the adoption date. The adoption of this guidance did not have a material effect on the Company’s financial statements.

In May 2009, FASB issued guidance which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date of financial statements but before the financial statements are issued or available to be issued. This guidance requires the disclosure of the date through which an entity has evaluated subsequent events, as well as whether the date is the date the financial statements were issued or the date the financial statements were available to be issued. The guidance is effective for interim and annual periods ending after June 15, 2009 and was adopted by the Company in the second quarter of 2009. The adoption of this guidance did not have any impact on the Company’s results of operations or financial position.

In June 2009, FASB established the FASB Accounting Standards Codification (“ASC”) as the single source of authoritative U.S. accounting and reporting standards for non-governmental entities. In addition to guidance issued by the Securities and Exchange Commission (“SEC”), the ASC significantly changes the way financial statement preparers, auditors and academics perform accounting research. ASC is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The establishment of ASC did not have any material impact on the Company’s results of operations or financial position.

Other accounting guidance that has been issued or proposed by FASB and other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon their respective adoptions.

F-10

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

3.	Property, Equipment and Capitalized Software Cost

Major categories of property, equipment and capitalized software cost at December 31, 2009 and 2008 consist of the following:

	Estimated	December 31,
	Useful Life	2009		2008
Furniture and fixtures	5 years	$	379,593	$	370,057
Leasehold improvements	39-55 months		14,048		14,048
Capitalized software cost	2-5 years		505,099		505,699
Total, at cost			898,740		889,804
Less: Accumulated depreciation and amortization			827,692		791,579
Property, equipment and capitalized software cost, net		$	71,048	$	98,225

Depreciation and amortization expense of property, equipment and capitalized software was $36,113 and $108,694 for the years ended December 31, 2009 and 2008, respectively.

Patents

Patents at December 31, 2009 and 2008 consist of the following:

	Remaining	December 31,
	Useful Life	2009		2008
European patent	14.8 years	$	19,963	$	19,963
United States patent	7.0 years		6,500		6,500
Total, at cost			26,463		26,463
Less: Accumulated amortization			7,678		6,178
Patents, net		$	18,785	$	20,285

The European patent was approved in February 2006. Amortization expense was $1,500 and $1,500 for the years ended December 31, 2009 and 2008, respectively. Estimated annual amortization for both patents is approximately $1,500 per year through 2016, $1,070 per year thereafter through 2023 and $792 in 2024.

5.	Short-Term and Demand Notes Payable

A.	Secured Demand Note

In September 2006, the Company’s principal subsidiary executed a secured $150,000 promissory note and related security agreement with a third-party entity. Interest at 12% per annum is payable monthly in arrears and the note principal is due on demand. The note was collateralized by the accounts receivable of the subsidiary’s principal customers and is unconditionally guaranteed by the Company.

As of March 31, 2009, the Company entered into a Loan Modification Agreement with Nascap Corp (“Nascap”). The original Nascap note was amended and restated as a revolving line of credit promissory note (“Nascap Restated Note”) in the principal amount not to exceed $750,000. The Nascap Restated Note contains the same terms and conditions as the original note, except for the revolving line of credit nature of the debt. As consideration for entering into the Loan Modification Agreement, the Company agreed to issue Nascap twenty Class A and twenty Class B warrants for each $1.00 of principal outstanding under the Nascap Restated Note on April 30, 2009. Each Class A and Class B warrant entitles the holder to purchase one share of the Company’s common stock at $0.05 per share. The Class B warrants require the holder to pay the exercise price in the form of cancellation of amounts outstanding under the Nascap Restated Note prior the payment of the exercise price in the form of cash. Accrued and unpaid interest on the Nascap note totaled $10,500 at December 31, 2009. At December 31, 2009 and 2008, respectively, $350,000 and $150,000 was outstanding on this note.

F-11

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

B.	Unsecured Demand Note Payable

The Company had outstanding unsecured demand loans due a stockholder in the aggregate principal amount of $150,000 at December 31, 2008. This demand loan bore interest at the rate of 18% per annum, payable monthly in arrears.

As of June 24, 2009, the Company entered into a Promissory Note Exchange whereby Ponzio delivered and assigned to the Company the promissory note of CCI, dated April 27, 2006, in the principal amount of $150,000 and payable to Ponzio in exchange for the Company’s issuing and delivering to Ponzio the Company’s 18% Senior Subordinated Secured Promissory Note, dated June 24, 2009, in the principal amount of $150,000 and payable to Ponzio (the “Ponzio New Note”).

The Ponzio New Note has a stated maturity of January 1, 2011 and bears interest at the rate of 18% per annum (20%, in the case of a default under the Ponzio New Note), with interest payable monthly in arrears. Accordingly, the balance outstanding as of December 31, 2009 is included in long term debt.

C.	Short-Term Insurance Premium Financing

At December 31, 2009 and 2008, the Company had an outstanding balance of $10,515 and $10,925, respectively, on loans utilized to fund certain financed insurance premiums. Both loans are payable over 9 month terms and are being paid according to their respective terms.

D. Pretect Note

The Pretect obligation arose from consulting services provided by Pretect in connection with the Company’s review of its internal control over financial reporting and disclosure controls and procedures. The Pretect Note provides for no interest (except in the event of default) and repayment of the principal amount in twelve equal monthly installments, commencing on April 1, 2009. The Balance outstanding as of December 31, 2009 is $8,250.

6. Agile Debentures

A. Agile Original 2008 Debentures –

On May 6, 2008, the Company entered into a Securities Purchase Agreement (the “Agile Purchase Agreement”) with Agile Opportunity Fund LLC (“Agile”). The Agile Purchase Agreement contemplated the Company’s immediate sale to Agile of a secured convertible debenture of the Company (the “Initial Original Agile Debenture”) in the original principal amount of $300,000 and having a maturity date of November 6, 2009, and a potential sale of a second secured convertible debenture (the “Additional Original Agile Debenture” and, collectively with the Initial Original Agile Debentures, the “Agile Original 2008 Debentures”) in the same original principal amount and having the same maturity date as the Initial Original Agile Debenture. The purchase price of each of the Agile Original 2008 Debentures was $300,000. The Agile Purchase Agreement further provided that, for no further consideration, the Company issue to Agile 3 million shares (each, an “Initial Original Equity Incentive Share”) of Company common stock in connection with the sale and issuance of the Initial Original Agile Debenture and an additional 2 million shares (each, an “Additional Original Equity Incentive Share” and, collectively with the Initial Original Equity Incentive Shares, the “Agile Original Equity Incentive Shares”) of Company common stock in connection with the sale and issuance of the Additional Original Agile Debenture.

The Agile Original 2008 Debentures bear interest at the rate of 15% per annum, payable monthly, although the Agile Original 2008 Debentures further provide that, in addition to interest, Agile is entitled to an additional payment, at maturity or whenever principal is paid, such that Agile’s annualized return on the amount of principal paid equals 30%. The principal and all accrued and unpaid interest under the Agile Original 2008 Debentures are, at the option of Agile, convertible into shares of Company common stock at a conversion price of $0.05 per share (subject to an anti-dilution adjustment).

F-12

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

The Company’s obligations under the Agile Original 2008 Debentures are, with a limited exception, secured by a first priority security interest in all of the Company’s assets and the Company’s two executive officers and sole members of the Company’s board of directors, Dean Garfinkel and Barry M. Brookstein, as well as an entity wholly-owned by Brookstein, have provided limited non-recourse guarantees and pledges of all of their shares of Company serial preferred stock as further security for the full satisfaction of all of the Company’s obligations under the Agile Original 2008 Debentures.

The Initial Equity Incentive Shares were collectively valued at $66,000. The cost of these shares was recorded as a discount on the Initial Original Agile Debenture and is being amortized over the Initial Original Agile Debenture’s eighteen month term. The Additional Original Equity Incentive Shares were valued at $28,000 and such cost is being amortized over the fourteen month remaining term of the Agile Original 2008 Debentures.

Effective as of January 31, 2009, the Company entered into an Agreement to Amend and Restate with Agile pursuant to which the Agile Original 2008 Debentures were amended to allow the Company, in certain circumstances, a five business day cure period prior to the formal declaration of an “Event of Default.” Prior to this amendment, Agile was not required to formally notify the Company before the declaration of an Event of Default.

B. Agile September 2009 Debenture –

On September 21, 2009, the Company sold and issued to Agile a Secured Convertible Debenture (the “Agile September 2009 Debenture”) in the original principal amount of $100,000 pursuant to the Omnibus Amendment and Securities Purchase Agreement, dated as of September 18, 2009 (the “Agile September 2009 Securities Purchase Agreement”), between the Company and Agile. The Agile September 2009 Debenture was rolled into a new note effective February 2010.

The Agile September 2009 Debenture is to bear interest at the rate of 15% per annum, payable monthly, although the Agile September 2009 Debenture further provides that, in addition to interest, Agile is entitled to an additional payment, at maturity or whenever principal is paid, such that Agile’s annualized return on the amount of principal payment so paid equals 30%. The principal and all accrued and unpaid interest under the Agile September 2009 Debenture are, at the option of Agile, convertible into shares (each, an “Agile September 2009 Debenture Share”) of Company common stock at a conversion price of $0.05 per share (subject to anti-dilution adjustment).

The Company’s obligations under the Agile September 2009 Debenture are secured by all of its assets and are subject to limited non-recourse guarantees of Dean R. Garfinkel, the Company’s chief executive officer, Barry M. Brookstein, the Company’s chief financial officer, and an entity in which Brookstein is the sole owner. Such guarantees have been secured by a pledge of the preferred stock owned by the guarantors.

C. Agile November 2009 Debenture –

On November 23, 2009, the Company sold and issued to a Secured Convertible Debenture (the “Agile November 2009 Debenture”) in the original principal amount of $80,000 pursuant to the Second Omnibus Amendment and Securities Purchase Agreement, dated as of November 23, 2009 (the “Agile November 2009 Securities Purchase Agreement”), between the Company and Agile. The Agile November 2009 Debenture was converted to a new note effective February 2010..

The Agile November 2009 Debenture is to bear interest at the rate of 15% per annum, payable monthly, although the Agile November 2009 Debenture further provides that, in addition to interest, Agile is entitled to an additional payment, at maturity or whenever principal is paid, such that Agile’s annualized return on the amount of principal payment so paid equals 30%. The principal and all accrued and unpaid interest under the Agile November 2009 Debenture is, at the option of Agile, convertible into shares (each, an “Agile November 2009 Debenture Share”) of Common Stock at a conversion price of $0.05 per share (subject to anti-dilution adjustment).

F-13

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

The Company’s obligations under the Agile November 2009 Debenture are secured by all of the assets of the Corporation and are subject to limited non-recourse guarantees of Dean R. Garfinkel, the Company’s chief executive officer, Barry M. Brookstein, the Company’s chief financial officer, and an entity in which Mr. Brookstein is the sole owner. Such guarantees have been secured by a pledge of the preferred stock owned by the guarantors.

The total gross consideration received from Agile in connection with the sale and issuance of the Agile November 2009 Debenture, the extension of the maturity date of the 2008 Debentures and the issuance of the 2.6 million Agile November 2009 Equity Incentive Shares was $80,000.

7.	Long-Term Debt

Long-term debt at December 31, 2009 and 2008 consists of the following:

	December 31,
	2008		2008
Notes payable and accrued interest to officer/stockholder (A)	$	53,183	$	933
Other unsecured debt, due March 31, 2009		—		50,000
Other secured debt and accrued interest (B)		156,750		—
Total long-term debt		209,933		50,933
Current maturities of long-term debt		933		50,933
Long-term debt less current maturities	$	209,000	$	—

(A) Brookstein Promissory Note Exchange Agreement -

As of June 24, 2009, the Company entered in to a Promissory Note Exchange Agreement (the “Brookstein Exchange Agreement”) with Barry M. Brookstein (“Brookstein”) and simultaneously consummated the transactions contemplated by the Brookstein Exchange Agreement. Brookstein, a director and principal stockholder of the Company, is the Company’s chief financial officer. Under the Brookstein Exchange Agreement, Brookstein delivered and assigned a promissory note of Call Compliance, Inc., one of the Company’s wholly-owned subsidiaries (“CCI”), dated March 3, 2009, in the principal amount of $50,000 and payable to Brookstein (the “Brookstein Original Note”) in exchange for the Company issuing and delivering to Brookstein the Company’s 18% Senior Subordinated Secured Promissory Note, dated June 24, 2009, in the principal amount of $50,000 payable to Brookstein (the “Brookstein New Note”). In connection with such exchange, the Company granted Brookstein a senior subordinated security interest (the “Brookstein Security Interest”) in all of the Company’s assets to secure the Company’s obligations under the Brookstein New Note, as evidenced and subject to the terms and conditions of a Security Agreement, dated June 24, 2009 (the “Brookstein Security Agreement”), between Brookstein and the Company. As further consideration for entering into the Brookstein Exchange Agreement, Brookstein was granted 1 million Class “A” common stock purchase warrants of the Company (each, a “Brookstein Class A Warrant”) and 1 million class “B” common stock purchase warrants of the Company (each, a “Brookstein Class B Warrant”). Each of these warrants entitles its holder to purchase one share of Company common stock at a purchase price of $0.05 per share. The Brookstein Class A Warrants and Brookstein Class B Warrants expire on June 23, 2014. If any amount (principal or interest) is outstanding under the Brookstein New Note, the purchase price upon exercise of any of the Brookstein Class B Warrants must be paid by the reduction of the amount outstanding under the Brookstein New Note.

The Brookstein Original Note was due on demand and bore interest at the rate of 18% per annum, payable monthly in arrears.

The Brookstein New Note has a stated maturity of January 1, 2011 and bears interest at the rate of 18% per annum (20%, in the case of a default under the Brookstein New Note), with interest payable monthly in arrears. As of December 31, 2009, accrued and unpaid interest totaled $2,250.

F-14

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

(B) Ponzio Promissory Note Exchange Agreement -

As of June 24, 2009, the Company entered into a Promissory Note Exchange Agreement (the “Ponzio Exchange Agreement”) with Henry A Ponzio (“Ponzio”) and simultaneously consummated the transactions contemplated by the Ponzio Exchange Agreement. Under the Ponzio Exchange Agreement, Ponzio delivered and assigned to the Company a promissory note of CCI, dated April 27, 2006, in the principal amount of $150,000 and payable to Ponzio (the “Ponzio Original Note”) in exchange for the Company’s issuing and delivering to Ponzio the Company’s 18% Senior Subordinated Secured Promissory Note, dated June 24, 2009, in the principal amount of $150,000 and payable to Ponzio (the “Ponzio New Note”). In connection with such exchange, the Company granted Ponzio a senior subordinated security interest (the “Ponzio Security Interest”) in all of the Company’s assets to secure the Company’s obligations under the Ponzio New Note, as evidenced and subject to the terms and conditions of a Security Agreement, dated June 24, 2009 (the “Ponzio Security Agreement”), between Ponzio and the Company. As further consideration for entering into the Ponzio Exchange Agreement, Ponzio was granted 3 million Class A warrants (each, a “Ponzio Class A Warrant”) and 3 million Class B warrants (each, a “Ponzio Class B Warrant”). Each of these warrants entitles its holder to purchase one share of common stock (each, a “Warrant Share”) at a purchase price of $0.05 per Warrant Share. The Ponzio Class A Warrants and Ponzio Class B Warrants expire on June 23, 2014. If any amount (principal or interest) is outstanding under the Ponzio New Note, the purchase price upon exercise of any of the Ponzio Class B Warrants must be paid by the reduction of such amounts outstanding under the Ponzio New Note.

The Ponzio Original Note was due on demand and bore interest at the rate of 18% per annum, payable monthly in arrears.

The Ponzio New Note has a stated maturity of January 1, 2011 and bears interest at the rate of 18% per annum (20%, in the case of a default under the Ponzio New Note), with interest payable monthly in arrears. Accrued and unpaid interest as of December 31, 2009 totaled $6,750.

8.	Income Taxes

The Company has identified its federal tax return and its state tax return in New York as "major" tax jurisdictions. Based on the Company's evaluation, it has concluded that there are no significant uncertain tax positions requiring recognition in the Company's financial statements. The Company's evaluation was performed for the 2006 through 2009 tax years, which years include the 2006 tax year of its predecessor company, GSA Publications, Inc., and the Company’s C Corporation tax years of 2006 through 2009. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position.

In connection with the CSC/GSA Merger in February 2006, the Company’s and its subsidiaries’ “S” corporation elections were terminated. For the 2009, 2008, 2007 and 2006 fiscal years, the Company sustained tax losses of $1,224,000, $1,394,000, $1,322,000 and $839,000, respectively. Accordingly, there were no provisions for current or deferred federal or state income taxes for these years. The income tax benefit for these years differs from the amount of income tax determined by applying the statutory federal income tax rate to continuing operations before income taxes as a result of the following:

Federal income tax benefit at statutory rate	34	%
Loss not producing tax benefits	(34	)
Income tax benefit	—	%

F-15

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

The Company has provided a valuation allowance against the total of the net deferred tax assets due to the uncertainty of future realization. The increase in this valuation allowance for the year ended December 31, 2009 was $516,955 and the increase in this allowance for the year ended December 31, 2008 was $251,720. The components of deferred tax assets and liabilities at December 31, 2009 and 2008 are as follows:

	December 31,
	2009			2008
Current Deferred Tax Liabilities:
Prepaid expenses	$	(7,394	)	$	(3,938	)
Total current deferred tax liabilities		(7,394	)		(3,938	)

Non-Current Deferred Tax Assets (Liabilities):
Property, equipment and capitalized software		8,538			51
Unamortized revenue rights		(140,344	)		(163,467	)
Deferred income and deferred credits		21,468			22,322
Net operating loss carry-forward		1,911,839			1,422,183
Total non-current deferred tax assets		1,801,501			1,281,089

Total deferred tax assets		1,794,106			1,277,151
Less: Valuation allowance		1,794,106			1,277,151
Net deferred tax asset	$	0		$	0

9.	Commitments and Contingencies

A.	Minimum Operating Lease Commitments

The Company leased office space in Glen Cove, New York. The lease requires minimum annual rentals plus operating expenses through July 31, 2011. The Company, through December 15, 2008, sublet a portion of such facilities on a month to month basis. Rent expense, including deferred rent expense, net of sublease income, for the year ended December 31, 2009 and 2008 was:

	Gross Rent Expense		Sublease Income			Net Rent Expense
Year ended December 31, 2009	$	64,267		—		$	64,267
Year ended December 31, 2008	$	95,560	$	(36,333	)	$	59,227

The Company was able to terminate its lease effective December 31, 2009 (Reference Note 13).

B.	Employment Agreements and Contribution of Accrued Salary

The Company has employment agreements with its two executive officers through November 30, 2011. During 2007, the officers waived one-half of their salary for a one-year period ending July 1, 2008. These officers deferred salaries totaling $335,000 during 2009. Minimum annual aggregate amounts due under these employment agreements are as follows: 2010: $480,000 and 2011: $440,000.

C. Retention of Marketing Communications Agency

On September 1, 2008, the Company retained the services of Greenstone Fontana Corp., a marketing communications agency, to execute a marketing communications program in accordance with the Company’s existing business plan and develop an advertising campaign including website development and enhancements, as well as the preparation of all relevant advertising materials inclusive of catalogs, data sheet and folders. The one-year agreement requires monthly cash payments of $10,000 and the issuance of three-year warrants to purchase up to 1.2 million shares of Common Stock, issuable in twelve equal monthly installments through September 2009. The warrants are exercisable at a purchase price of $0.05 per share. This agreement was terminated effective July 1, 2009. Accordingly, warrants were issued only during the first six months of 2009. The warrants were valued using a Black-Scholes option pricing model.

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COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

D. Retention of Investor and Public Relations Consultant

Pursuant to a Consulting Agreement, executed as of December 1, 2008, the Company retained the services of Summit Trading Limited, an investor and public relations consultant, to provide one or more plans, for coordination in executing the agreed-upon plan, and for using various business services as agreed by both the Company and Summit. The plans and services may include the following: consulting with the Company’s management concerning marketing surveys, availability to expand investor base, investor support, strategic business planning, broker relations, conducting due diligence meetings, attendance at conventions and trade shows, assistance in the preparation and dissemination of press releases and stockholder communications, review and assistance in updating a business plan, review and advise on the capital structure for the Company, assistance in the development of an acquisition profile and structure, recommending financing alternatives and sources and consulting on corporate finance and/or investment banking issues. This agreement is limited to the United States and has a term of two years. The Company has the right, but not the obligation, to renew this agreement. The agreement required the issuance of 26,666,667 shares of Common Stock that were valued at $140,000. This value was amortized to expense over a two-year period beginning December 1, 2008.

10.	Concentrations

For the years ended December 31, 2009 and 2008, sales through the Company’s principal distributor comprised approximately 82% and 88%, respectively, of the Company’s revenues. At December 31, 2009 and 2008, amounts due from the principal distributor comprised 79% and 84%, respectively, of the Company’s trade receivables.

11.	Related Party Transactions

A.	Related Party Loan

B.	Preferred Stock Dividends

The Company has failed to pay dividends on the 1.25 million outstanding shares of its Series B Senior Subordinated Convertible Voting Preferred Stock (the “Series B Preferred Stock”) that were payable on the last day of each month during 2009. Dividends on the Series B Preferred Stock may only be paid out of funds legally available for such purpose. Under Nevada law, generally, a corporation’s distribution to stockholders may only be made if, after giving effect to such distribution, (i) the corporation would be able to pay its debts as they become due in the usual course of action and (ii) the corporation’s total assets equal or exceed the sum of the corporation’s liabilities plus the amount that would be needed, if the corporation was to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose rights are superior to those receiving the distribution.

F-17

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

During the year ended December 31, 2008, the Company paid dividends of $150,000 on its outstanding Series B Preferred Stock.

12.	Common Stock Transactions

A.	Treasury Stock and Warrants

In May 2005, the Company purchased 4,097,570 shares of Common Stock from a then senior executive officer, director and principal stockholder who was resigning her positions with the Company. The consideration for the treasury shares included warrants to purchase 819,514 shares of Common Stock with an exercise price of $0.30506 per share. These warrants, which expire on June 1, 2010, were subsequently assigned to another senior executive officer, director and principal stockholder pursuant to a domestic relations settlement agreement.

B.	Issuance and Exercise Debt Extension Warrants

On September 24, 2007, in exchange for one-year extensions of the 2006 Debentures and 2007 Debenture, the Company issued five-year warrants to purchase an aggregate of 3 million shares of Common Stock at an exercise price of $0.004 per share. These warrants provided for cashless exercise at the option of the holders.

On January 29, 2008, the holders exercised their warrants, electing cashless exercise. The Company issued a total of 2,756,757 shares of Common Stock to the warrant holders, which issuance fully satisfied all of the Company’s obligations under the warrants.

C.	Issuance of Non-Plan Common Stock Purchase Options

On January 4, 2008, the Company’s board of directors granted five-year options to purchase a total of 45 million shares of Common Stock. Of such options, options to purchase an aggregate of 30 million shares were granted to the Company’s two senior executive officers, directors and principal stockholders executive officers and options to purchase an additional aggregate 15 million shares were granted to two other employees. The options are exercisable through January 4, 2013 and have an exercise price of $0.026 per share, the per share closing market price of the Common Stock on the date of grant. The options are subject to earlier expiration as follows: (a) on the date of termination of employment for cause; or (b) one year after termination of employment: (i) voluntarily by the employee, (ii) by the Company, but without cause, or (iii) by reason of the optionee’s death or permanent and total disability. The Company recorded a charge to operations of $162,000 in connection with the grant of these option awards. The options were valued using a Black-Scholes option pricing model with the following additional inputs: Expected term: 2.5 years; risk-free interest rate: 2.885%; and volatility: 16.92%. The volatility rate used was based upon an average volatility rate for two entities providing telecommunications services and who are customers of the Company. The Company did not use the volatility rate for the Common Stock as the Common Stock has not been trading for the sufficient length of time to accurately compute its volatility.

F-18

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

D.	Shares/Warrants Issued in Connection with the Sale and Issuance of the Initial Agile Debenture

In connection with the sale and issuance of the Initial Agile Debenture, and for no further consideration, the Company issued to Agile 3 million shares of Common Stock (the “Initial Equity Incentive Shares”). The Initial Equity Incentive Shares were valued at $66,000; such valuation being based on the closing price of Common Stock of $0.022 per share on May 5, 2008, the business day prior to the sale and issuance of the Initial Agile Debenture. The cost of the Initial Equity Incentive Shares was recorded as a discount on the Initial Agile Debenture and is being amortized over the eighteen month term of the Initial Agile Debenture.

The Company issued to its investment banker, Cresta Capital Strategies, LLC, five-year warrants (the “Cresta Initial Warrants”) to purchase 900,000 shares of Common Stock (the “Cresta Warrant Shares”), at a purchase price of $0.05 per share, in connection with the Company’s sale and issuance of the Initial Agile Debenture and the issuance of the 3 million Initial Equity Incentive Shares to Agile. The Cresta Initial Warrants were valued at $180 using a Black-Scholes option pricing model with the following additional inputs: expected term: 5 years; risk-free interest rate: 3.07%; and volatility 17.62%. The volatility rate used was based upon an average volatility rate for two entities providing telecommunications services and who are customers of the Company. The Company did not use the volatility rate for the Common Stock as the Common Stock has not been trading for the sufficient length of time to accurately compute its volatility. The cost of the Cresta Initial Warrants is included in deferred loans costs and is being amortized over the Initial Agile Debenture’s eighteen month term.

E.	Shares/Warrants Issued in Connection with the Sale and Issuance of the Additional Agile Debenture

The Company issued to Agile 2 million shares of Common Stock (the “Additional Equity Incentive Shares”), in connection with the sale and issuance of the Additional Agile Debenture, and for no further consideration. The Additional Equity Incentive Shares were valued at $28,000; such valuation being based on the closing price of Common Stock of $0.014 per share on August 29, 2008, the business day prior to the sale and issuance of the Additional Agile Debenture. The cost of the Additional Equity Incentive Shares was recorded as a discount on the Additional Agile Debenture and is being amortized over the fourteen month term of the Additional Agile Debenture.

In connection with its sale and issuance of the Additional Agile Debenture and the issuance of the 2 million Additional Equity Incentive Shares to Agile, the Company issued to Cresta five-year warrants (the Cresta Additional Warrants”) to purchase 800,000 shares (the “Cresta Additional Warrant Shares”) of Common Stock at a purchase price of $0.05 per share. The Cresta Additional Warrants were deemed to have minimal value using a Black-Scholes option pricing model with the following additional inputs: expected term: 5 years; risk-free interest rate: 3.06%; and volatility 17.34%. The volatility rate used was based upon an average volatility rate for two entities providing telecommunications services and who are customers of the Company. The Company did not use the volatility rate for the Common Stock as the Common Stock has not been trading for the sufficient length of time to accurately compute its volatility.

F. Shares/Warrants Issued in Connection with the Sale and Issuance of the Agile September 2009 Debenture

In connection with the sale and issuance of the Agile September 2009 Debenture and for no further consideration, the Corporation issued to Agile 2 million shares (each, an “Agile September 2009 Equity Incentive Share”) of Company common stock. The Agile September 2009 Equity Incentive Shares were collectively valued at $28,000 and such cost is being amortized over the six month term of the Agile September 2009 Debenture.

In connection with the sale and issuance of the Agile September 2009 Debenture, the Company issued to its investment banker, Cresta Capital Strategies, LLC, five-year warrants to purchase 400,000 shares of Company common stock at a purchase price of $0.05 per share. The warrants were deemed to have minimal value using the Black-Scholes option pricing model with the following additional inputs: expected volatility: 21.82%; risk free interest rate: 2.43%; term: 5 years. The volatility rate used was based upon an average volatility rate for two entities providing telecommunications services and who are customers of the Company. The Company did not use the volatility rate for the common stock as the common stock had not been trading for the sufficient length of time to accurately compute its volatility when these warrants were issued.

F-19

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

G. Shares/Warrants Issued in Connection with the Sale and Issuance of the Agile November 2009 Debenture

In connection with the sale and issuance of the Agile November 2009 Debenture, (i) Agile extended the maturity date to February 22, 2010 (and were further extended upon the execution of the Execuserve Corp. Acquisition (Reference Note 13) of the Agile Original 2008 Debentures and (ii) the Corporation issued to Agile 2.6 million shares (each, an “Agile November 2009 Equity Incentive Share”) of the Common Stock of the Company. The Agile November 2009 Equity Incentive Shares were collectively valued at $33,800 and such cost is being amortized over the six month term of the Agile November 2009 Debentures.

In connection with the sale and issuance of the Agile November 2009 Debenture and the 2.6 million Agile November 2009 Equity Incentive Shares, the Company issued to its investment banker, Cresta Capital Strategies, LLC, five-year warrants (each, a “Cresta November 2009 Warrant”) to purchase 320,000 shares (each, a “Cresta November 2009 Warrant Share”) of Common Stock at a purchase price of $0.05 per share. The warrants were deemed to have minimal value using the Black-Scholes option pricing model with the following additional inputs: expected volatility: 21.82%; risk free interest rate: 2.43%; term: 5 years. The volatility rate used was based upon an average volatility rate for two entities providing telecommunications services and who are customers of the Company. The Company did not use the volatility rate for the common stock as the common stock had not been trading for the sufficient length of time to accurately compute its volatility when these warrants were issued.

H.	Conversion of Preferred Stock to Common Stock

During 2009, 206,250 shares of the 2,500,000 share of Series A Preferred Stock issued and outstanding were converted into 20,625,000 shares of Common Stock. There are remaining 2,293,750 shares of series A Preferred Stock issued and outstanding as of December 31, 2009.

During 2008, 57,140 shares of Series C Preferred Stock were converted into 5,714,000 shares of Common Stock. There were remaining 1,828,569 shares of Series C Preferred Stock issued and outstanding as of December 31, 2009 and 2008.

I.	Issuance of Common Shares/Warrants for Prior and Current Services

(1)	Issuance of Shares to Investment Banker

On March 17, 2008, the Company issued 1,000,000 shares of common Stock to Cresta as partial payment for agreeing to provide investment banking services. The aggregate share value was $50,000, based on the $0.05 market price of the Common Stock per share on March 14, 2008, the business day prior to entering into the agreement.

(2)	Issuance of Warrants to Marketing Communications Agency

During the last quarter of 2008 and through the first six months of 2009, the Company issued Greenstone Fontana Corp. three year warrants to purchase an aggregate of 900,000 shares of Common Stock at a purchase price of $0.05 per share. The warrants were issued in 100,000 warrant installments effective the first calendar day of each of month from October 2008 through June 2009. These warrants were deemed to have minimal value using a Black-Scholes option pricing model with the following additional input ranges: expected volatility: 17.73% - 24.15%; risk free interest rate: 1.12% - 2.28%; term: 3 years. The volatility rate used was based upon an average volatility rate for two entities providing telecommunications services and who are customers of the Company. The Company did not use the volatility rate for Company common stock as the common stock had not been trading for the sufficient length of time to accurately compute its volatility when these warrants were issued

(3)	Issuance of Shares to Investor and Public Relations Consultant

On December 1, 2008, the Company agreed to issue 26,666,667 shares of Common Stock to Summit Trading Limited as payment for investor and public relations services. The aggregate value of such 26,666,667 shares was $140,000, based on the average of the closing bid and ask prices on December 1, 2008 of $0.00525 per share.

(4) Issuance of Shares to Pretect, Inc.

F-20

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

On March 2, 2009, the Company satisfied a payable due Pretect, Inc. (“Pretect”) in the amount of $29,750 by issuing to Pretect (i) 100,000 shares of Company common stock and (ii) a promissory note in the principal amount of $24,750 (the “Pretect Note”). The Pretect obligation arose from consulting services provided by Pretect in connection with the Company’s review of its internal control over financial reporting and disclosure controls and procedures. The Pretect Note provides for no interest (except in the event of default) and repayment of the principal amount in twelve equal monthly installments, commencing on April 1, 2009.

J. Issuance of Warrants to Nascap –

The aggregate 14 million warrants issued to Nascap as of June 30, 2009 pursuant to the Nascap Modification Agreement were deemed to have minimal value using the Black-Scholes option pricing model with the following additional inputs: expected volatility: 21.67%; risk free interest rate: 2.66%; term: 5 years. The volatility rate used was based upon an average volatility rate for two entities providing telecommunications services and who are customers of the Company. The Company did not use the volatility rate for Company common stock as the common stock had not been trading for the sufficient length of time to accurately compute its volatility when these warrants were issued.

K. Issuance of Warrants in Connection with the Promissory Note Exchange Agreements dated June 24, 2009 –

The aggregate 8 million warrants issued to Ponzio and Brookstein as of June 24, 2009 pursuant to their loan modification agreements with the Company were deemed to have minimal value using a Black-Scholes option pricing model with the following additional input ranges: expected volatility: 21.75%; risk free interest rate: 2.66%; term: 5 years. The volatility rate used was based upon an average volatility rate for two entities providing telecommunications services and who are customers of the Company. The Company did not use the volatility rate for Company common stock as the common stock has not been trading for the sufficient length of time to accurately compute its volatility when these warrants were issued.

L. Issuance of Deferred Salary Warrants –

The Company’s chief executive officer, Dean R. Garfinkel, chief financial officer, Barry M. Brookstein, and controller, Cecilia Carfora, have been deferring all or a portion of their salaries since January 1, 2009. The amount of deferred salaries totaled $350,000 as of December 31, 2009, consisting of $185,000 due Garfinkel, $150,000 due Brookstein and $15,000 due Ms. Carfora. The Company has agreed to grant these officers Deferred Salary Warrants, as of the last day of each fiscal quarter, at the rate of 40 Deferred Salary Warrants for every $1 of salary deferred during such quarter, except for the quarter ended June 30, 2009, where the number of Deferred Salary Warrants will be based on the amount of salary accrued through June 30, 2009. Accordingly, as of June 30, 2009, Garfinkel was granted 3.4 million Deferred Salary Warrants, Brookstein was granted 2.8 million Deferred Salary Warrants and Ms. Carfora was granted 600,000 Deferred Salary Warrant,, for the three months ending September 30, 2009, Garfinkel was granted 1.8 million Deferred Salary Warrants and Brookstein was granted as of 1.2 million Deferred Salary Warrants for salary deferred during the third quarter 2009, and for the three months ending December 31, 2009, Garfinkel was granted 2.2 million Deferred Salary Warrants and Brookstein was granted as of 2.0 million Deferred Salary Warrants for salary deferred during the fourth quarter 2009.

The 6.8 million Deferred Salary Warrants granted as of June 30, 2009, the 3.0 million Deferred Salary Warrants granted as of September 30, 2009 and the 4.2 million Deferred Salary Warrants granted as of December 31, 2009 were deemed to have minimal value using the Black-Scholes option pricing model with the following additional inputs: expected volatility: 21.51 -24.29%; risk free interest rate: 2.28 - 2.66%; term: 5 years. The volatility rate used was based upon an average volatility rate for two entities providing telecommunications services and who are customers of the Company. The Company did not use the volatility rate for Company common stock as the common stock has not been trading for the sufficient length of time to accurately compute its volatility.

F-21

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

M. Issuance of Dividend Accrual Warrants –

The 3 million Dividend Accrual Warrants granted as of June 30, 2009, the 1.5 million Dividend Accrual Warrants granted as of September 30, 2009 and December 31, 2009 the were deemed to have minimal value using the Black-Scholes option pricing model with the following additional inputs: expected volatility: 21.51 – 24.29%; risk free interest rate: 2.28 - 2.66%; term: 5 years. The volatility rate used was based upon an average volatility rate for two entities providing telecommunications services and who are customers of the Company. The Company did not use the volatility rate for common stock as the common stock had not been trading for the sufficient length of time to accurately compute its volatility when these warrants were issued.

13.	Subsequent Events

On February 5, 2010, the Company entered into an Agreement and Plan of Merger, dated as of February 5, 2010 (the “Merger Agreement”), with Execuserve Corp., a Virginia corporation (“Execuserve”), CSC/Execuserve Acquisition Corp., a Virginia corporation and wholly-owned subsidiary of the Company (“Merger Sub”), W. Thomas Eley (“Eley”), James A. Robinson, Jr. (“Robinson”) and Robin Rennockl (“Rennockl”). The Merger Agreement contemplated, among other matters, the consummation of the following transactions:

(a)	merger (the “Merger”) of Merger Sub with and into Execuserve, with Execuserve being the surviving corporation and wholly-owned by the Company;

(b)	issuance of an aggregate of 19,915,285 shares (each, a “Merger Share”) of Common Stock of the Company in exchange for all of the issued and outstanding common and preferred stock of Execuserve (collectively, (the “Execuserve Shares”);

(c)	issuance of an additional 28,114,495 shares (each, a “Exchanged Debt Share”) of Company Common Stock in exchange for certain outstanding debt of Execuserve in the aggregate principal amount of $647,000 (the “Execuserve Exchanged Debt”);

(d)	issuance of an aggregate 7,970,220 shares (each, a “Retention Share”) of Company Common Stock to certain employees of Execuserve, including Robinson, who is to receive 3,170,220 Retention Shares, and Rennockl, who is to receive 4,000,000 Retention Shares;

(e)

satisfaction of certain other debt (the “Satisfied Debt”) of Execuserve, including approximately $28,000 owed to Eley relating to charges made on Eley’s personal credit card for Execuserve’s benefit and on a corporate charge card account which Eley had personally guaranteed the payment of all charges on such account;

(f)	Execuserve retaining Eley as a consultant pursuant to a written consulting agreement;

(g)	Execuserve retaining Robinson as its chief executive officer and president pursuant to a written Employment Agreement;

(h)	Execuserve retaining Rennockl as its Vice President of Sales pursuant to a written Employment Agreement;

(i)	Eley being elected to the Company’s Board of Directors;

(j)

all of the Merger Shares, Exchanged Debt Shares and Retention Shares being subject to lock-up arrangements pursuant to which each of the recipients of such shares would be entitled to sell or otherwise dispose of up to 25% of the shares such recipient received beginning six months following the effective date of the Merger, up to 50% of the shares such recipient received beginning twelve months following the effective date of the Merger, up to 75% of the shares such recipient received beginning eighteen months following the effective date of the Merger and all of the shares such recipient received beginning 24 months following the effective date of the Merger.

The Merger became effective on February 9, 2010. As a result of the Merger’s effectiveness, among other matters, (i) the Company became obligated to issue all of the Merger Shares, Exchanged Debt Shares and Retention Shares, (ii) the Company tendered payment in full against the Satisfied Debt, (iii) Execuserve retained Eley as a consultant, Robinson as its Chief Executive Officer and President and Rennockl as its Vice President of Sales, and (iv) Eley became a member of the Company’s Board of Directors.

F-22

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

In connection with the consummation of the Merger and in order to fund the future operations of the Company and Execuserve, to fund the payment of outstanding accounts payable of the Company and Execuserve, including the Satisfied Debt, and to restructure the debt currently owed to Agile by the Company and Execuserve, the Company agreed to borrow additional funds from Agile and restructure the outstanding indebtedness owed to Agile by the Company and Execuserve pursuant to an Amended and Restated Securities Purchase Agreement, dated as of February 5, 2010 (the “Agile A&R Agreement”), among the Company, Execuserve, Spirits Management Inc. (“Spirits”), Barry Brookstein (“Brookstein”), Dean Garfinkel (“Garfinkel”) and Agile. Garfinkel is the President, Chief Executive Officer and a director of the Company, Brookstein is the Chief Financial Officer and a director of the Company and Spirits is a New York corporation in which Brookstein is an executive officer and the sole shareholder.

The following represents the unaudited condensed pro forma financial results of the Company as if the acquisition of Execuserve had occurred as of the beginning of the annual period presented. Unaudited condensed pro forma results are based upon accounting estimates and judgments that the Company believes are reasonable. The unaudited condensed pro forma results also include adjustments to interest expense as all existing convertible notes and bridge loans of Execuserve were repaid or converted to common stock upon execution of the acquisition. The condensed pro forma results are not necessarily indicative of the actual results of operations of the Company had the acquisition occurred at the beginning of the years presented, nor does it purport to represent the results of operations for future periods.

For the years ended December 31,	2009			2008
Total revenues	$	1,303,027		$	2,069,240
Net loss	$	(1,691,035	)	$	(1,745,876	)
Earnings per share	$	(.01	)	$	(.01	)

The Agile A&R Agreement is an amendment and restatement of the previous agreements between the Company, Spirits, Brookstein, Garfinkel and Agile. These previous agreements were dated as of May 6, 2008, January 31, 2009, September 21, 2009 and November 23, 2009. Under such previous agreements, the Company sold and issued to Agile secured convertible debentures (the “Existing Company Debentures”) in the aggregate principal amount of $780,000 and 9.6 million shares (the “Existing Company Shares”) of Company Common Stock for gross proceeds of $780,000. The Company had granted Agile a security interest in substantially all of the Company’s assets (subject to then existing security interests granted others) to secured the Company’s obligations under the Existing Company Debentures and Spirits, Brookstein and Garfinkel had pledged their shares of preferred stock of the Company as further security for the payment of amounts due under the Existing Company Debentures.

In addition, between November 16, 2007 and June 8, 2008, Execuserve had sold and issued to Agile secured convertible promissory notes (the “Existing Execuserve Notes”) in the aggregate principal amount of $460,000 and warrants (the “Existing Execuserve Warrants”) to purchase shares of the common stock of Execuserve or Execuserve’s successor by merger. Execuserve had granted Agile a security interest in substantially all of Execuserve’s assets (subject to then existing security interests granted others) to secured Execuserve’s obligations under the Existing Execuserve Notes.

As of the date of the Agile A&R Agreement, accrued and unpaid interest under the Existing Company Debentures totaled $21,925 and accrued and unpaid interest under the Existing Execuserve Notes totaled $117,319.

The Agile A&R Agreement contemplated, among other matters, the following transactions:

(a)	Agile providing the Company with $525,000 in new funds (the “New Agile Funds”);

(b)

amending and restating the obligations of the Company and Execuserve contained in the Existing Company Debentures and Existing Execuserve Notes, and the new obligations arising in connection with the loan of the New Agile Funds, into one Amended and Restated Secured Convertible Debenture of the Company in the principal amount of $1,765,000 (the “Agile A&R Debenture”) with a maturity date of February 1, 2011 and delivering to Agile the Agile A&R Debenture, with the obligations under the Agile A&R Debenture being guaranteed by Call Compliance Inc., another wholly-owned subsidiary of the Company, and Execuserve;

F-23

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

(c)	subordination of the security interests in the assets of the Company held by Brookstein, Henry A. Ponzio (“Ponzio”) and Nascap Corp. (“Nascap”), to the security interest in the assets of the Company held by Agile;

(d)

repayment (through the use of a portion of the New Agile Funds) to Agile of $10,000 of accrued and unpaid interest under the Existing Company Debentures and $50,000 of accrued and unpaid interest under the Existing Execuserve Notes, with the remaining portions of the accrued and unpaid interest under both the Existing Company Debentures and Existing Execuserve Notes, totaling $79,244, being acknowledged as a remaining obligation of the Company due and payable on the maturity date of the Agile A&R Debenture;

(e)	termination of the Existing Execuserve Warrants; and

(f)	issuance to Agile of 2.4 million shares (the “Agile A&R Shares”) of Company Common Stock.

The transactions contemplated by the Agile A&R Agreement were consummated as of February 9, 2010.

The principal and accrued and unpaid interest under the Agile A&R Debenture is convertible, in whole or part, at a per share price equal to the market price of the Company Common Stock on the date of conversion exercise. If the market price of the Company Common Stock decreases between the date of conversion exercise and the date the stock certificate evidencing the subject conversion shares are delivered to Agile, the Company is obligated to issue to Agile additional shares of Company Common Stock to the effect that Agile receives a total number of shares that Agile would have received if Agile had made the conversion exercise on the date on which the stock certificate had been delivered to Agile. The Agile A&R Debenture provides for cashless exercise.

In consideration for their agreeing to subordinate their security interests to the security interest of Agile, effective as of February 9, 2010, the Company issued 1 million shares of Company Common Stock to Brookstein, 3 million shares of Company Common Stock to Ponzio and 7 million shares to Nascap (collectively, the (“Subordination Shares”).

In connection with the consummation of the Merger, the Company issued to Summit Trading Limited (“Summit”) 12 million shares of Company Common Stock as consideration for services rendered with respect to the Merger Agreement in addition to shares of Company Common Stock previously issued to Summit (reference is made to the Company’s filing of a Current Report on Form 8-K, dated December 5, 2008).

During the fourth quarter of 2009, the Company failed to pay interest on the promissory notes that were previously issued to Brookstein, Ponzio and Nascap. The Company’s obligations under these notes were secured by the security interests that Brookstein, Ponzio and Nascap subordinated to the security interest we granted to Agile in connection with the issuance of the Agile A&R Debenture. The principal amounts of such notes and the amounts of interest not paid during the fourth quarter of 2009 are as follows:

Name of Noteholder	Principal Amounts of Note		Interest Not Paid
Barry M. Brookstein	$	50,000	$	2,250
Henry A. Ponzio	$	150,000	$	6,750
Nascap Corp.	$	350,000	$	10,500

To compensate Brookstein, Ponzio and Nascap for the failure to pay interest on their promissory notes during the fourth quarter of 2009, the Company granted to such noteholders warrants (each, a “Fourth Quarter 2009 Deferred Interest Payment Warrant”) to purchase shares of Common Stock at the rate of 40 Fourth Quarter 2009 Deferred Interest Payment Warrants for every $1 of interest not paid. For the Fourth Quarter 2009, 780,000 Deferred Interest Payment Warrants were issued and have terms substantially identical to the Fourth Quarter 2009 Deferred Salary Warrants and Dividend Accrual Warrants.

F-24

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

On April 7, 2010, the Company entered into an agreement with the owner and developer (the “Seller”) of certain software and intellectual proprerty rights. In exchange for the transfer of the software and intellectual property, the Company will provide the Seller with the following:

2,750,000 restricted shares of the Compliance Systems Corporation common stock, and

500,000 warrants to purchase shares of Compliance Corporation Common Stock at a per Warrant Share exercise price of $.05.

The Company would pay $1,000 a month for 10.5 months starting April 15, 2010,

The Company would provide the lessor with 1,675,000 5-year warrants with an exercise price of $.02 a share,

The Company is relieved of $39,000 in CAM expenses and real estate taxes owed to the lessor,

The Company has forgiven the $10,600 security deposit held with the lessor, and

The Company is relieved of future lease obligations effective January 1, 2010 through July 31, 2011, the former maturity date of the lease.

F-25

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 15, 2010	Compliance Systems Corporation.

	By:	/s/ Dean Garfinkel
		Dean Garfinkel, President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature and Name	Capacities	Date

/s/ Dean Garfinkel	Chief Executive Officer, President	May 15, 2010
Dean Garfinkel	and Director
	(Principal Executive Officer)

/s/ Barry M. Brookstein	Chief Financial Officer and Director	May 15, 2010
Barry M. Brookstein	(Principal Financial Officer and
	Principal Accounting Officer)

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