SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

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

For the Fiscal Year ended December 31, 2006

Commission File Number: 0001-22563

CDSI HOLDINGS INC.

(Name of small business issuer in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		95-4463937 (I.R.S. Employer Identification No.)

100 S.E. Second Street, 32nd Floor, Miami, Florida (Address of principal executive offices)		33131 (Zip Code)

305-579-8000
(Issuer’s telephone number)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, par value $.01 per share

     Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o

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

     Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. 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 o

     The issuer’s revenues for the year ended December 31, 2006 were $0.

     The aggregate market value of the voting stock of the issuer held by non-affiliates of the issuer on March 19, 2007 based on the closing price on such date was $358,600.

     As of April 2, 2007 the issuer had a total of 3,120,000 shares of Common Stock outstanding.

Transitional Small Business Disclosure Format: Yes o No x

 

 

PART I

ITEM 1. DESCRIPTION OF BUSINESS

FORWARD-LOOKING STATEMENTS

     Certain statements made in this Annual Report on Form 10-KSB are “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Company’s plans and objectives are based, in part, on assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, particularly in view of the Company’s limited operations, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. Readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date on which such statements are made. Factors that could cause actual results to differ materially from those express or implied by such forward-looking statements include, but are not limited to, the factors set forth in this report under the headings “The Company”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The Company does not undertake to update any forward-looking statement that may be made from time to time on its behalf.

THE COMPANY

Overview

     CDSI Holdings Inc. (the “Company”) holds limited amounts of cash and 2,800 shares of Common Stock of Dialog Group Inc. (“Dialog”, formerly known as IMX Pharmaceuticals Inc.). Prior to February 2000, its former wholly-owned subsidiary, Controlled Distribution Systems, Inc. (“CDS”), was primarily engaged in marketing and leasing a prepaid, wireless, remote-operated retail inventory control and dispensing system for tobacco products called the Coinexx Star 10. Prior to October 2000, CDS also owned traditional cigarette vending machines and a related vending route. In February 2000, the Company terminated all operations relating to marketing and leasing the Coinexx Star 10 system. On October 5, 2000, CDS completed the sale to Gutlove & Shirvant, Inc. of the assets of its cigarette vending route, including vending machines and a van. Prior to January 4, 2007, Dialog was a provider of relationship marketing communications services, business and consumer targeting databases for the healthcare, financial and other direct-to-customer, direct-to-professional business markets. On January 8, 2007, the Dialog reported that it had completed the sale of substantially all of its operating assets.

     The Company intends to seek new business opportunities. As the Company has only limited cash resources, the Company’s ability to complete any acquisition or investment opportunities it may identify will depend on its ability to raise additional financing, as to which there can be no assurance. There can be no assurance that the Company will successfully identify, complete or integrate any future acquisition or investment, or that acquisitions or investments, if completed, will contribute favorably to its operations and future financial condition.

Company History

     The Company was incorporated in Delaware in December 1993 under the name PC411, Inc. In January 1999, it changed its name to CDSI Holdings Inc. to reflect the change in its principal business. The Company was originally formed to develop an on-line service that transmits name, address, telephone number and other related information digitally to users of personal computers. In May 1998 the Company acquired CDS and, in December 1998, CDS acquired substantially all of the assets of TD Rowe Corporation’s New York cigarette vending route. In November 1998, the Company transferred substantially all of the non-cash assets and certain liabilities used in its on-line data distribution business to ThinkDirectMarketing Inc. (“TDMI”) in exchange for an initial 42.5% interest in that company. The other investors of TDMI included Acxiom Corporation, Cater Barnard plc and TDMI’s management and employees. In January 2002, Dialog acquired all the stock of TDMI that it did not already own, and the Company presently holds 2,800 shares of Dialog Common Stock.

     Effective November 12, 2003, the Company and its wholly-owned subsidiary CDS merged with the Company as the surviving corporation.

ThinkDirectMarketing, Inc.

     On November 5, 1998, the Company contributed substantially all the non-cash assets and certain liabilities related to its on-line electronic delivery information service to TDMI, and received preferred stock of TDMI. On January 31, 2002, Dialog acquired all the shares of TDMI that it did not already own by exercising an option previously granted by the remaining TDMI stockholders. The Company received 8,250 shares of Dialog Class B Convertible Preferred Stock in exchange for its interest in TDMI. Each share of Dialog Class B Preferred Stock was entitled to receive an annual dividend of $4.00 on December 31 of each year. The dividend was payable at the option of Dialog in shares of its Common Stock. The shares of Dialog Class B Preferred Stock to be received by the Company were initially convertible into 165,000 shares of Dialog Common Stock.

     On November 4, 2002, the holders of Dialog Class B Preferred Stock and Dialog agreed to (i) increase the number of common shares into which the Dialog Class B Preferred Stock was convertible from 1,575,000 to 3,150,000 and (ii) eliminate the annual dividend on the Class B Preferred Stock. As a result, the Class B Preferred Stock held by CDSI became convertible into 330,000 shares of Dialog Common Stock and, on February 7, 2003, CDSI converted its Class B Preferred Shares into 330,000 shares of Dialog Common Stock. The Company sold 50,000 shares of Dialog stock for $4,888 in 2004.

     Dialog is registered under the Securities Exchange Act of 1934 and is required to file periodic and other information with the Securities and Exchange Commission (symbol “DLGO”). Dialog’s common stock trades on the NASD OTC Bulletin Board. On September 18, 2006, Dialog effected a 1-for-100 reverse stock split. Based on public filings by Dialog, management currently estimates that CDSI’s interest in Dialog (currently 2,800 shares) is less than a 0.01% on a fully-diluted basis.

     On January 8, 2007, the Dialog reported that it had completed the sale of substantially all of its operating assets to Dialog Marketing Services, Inc., a subsidiary of Redi Direct, Inc., a privately held information services company on January 4, 2007. The sale, which was effective as of December 31, 2006, was for a cash purchase price of $1,900,000. Dialog reported that subsequent to the sale, it retained its financial assets, including its receivables, and was relieved of the liability for its office leases.

Employees

     As of December 31, 2006, the Company had two employees, its President and Chief Executive Officer and its Vice President and Chief Financial Officer, both of whom are also employees of Vector Group Ltd. (“Vector”), the parent of New Valley LLC (“New Valley”), its largest stockholder. The Company believes that it has good relations with its employees.

RISK FACTORS

     Accumulated Deficit; History of Losses. At December 31, 2006, the Company had an accumulated deficit of approximately $8.2 million. The Company has reported an operating loss in each of its fiscal quarters since inception and expects to continue to incur operating losses in the immediate future. The Company has reduced operating expenses and is seeking acquisition and investment opportunities. There is a risk that the Company will continue to incur operating losses.

     Limited Resources and No Source of Operating Revenues. At December 31, 2006, the Company had cash and cash equivalents of $61,812 and net working capital of $54,436. Since the sale of CDS’s vending route in October 2000, the Company has had no source of operating revenue. The Company will not achieve any significant revenues until the consummation of an acquisition or investment, if ever. Moreover, there can be no assurance that any acquisition or investment, if achieved, will result in material revenues from its operations or that it will operate on a profitable basis.

     A Limited Trading Market Exists for Dialog Group Inc. The Company owns 2,800 shares of Common Stock of Dialog, which are carried at $224 on the Company’s Balance Sheet at December 31, 2006. In accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, the Company has classified these shares as “Investment Securities Available for Sale” as of December 31, 2006. The Dialog Common Stock is carried at fair value, based on the last trade prior to December 31, 2006, and net unrealized gains are included as a component of stockholders’ equity. However, no assurance can be given that the Company will ultimately realize fair value for its Dialog shares as there is only a limited trading market for the shares and the Company may not be able to sell any material portion of its shares at prevailing market prices. During 2006, the average daily trading volume of Dialog’s Common Stock was approximately 297 shares, with 189 days of 251 trading days having no trading activity. No assurances can be given that an orderly trading market will be maintained for Dialog’s Common Stock. On January 8, 2007, the Dialog reported that it had completed the sale of substantially all of its operating assets.

     Additional Financing Requirements. The Company’s ability to complete any acquisition or investment opportunities it may identify will depend upon the availability of, and its ability to secure, new equity or debt financing. The Company has no commitments for any financing. Further, there can be no assurance that the Company will be able to generate levels of revenues and cash flows sufficient from any acquisition or investment to fund operations or that the Company will be able to obtain financing on satisfactory terms, if at all, to achieve profitable operations.

     “Blind Pool”; Broad Discretion of Management. Prospective investors who invest in the Company will do so without an opportunity to evaluate the specific merits or risks of any proposed transactions. As a result, investors will be entirely dependent on the broad discretion and judgment of management in connection with the application of the Company’s working capital and the selection of an acquisition or investment target. There can be no assurance that determinations ultimately made by the Company will permit the Company to achieve profitable operations.

     Acquisition and Investment Risks. As part of its business strategy, the Company may evaluate new acquisition and investment opportunities. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations and products or services of the acquired companies, the expenses

incurred in connection with the acquisition and subsequent assimilation of operations and products or services and the potential loss of key employees of the acquired company. There can be no assurance that the Company will successfully identify, complete or integrate any future acquisitions or investments or that completed acquisitions or investments will contribute favorably to the Company’s operations and future financial condition.

     Dependence Upon Executive Officers and Board of Directors. The ability of the Company to successfully effect a transaction will be largely dependent upon the efforts of its management and the Board of Directors. The Company only has two employees, none of whom work full-time for the Company. No assurance can be given that the Board of Directors and management will be successful in consummating a transaction and achieving profitability.

     Limited Trading Market. During 1999, the Company’s securities were delisted from the Nasdaq SmallCap market for failure to comply with the minimum listing maintenance requirements. As a result, the Company’s securities currently trade on the OTC Bulletin Board of the National Association of Security Dealers, Inc. Consequently, a stockholder could likely find it more difficult to sell or to obtain quotations as to prices of the Company’s securities. In addition, there is a limited trading market in the Company’s securities. During 2006, the average daily trading volume of the Company’s Common Stock was approximately 1,003 shares, with 160 days of 251 trading days having no trading activity. No assurances can be given that the Company’s Common Stock will continue to trade on the OTC Bulletin Board or that an orderly trading market will be maintained for the Company’s Common Stock.

     Absence of Full-Time Management Personnel. The Company’s current President and Chief Executive Officer and its Vice President and Chief Financial Officer are executive officers of Vector. Neither of these individuals devotes his full time and attention to the affairs of the Company.

     Concentration of Stock Ownership. New Valley LLC, a wholly-owned subsidiary of Vector, beneficially owns approximately 47.8% of the Company’s outstanding Common Stock. As a result, Vector, through its subsidiary, effectively controls all matters requiring stockholder approval, including the election of directors, the appointment of officers and approval of significant corporate transactions including a merger, an acquisition or a sale of all or substantially all of the Company’s assets. Such concentration of ownership may also have the effect of delaying or preventing a change in control of the Company. In addition, the Company is subject to a State of Delaware statute regulating business combinations, which may also hinder or delay a change of control.

     Absence of Dividends. The Company has never paid nor does it expect in the foreseeable future to pay any dividends.

     Limitation on Director Liability. To the extent permitted under the Delaware General Corporation Law, the Company’s Restated Certificate of Incorporation limits the liability of directors for monetary damages for breaches of a director’s fiduciary duty, including breaches that constitute gross negligence. As a result, under certain circumstances, neither the Company nor its stockholders may be able to recover damages from directors.

     Dilution. The Board of Directors of the Company, without any action by the stockholders, is authorized to designate and issue additional classes or series of capital stock (including classes or series of preferred stock) as it deems appropriate and to establish the rights, preferences and privileges of such classes or series. The issuance of any new class or series of capital stock would not only dilute the ownership interest of the current stockholders of the Company but may also adversely affect the voting power and other rights of holders of Common Stock. The rights of holders of preferred stock and other classes of common stock that may be issued may be superior to the rights of the holders of the existing class of Common Stock in terms of the payment of ordinary and liquidating dividends and voting rights.

     Forward-looking Statements. This report contains forward-looking statements that involve risks and uncertainties. Words such as “anticipate,” “believes,” “expects,” “future” and “intends” and similar expressions are used to identify forward-looking statements. You should not unduly rely on these forward-looking statements, which apply only as of the date of this report. The Company’s actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described above and elsewhere in this report.

ITEM 2. PROPERTIES

     The Company’s corporate offices are located in the executive offices of Vector. The Company believes that its current facilities are adequate for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

     Reference is made to Note 9 to our financial statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

PART II

ITEM 5.		MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

     The Company’s Common Stock is currently traded on the OTC Bulletin Board under the symbol “CDSI”. The following table sets forth for the periods indicated, the reported high and low closing bid quotations per share for the Company’s Common Stock. The sale prices set forth below reflect inter-dealer quotations, do not include retail mark-ups, markdowns or commissions and do not necessarily represent actual transactions.

		High				Low
2006
Fourth Quarter		$	0.150			$	0.131
Third Quarter			0.140				0.120
Second Quarter			0.150				0.130
First Quarter			0.180				0.142
2005
Fourth Quarter		$	0.200			$	0.147
Third Quarter			0.200				0.136
Second Quarter			0.190				0.120
First Quarter			0.420				0.100

     As of March 19, 2007, there were 32 holders of record of the Company’s Common Stock.

     Dividend Policy

     The Company has never declared or paid dividends on its Common Stock and does not expect to pay any dividends in the foreseeable future.

     Recent Sales of Unregistered Securities

     No securities were issued by the Company in 2006.

     Issuer Purchases of Equity Securities

     No securities of the Company were repurchased by the Company during the fourth quarter of 2006.

ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Overview

     The Company intends to seek new business opportunities. As the Company has only limited cash resources, the Company’s ability to complete any acquisition or investment opportunities it may identify will depend on its ability to raise additional financing, as to which there can be no assurance. There can be no assurance that the Company will successfully identify, complete or integrate any future acquisition or investment, or that acquisitions or investments, if completed, will contribute favorably to its operations and future financial condition.

ThinkDirectMarketing, Inc.

     On November 5, 1998, the Company contributed substantially all the non-cash assets and certain liabilities related to its on-line electronic delivery information service to TDMI, and received preferred stock of TDMI. See Note 3 to the Financial Statements for additional information concerning the Company’s former investment in TDMI.

     On January 31, 2002, Dialog acquired all the shares of TDMI it did not already own by exercising an option previously granted by the remaining TDMI stockholders. The Company received convertible preferred stock of Dialog in exchange for its interest in TDMI, and, on February 7, 2003, CDSI converted its Class B Preferred Shares into 330,000 shares of Dialog Common Stock. The Company sold 50,000 shares of Dialog stock for $4,888 in 2004. On September 18, 2006, Dialog effected a 1-for-100 reverse stock split. Based on public filings by Dialog, management currently estimates that CDSI’s interest in Dialog (currently 2,800 shares) is less than a 0.01% on a fully-diluted basis. The Company’s remaining 2,800 Dialog shares may be sold by the Company pursuant to Rule 144(k) of the Securities Act of 1933. See Notes 3 and 4 to the Financial Statements.

Results of Operations

     Revenues

     For the years ended December 31, 2006 and 2005, the Company did not generate revenues from operations.

     Expenses

     Expenses associated with corporate activities were $33,983 and $34,061 for the years ended December 31, 2006 and 2005, respectively. The expenses in both years were primarily associated with costs necessary to maintain a public company, which consist primarily of directors’ fees, auditing fees and stock transfer fees.

     Other Income

     Interest income was $3,535 and $3,125 for the years ended December 31, 2006 and 2005, respectively. The increase is due primarily to higher prevailing interest rates offset by lower cash balances in 2006 versus 2005.

Liquidity and Capital Resources

     At December 31, 2006, the Company had an accumulated deficit of $8.2 million. The Company has reported an operating loss in each of its fiscal quarters since inception and it expects to continue to incur operating losses in the immediate future. The Company has reduced operating expenses and is seeking acquisition and investment opportunities. No assurance can be given that the Company will not continue to incur operating losses.

     The Company has limited available cash, limited cash flow, limited liquid assets and no credit facilities. The Company has not been able to generate sufficient cash from operations and, as a consequence, financing has been required to fund ongoing operations. Since completion of the Company’s initial public offering of its common stock (the “IPO”) in May 1997, the Company has primarily financed its operations with the net proceeds of the IPO. The funds were used to complete the introduction of the PC411 Service over the Internet, to expand marketing, sales and advertising, to develop or acquire new services or databases, to acquire CDS and for general corporate purposes.

     Cash used for operations for the years ended December 31, 2006 and 2005 were $29,848 and $31,286, respectively. The decrease is associated primarily with the timing of payments of accounts payable and accrued liabilities. The Company evaluates its accruals on a quarterly basis and makes adjustments when appropriate.

     The Company does not expect significant capital expenditures during the year ended December 31, 2007.

     At December 31, 2006, the Company had cash and cash equivalents of $61,812.

     Inflation and changing prices had no material impact on revenues or the results of operations for years ended December 31, 2006.

     The Company’s 2,800 shares of Dialog Common Stock may be sold pursuant to Rule 144(k) of the Securities Act of 1933. In accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, the Company has classified these shares as “Investment Securities Available for Sale” as of December 31, 2006. The Dialog Common Stock is carried at fair value ($244), and net unrealized gains are included as a component of stockholders’ equity. However, no assurance can be given that the Company will ultimately realize fair value for its Dialog shares as there is only a limited trading market for the shares and the Company may not be able to sell any material portion of its shares at prevailing market prices. No assurances can be given that an orderly trading market will be maintained for Dialog’s Common Stock. The Company sold 50,000 shares (500 shares adjusted for reverse stock split) of Dialog stock for $4,888 in the third quarter of 2004.

     On January 8, 2007, the Dialog reported that it had completed the sale of substantially all of its operating assets.

     We are not authorized to transact business in any state other than Delaware, which is its state of incorporation. We received an inquiry from the Florida Department of State inquiring whether we should have registered with the FDS in previous years, beginning in 1998. In March 2006, we responded to the inquiry and stated we believe our activities in previous years did not meet the requirements for such registration; however, no assurance can be provided that our position will be accepted. We are unable to quantify the amount of any registration fees and other costs attributable to any failure to register and have not accrued any amounts in our financial statements related to such inquiry.

     We have recently filed for refunds of approximately $21,700 for unclaimed property in a state we previously conducted business. No assurance can be given that we will prevail in receiving such refund claims.

     Management is currently evaluating alternatives to supplement the Company’s present cash and cash equivalents to meet its liquidity requirements over the next twelve months. Such alternatives include seeking additional investors and/or lenders. Although there can be no assurance, we believe that we will be able to continue as a going concern for the next twelve months.

     We or our affiliates, including Vector, may, from time to time, based upon present market conditions, may purchase shares of the Common Stock in the open market or in privately negotiated transactions.

ITEM 7. FINANCIAL STATEMENTS

     Reference is made to the Financial Statements, the report thereon and notes thereto, commencing on page F-1 to this report.

ITEM 8.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None

ITEM 8A. CONTROLS AND PROCEDURES

     Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report, and, based on that evaluation, its principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

     Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.

ITEM 8B. OTHER INFORMATION

     None.

PART III
MANAGEMENT

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS

     Set forth below are the names, ages and positions of the Company’s directors and executive officers as of April 2, 2007.

Name		Age				Position
Richard J. Lampen			53			President, Chief Executive Officer and Director
J. Bryant Kirkland III			41			Vice President, Chief Financial Officer, Secretary, Treasurer and Director
Robert M. Lundgren			48			Director
Henry Morris			53			Director

     Richard J. Lampen, age 53, has served as President and Chief Executive Officer of the Company since November 1998 and as a director of the Company since January 1997. Since September 2006, he has served as President and Chief Executive Officer of Ladenburg Thalmann Financial Services Inc. From October 1995 to December 2005, Mr. Lampen served as the Executive Vice President of New Valley Corporation, a publicly-held company principally engaged in the real estate business and seeking to acquire additional operating companies and real estate properties, which was the predecessor to New Valley LLC. Since July 1996, he has served as the Executive Vice President of New Valley’s parent, Vector, a New York Stock Exchange listed holding company. From May 1992 to September 1995, Mr. Lampen was a partner at Steel Hector & Davis, a law firm located in Miami, Florida. From January 1991 to April 1992, Mr. Lampen was a Managing Director at Salomon Brothers Inc, an investment bank, and was an employee at Salomon Brothers Inc from 1986 to April 1992. Mr. Lampen is a director of Ladenburg Thalmann Financial Services Inc. and served as a director of New Valley Corporation from June 1996 to December 2005. Mr. Lampen has served as a director of a number of other companies, including U.S. Can Corporation, The International Bank of Miami, N.A. and Spec’s Music Inc., as well as a court-appointed independent director of Trump Plaza Funding, Inc. Mr. Lampen received a Bachelor of Arts degree from The Johns Hopkins University in 1975 and received a Juris Doctorate degree in 1978 from Columbia Law School.

     J. Bryant Kirkland III, age 41, has served as the Company’s Vice President, Chief Financial Officer, Secretary and Treasurer since January 1998 and as a director of the Company since November 1998. Mr. Kirkland has served as a Vice President of Vector Group Ltd. since 2001 and became Vice President, Treasurer and Chief Financial Officer of Vector on April 1, 2006. From November 1994 to December 2005, Mr. Kirkland served in various financial capacities with New Valley Corporation, the predecessor to New Valley LLC, since November 1994 and from January 1998 to December 2005 as the Vice President, Treasurer and Chief Financial Officer of New Valley Corporation. Mr. Kirkland also served as Chief Financial Officer of Ladenburg Thalmann Financial Services Inc. from June 2001 to October 2002. Mr. Kirkland received a Bachelor of Science in Business Administration from the University of North Carolina in 1987 and a Masters of Business Administration from Barry University in December 2006.

     Robert M. Lundgren, age 48, has served as a director of the Company since January 1997. He also served as Vice President, Chief Financial Officer, Secretary and Treasurer of the Company from January 1997 through January 14, 1998. Mr. Lundgren has served as Director of Finance and Operations of Palmer Trinity School in Miami, Florida since July 2002. Mr. Lundgren was an independent consultant from October 2001 until July 2002. From January 14, 1998 to October 2001, Mr. Lundgren was employed by Solar Cosmetic Labs, Inc. as Chief Financial Officer. From November 1994 through January 14, 1998, Mr. Lundgren was employed by New Valley Corporation where he served as Vice President and Chief Financial Officer from May 1996 to January 14, 1998. From November 1992 through November 1994,

Mr. Lundgren worked for Deloitte & Touche as a Senior Manager in the audit practice. Mr. Lundgren has been a certified public accountant since 1981 and holds a Bachelor of Science in Accounting from Wake Forest University.

     Henry Morris, age 53, became a director of the Company in May 1997. Since 1989, Mr. Morris has been the Chairman and President of Morris & Carrick, Inc., a political and media consulting firm. Mr. Morris is also Chairman of the Board and Chief Executive Officer of Curran & Connors, Inc., a designer and producer of annual reports and corporate literature. From May 2003 until December 2006, Mr. Morris was a director of eSpeed, Inc., which operates electronic interactive marketplaces for financial and non-financial products. Mr. Morris received a Bachelor of Arts degree in 1974 from Columbia College and a Juris Doctorate degree in 1978 from Columbia Law School.

     Each director of the Company holds office until the next annual meeting of stockholders, or until his successor is elected and qualified. At present, the Company’s By-laws provide for not less than two directors or more than nine directors. Currently, there are four directors. The By-laws permit the Board of Directors to fill any vacancy and such director may serve until the next annual meeting of stockholders or until his successor is elected and qualified. Officers serve at the discretion of the Board of Directors.

Audit Committee

     The Audit Committee of the Company’s Board of Directors consists of Messrs. Lundgren and Morris. The Company’s Board of Directors has determined that Mr. Lundgren is an “audit committee financial expert”, and that Messrs. Lundgren and Morris are “independent”, as those terms are defined under the applicable Securities and Exchange Commission rules. In determining that Messrs. Lundgren and Morris are “independent”, the Board used the definition of independence in Rule 4200(a)(15) of the NASD’s listing standards.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the “SEC”). Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms which they file. Based solely on review of the copies of such forms furnished to the Company, or written representations that no Forms 5 were required, the Company believes that, during and with respect to the fiscal year ended December 31, 2006, all officers and directors complied with applicable Section 16(a) filing requirements.

Code of Ethics

     The Company has adopted a Code of Ethics that applies to the Company’s two employees, its President and Chief Executive Officer and its Vice President and Chief Financial Officer. The Company will provide, without charge, a copy of the Code of Ethics on the written request of any person addressed to the Company’s Chief Financial Officer at CDSI Holdings Inc., 100 S.E. Second Street, 32^nd Floor, Miami, Florida 33131.

ITEM 10. EXECUTIVE COMPENSATION

Executive Compensation

     The following table sets forth the combined remuneration paid or accrued by the Company during its last two fiscal years to those persons who were, at December 31, 2006, the Company’s Principal Executive Officer or who were executive officers whose cash compensation exceeded $100,000 (the “named executive officers”).

Summary Compensation Table

																										Nonqualified
																						Non-Equity				Deferred
																						Incentive Plan				Compensation								Total
Name and																		Option				Compensation				Earnings				All Other				Compensation
Principal Position		Year				Salary ($)				Bonus ($)				Stock Awards ($)				Awards ($)				($)				($)				Compensation ($)				($)
Richard J. Lampen President and Chief Executive Officer(1)			2006				—				—				—				—				—				—				—			None
			2005				—				—				—				—				—				—				—			None

Stock Options

     In order to attract and retain persons necessary for the business of the Company, the Company adopted the 1997 Stock Option Plan (the “Option Plan”) covering up to 750,000 shares, pursuant to which officers, directors and key employees of the Company and consultants to the Company are eligible to receive incentive and/or non-incentive stock options. The Option Plan, which expires ten years from the date of its adoption, is administered by the Board of Directors or the Compensation Committee. The selection of participants, allotment of shares, determination of price and other conditions relating to the grant of options is determined by the Board of Directors or the Compensation Committee. Incentive stock options granted under the Option Plan are exercisable for a period of up to 10 years from the date of grant at an exercise price which is not less than the fair market value of the Common Stock on the date of the grant, except that the term of an incentive stock option granted under the Option Plan to a stockholder owning more than 10% of the outstanding Common Stock may not exceed five years and its exercise price may be not less than 110% of the fair market value of the shares on the date of the grant.

     Under the Option Plan, each director who is not a full-time employee of the Company, immediately upon first taking office, is granted options to purchase 6,000 shares of Common Stock exercisable at the fair market value of such shares on the date of grant. Options for 3,000 shares covered thereby are exercisable immediately and options for 3,000 shares become exercisable on the first anniversary of the date of grant. Subsequently, the Option Plan provides for annual grants of options to purchase 3,000 shares of Common Stock upon reelection as a director of the Company.

Option Awards

Stock Awards

Equity

Incentive

Equity

Plan

Incentive

Awards:

Equity

Plan

Market or

Incentive

Awards:

Payout

Plan

Number of

Value of

Awards:

Unearned

Unearned

Number of

Number

Market

Shares,

Shares,

Number of

Securities

of Shares

Value of

Units or

Units or

Securities

Number of

Underlying

or Units

Shares or

Other

Other

Underlying

Securities

Unexer-

Option

of Stock

Units of

Rights

Rights

Unexercised

Underlying

cised

Option

Expir-

That

Stock That

That Have

That

Options (#)

Options (#)

Unearned

Exercise

ation

Have Not

Have Not

Not

Have Not

Name

Exercisable

Unexercisable

Options (#)

Price ($)

Date

Vested (#)

Vested ($)

Vested (#)

Vested ($)

Richard J. Lampen

6,000

—

—

$

5.50

5/21/07

—

—

—

—

3,000

—

—

$

0.44

1/12/09

—

—

—

—

     There were no exercises or grants of options during 2006.

Employment Agreements and Other Compensation Plans

     The Company is not party to any employment agreements or other compensation plans except for the Option Plan.

Compensation of Directors

     The Company pays each director who is not a full-time employee of the Company an annual retainer of $5,000, payable quarterly, and reimburses the directors for reasonable travel expenses incurred in connection with their activities on behalf of the Company.

     The table below summarizes the compensation paid by the Company to non-employee directors for the fiscal year ended December 31, 2006.

																		Changes in Pension
																		Value and
																		Nonqualified
														Non-Equity				Deferred
		Fees Earned or Paid								Option				Incentive Plan				Compensation				All Other
Name		in Cash ($)				Stock Awards ($)				Awards ($)				Compensation ($)				Earnings ($)				Compensation ($)				Total ($)
Richard J. Lampen		$	5,000				—				—				—				—				—			$	5,000
J. Bryant Kirkland III		$	5,000				—				—				—				—				—			$	5,000
Robert M. Lundgren		$	5,000				—				—				—				—				—			$	5,000
Henry Morris		$	5,000				—				—				—				—				—			$	5,000

ITEM 11.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     The following table sets forth, as of April 2, 2007, the beneficial ownership of the Company’s Common Stock (the only class of voting securities) by (i) each person known to the Company to own beneficially more than five percent of the Common Stock, (ii) each of the Company’s directors, (iii) each of the Company’s named executive officers (as such term is defined in the Summary Compensation Table above) and (iv) all directors and executive officers as a group. Unless otherwise indicated, each person possesses sole voting and investment power with respect to the shares indicated as beneficially owned, and the business address of each person is 100 S.E. Second Street, Miami, Florida 33131.

		Number of Shares of
Name and Address(1)		Common Stock				Percentage of Ownership
New Valley LLC(2)			1,490,000				47.8	%
J. Bryant Kirkland III(3)			9,000				*
Richard J. Lampen(3)			9,000				*
Henry Morris(3) 271 Madison Avenue New York, NY 10016			9,000				*
Robert Lundgren(3) 14545 SW 79th Court Miami, FL 33158			16,333				*
All executive officers and directors as a group (4 persons)(3)			43,333				1.4	%

Equity Compensation Plan Information

     The following table summarizes information about the options, warrants and rights and other equity compensation under the Company’s equity plans as of December 31, 2006.

Number of securities remaining

Number of securities to

available for future issuance

be issued upon exercise

Weighted-average exercise

under equity compensation

of outstanding options,

price of outstanding

plans (excluding securities

warrants and rights

options, warrants and rights

reflected in column (a))

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders (1)

653,333

$

4.88

596,667

Equity compensation plans not approved by security holders.

—

—

—

Total

653,333

$

4.88

596,667

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Certain accounting and related finance functions are performed on behalf of the Company by employees of the Company’s principal stockholder, New Valley. Expenses incurred relating to these functions are allocated to the Company and paid as incurred to New Valley based on management’s best estimate of the cost involved. The amounts allocated were immaterial for all periods presented herein.

ITEM 13. EXHIBITS

		Exhibits
		The Exhibits listed below are filed as part of this report.
3.1		Form of Restated Certificate of Incorporation of the Company (1)
3.2		Certificate of Amendment to the Restated Certificate of Incorporation of the Company (2)
3.3		Form of By-Laws of the Company (1)
10.1		Form of 1997 Stock Option Plan (1)
10.2		Form of PC411, Inc. New Valley Corporation Stock Option Plan and Agreement (1)
31.1		Certification of Chief Executive Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2		Certification of Chief Financial Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1		Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2		Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The Audit Committee reviews and approves audit and permissible non-audit services performed by Becher Della Torre Gitto & Company PC, as well as the fees charged for such services. In its review of non-audit service fees and its appointment of Becher Della Torre Gitto & Company PC as the Company’s independent accountants, the Audit Committee considered whether the provision of such services is compatible with maintaining Becher Della Torre Gitto & Company PC’s independence. All of the services provided and fees charged by Becher Della Torre Gitto & Company PC in 2006 and 2005 were pre-approved by the Audit Committee.

     Audit Fees. The aggregate fees billed by Becher Della Torre Gitto & Company PC for professional services for the audit of the annual financial statements of the Company for 2006 and the review of the financial statements included in the Company’s quarterly reports on Form 10-QSB for the quarters ended March 31, 2006, June 30, 2006 and September 30, 2006 was $9,328. The aggregate fees billed by Becher Della Torre Gitto & Company PC for professional services for the audit of the annual financial statements of the Company for 2005 and the review of the financial statements included in the Company’s quarterly reports on Form 10-QSB for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005 was $9,150.

     Audit-Related Fees. There were no other fees billed by Becher Della Torre Gitto & Company PC during the last two fiscal years for assurance and related services that were reasonably related to the performance of the audit or review of the Company’s financial statements and not reported under “Audit Fees” above.

     Tax Fees. There were no fees billed by Becher Della Torre Gitto & Company PC or PricewaterhouseCoopers LLP during the last two fiscal years for professional services rendered by such firms for tax compliance, tax advice and tax planning.

     All Other Fees. There were no other fees billed by Becher Della Torre Gitto & Company PC or PricewaterhouseCoopers LLP during the last two fiscal years for products and services provided by such firms.

SIGNATURES

     In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on April 2, 2007, on its behalf by the undersigned, thereunto duly authorized.

POWER OF ATTORNEY

     The undersigned directors and officers of CDSI Holdings Inc. hereby constitute and appoint Richard J. Lampen and J. Bryant Kirkland III, and each of them, with full power to act without the other and with full power of substitution and resubstitution, our true and lawful attorneys-in-fact with full power to execute in our name and behalf in the capacities indicated below, this Annual Report on Form 10-KSB and any and all amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, and hereby ratify and confirm all that such attorneys-in-fact, or any of them, or their substitutes shall lawfully do or cause to be done by virtue hereof.

     In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on April 2, 2007.

Signature		Title
/s/ Richard J. Lampen   Richard J. Lampen		Director, President and Chief Executive Officer
/s/ J. Bryant Kirkland III   J. Bryant Kirkland III		Director, Vice President, Treasurer and Chief Financial Officer (principal accounting and financial officer)
/s/ Henry Morris   Henry Morris		Director
/s/ Robert Lundgren   Robert Lundgren		Director

CDSI HOLDINGS INC.

Financial Statements

December 31, 2006 and 2005

(With Report of Independent Registered Public Accounting Firm Thereon)

CDSI HOLDINGS INC.

Index to Financial Statements

			Page
Report of Independent Registered Public Accounting Firm			F-2
Audited Financial Statements:
Balance Sheet			F-3
Statements of Operations			F-4
Statements of Stockholders’ Equity			F-5
Statements of Cash Flows			F-6
Notes to Financial Statements			F-7

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of
CDSI Holdings Inc.:

We have audited the accompanying balance sheet of CDSI Holdings Inc. (the “Company”) as of December 31, 2006, and the related statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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 audit includes 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 financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the CDSI Holdings, Inc. as of December 31, 2006, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2006 in conformity with accounting principles generally accepted in the United State of America.

/s/ Becher Della Torre Gitto & Company PC

Becher Della Torre Gitto & Company PC
Ridgewood, NJ

March 23, 2007

CDSI HOLDINGS INC.

Balance Sheet

		December 31,
		2006
Assets
Current assets:
Cash and cash equivalents		$	61,812
Investment securities available for sale			224
Total assets		$	62,036
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses		$	7,600
Total current liabilities			7,600
Commitments and contingencies			—
Stockholders’ equity:
Preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding			—
Common stock, $.01 par value. Authorized 25,000,000 shares; 3,120,000 shares issued and outstanding			31,200
Additional paid-in capital			8,209,944
Accumulated deficit			(8,186,932	)
Accumulated other comprehensive income			224
Total stockholders’ equity			54,436
Total liabilities and stockholders’ equity		$	62,036

See accompanying notes to financial statements.

CDSI HOLDINGS INC.

Statements of Operations

		Years Ended December 31,
		2006				2005
Revenues		$	—			$	—
Cost and expenses:
General and administrative			33,983				34,061
			33,983				34,061
Operating loss			(33,983	)			(34,061	)
Other income:
Interest income			3,535				3,125
			3,535				3,125
Net loss		$	(30,448	)		$	(30,936	)
Net loss per share (basic and diluted)		$	(0.01	)		$	(0.01	)
Shares used in computing net loss Per share			3,120,000				3,120,000

See accompanying notes to financial statements.

CDSI HOLDINGS INC.

Statements of Stockholders’ Equity

																		Accumulated
										Additional								Other				Total
		Common stock								Paid-in				Accumulated				Comprehensive				Stockholders’
		Shares				Amount				Capital				Deficit				Income				Equity
Balance at January 1, 2005			3,120,000			$	31,200			$	8,209,944			$	(8,125,548	)		$	10,500			$	126,096
Net loss			—				—				—				(30,936	)			—				(30,936	)
Net realized gains reclassified into net income			—				—				—				—				—				—
Change in unrealized loss on investment securities			—				—				—				—				(8,680	)			(8,680	)
Total comprehensive loss			—				—				—				—				—				(39,616	)
Balance at January 1, 2006			3,120,000			$	31,200			$	8,209,944			$	(8,156,484	)		$	1,820			$	86,480
Net loss			—				—				—				(30,448	)			—				(30,448	)
Net realized gains reclassified into net income			—				—				—				—				—				—
Change in unrealized loss on investment securities			—				—				—				—				(1,596	)			(1,596	)
Total comprehensive loss			—				—				—				—				—				(32,044	)
Balance at December 31, 2006			3,120,000			$	31,200			$	8,209,944			$	(8,186,932	)		$	224			$	54,436

See accompanying notes to financial statements.

CDSI HOLDINGS INC.

Statements of Cash Flows

		Years Ended December 31,
		2006				2005
Cash flows from operating activities:
Net loss		$	(30,448	)		$	(30,936	)
Adjustments to reconcile net loss to net cash used in operating activities:
Changes in assets and liabilities:
Accounts payable and accrued expenses			600				(350	)
Net cash used in operating activities			(29,848	)			(31,286	)
Net cash flows provided from investing activities:
Proceeds from sale of investments			—				—
Net cash flows provided from investing activities			—				—
Net cash flows provided from financing activities			—				—
Net decrease in cash			(29,848	)			(31,286	)
Cash and cash equivalents beginning of period			91,660				122,946
Cash and cash equivalents at end of period		$	61,812			$	91,660
Supplemental cash flow information:
Cash paid during year for:
Interest			—				—
Income taxes			—				—

See accompanying notes to financial statements.

CDSI HOLDINGS INC.

Notes to Financial Statements

(1)		Business and Organization
		CDSI Holdings Inc. (the “Company” or “CDSI”) was incorporated in Delaware on December 29, 1993. On January 12, 1999, the Company’s stockholders voted to change the corporate name of the Company from PC411, Inc. to CDSI Holdings Inc. Prior to May 8, 1998, the Company’s principal business was an on-line electronic delivery information service that transmits name, address, telephone number and other related information digitally to users of personal computers (the “PC411 Service”). On May 8, 1998, the Company acquired Controlled Distribution Systems, Inc. (“CDS”), a company engaged in the marketing and leasing of an inventory control system for tobacco products. In February 2000, CDSI announced CDS will no longer actively engage in the business of marketing and leasing the inventory control system. Effective November 12, 2003, the Company and its wholly-owned subsidiary CDS merged with the Company as the surviving corporation.
		At December 31, 2006, the Company had an accumulated deficit of approximately $8,186,932. The Company has reported an operating loss in each of its fiscal quarters since inception and it expects to continue to incur operating losses in the immediate future. The Company has reduced operating expenses and is seeking acquisition and investment opportunities. There is a risk the Company will continue to incur operating losses.
		CDSI intends to seek new business opportunities. As CDSI has only limited cash resources, CDSI’s ability to complete any acquisition or investment opportunities it may identify will depend on its ability to raise additional financing, as to which there can be no assurance. There can be no assurance that the Company will successfully identify, complete or integrate any future acquisition or investment, or that acquisitions or investments, if completed, will contribute favorably to its operations and future financial condition.
(2)		Summary of Significant Accounting Policies
		Cash and Cash Equivalents
		Cash and cash equivalents include money market funds with a maturity of three months or less.
		Fair Value of Financial Instruments
		The fair values of the Company’s cash and cash equivalents and accrued expenses approximate their carrying values due to the relatively short maturities of these instruments.

CDSI HOLDINGS INC.

Notes to Financial Statements — Continued

		Investment Securities Available for Sale
		The Company owns 2,800 shares of Dialog Group Inc. (“Dialog”) Common Stock and classifies its investment in Dialog as “Investment Securities Available for Sale” as of December 31, 2006. The Dialog Common Stock is carried at fair value, based on the last trade prior to December 31, 2006, and net unrealized gains are included as a component of stockholders’ equity. However, no assurance can be given that the Company will ultimately realize fair value for its Dialog shares as there is only a limited trading market for the shares and the Company may not be able to sell any material portion of its shares at prevailing market prices. The Company sold 50,000 shares of Dialog stock in 2004 for a net gain of $4,888. Realized gains and losses are included in other income. The cost of securities sold is determined based on average cost. See Notes 3 and 4.
		Income Taxes
		The Company utilizes the liability method of accounting for deferred income taxes. Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
		Computation of Basic and Diluted Net Loss per Share
		Basic net loss per share of Common Stock has been computed by dividing the net loss applicable to common shareholders by the weighted average number of shares of common stock outstanding during the year. Diluted loss per share is computed by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding, increased by the assumed conversion of other potentially dilutive securities during the period. Stock options and warrants totaling 653,333 shares at December 31, 2006 and 2005 were excluded from the calculation of diluted per share results presented because their effect was anti-dilutive. Accordingly, diluted net loss per common share is the same as basic net loss per common share.
		Use of Estimates
		The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
		Concentrations of Risks
		Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash held in overnight money market accounts. The Company has no formal policy requiring collateral to support the financial instruments subject to credit risk.

CDSI HOLDINGS INC.

Notes to Financial Statements — Continued

(3)		ThinkDirectMarketing, Inc. Transaction
		On November 5, 1998, the Company contributed the non-cash assets and certain liabilities of the PC411 Service to ThinkDirectMarketing, Inc. (“TDMI”) (formerly known as Digital Asset Management, Inc.). The Company received preferred stock representing an initial 42.5% interest in TDMI in exchange for the contribution of the PC411 Service’s net assets. The Company’s carrying value in the net assets contributed to TDMI totaled $73,438. The Company recorded $462,360 as a capital contribution in connection with the transaction, which represented the Company’s 42.5% interest in the capital raised by TDMI in excess of the carrying value of the Company’s net assets contributed to TDMI. The Company agreed, under certain conditions, to fund up to $200,000 of an $800,000 working capital line. The Company funded $100,000 of the working capital line in the second quarter of 1999. In July 1999, the Company agreed to extend the maturity of its working capital line and was released from any further obligation to fund additional amounts under the working capital line.
		In October 2000, TDMI and Cater Barnard plc (formerly known as VoyagerIT.com) entered into an agreement whereby Cater Barnard purchased for $5,000,000 shares of TDMI’s convertible preferred stock and convertible notes on various dates between November 10, 2000 and June 8, 2001. On October 16, 2001, Cater Barnard agreed to use its best efforts to fund an additional $1,250,000 to TDMI by January 31, 2002 and on the same date, the TDMI stockholders granted Cater Barnard an option to purchase by January 31, 2002 all of TDMI’s common stock not held by Cater Barnard for an aggregate purchase price of 78,750 shares of Convertible Preferred Stock of Dialog Group Inc. (“Dialog”, formerly known as IMX Pharmaceuticals, Inc.). Dialog was then a majority-owned subsidiary of Cater Barnard to which Cater Barnard had transferred its interest in TDMI. The preferred stock was initially convertible into 1,575,000 shares of Dialog Common Stock.
		On January 31, 2002, Dialog acquired all the shares of TDMI it did not already own by exercising the option previously granted to Cater Barnard. CDSI received 8,250 shares of Dialog Class B Convertible Preferred Stock in exchange for its interest in TDMI. Each share of Dialog Class B Preferred Stock was entitled to receive an annual dividend of $4.00 on December 31 of each year. The dividend was payable at the option of Dialog in shares of its Common Stock. The shares of Dialog Class B Preferred Stock to be received by the Company were initially convertible into 165,000 shares of Dialog Common Stock.
		On November 4, 2002, the holders of Dialog Class B Preferred Stock and Dialog agreed to (i) increase the number of common shares into which the Dialog Class B Preferred Stock is convertible from 1,575,000 to 3,150,000 and (ii) eliminate the annual dividend on the Class B Preferred Stock. As a result, the Class B Preferred Stock held by CDSI became convertible into 330,000 shares of Dialog Common Stock and, on February 7, 2003, CDSI converted its preferred shares into 330,000 shares of Dialog Common Stock. The Company sold 50,000 shares of Dialog stock for $4,888 in the third quarter of 2004. See Note 4. On September 18, 2006, Dialog effected a 1-for-100 reverse stock split. Based on public filings by Dialog, management currently estimates that CDSI’s interest in Dialog (currently 2,800 shares) is less than a 0.01% on a fully-diluted basis.

CDSI HOLDINGS INC.

Notes to Financial Statements — Continued

		On January 8, 2007, the Dialog reported that it had completed the sale of substantially all of its operating assets.
(4)		Investment Securities Available for Sale
		The Company’s 2,800 shares of Dialog Common Stock may be sold by the Company pursuant to Rule 144(k) of the Securities Act of 1933. See Note 3. In accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, the Company has classified these shares as “Investment Securities Available for Sale” as of December 31, 2006 The Dialog Common Stock is carried at fair value, based on the last trade prior to December 31, 2006 and net unrealized gains are included as a component of stockholders’ equity. However, no assurance can be given that the Company will ultimately realize fair value for its Dialog shares as there is only a limited trading market for the shares and the Company may not be able to sell any material portion of its shares at prevailing market prices.
(5)		Related Party Transactions
		Certain accounting and related finance functions are performed on behalf of the Company by employees of the parent of the Company’s principal stockholder, Vector Group Ltd. (“Vector”). Expenses incurred relating to these functions are allocated to the Company and paid as incurred to Vector based on management’s best estimate of the cost involved. The amounts allocated were immaterial for all periods presented herein.
(6)		Stock Options
		The Company grants equity compensation under its 1997 Stock Option Plan (“the 1997 Plan”), which provides for the grant of options to purchase the Company’s stock to the employees and directors of the Company. The term of the options granted under the 1997 Plan is limited to 10 years. As of December 31, 2006, there were approximately 596,667 shares available for issuance under the 1997 Plan.
		Prior to January 1, 2006, the Company accounted for share-based compensation plans in accordance with the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” as permitted by SFAS No. 123. The Company elected to use the intrinsic value method of accounting for employee and director share-based compensation expense for its non-compensatory employee and director stock option awards and did not recognize compensation expense for the issuance of options with an exercise price equal to the market price of the underlying common stock on the date of grant.
		On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), which requires the Company to value unvested stock options granted prior to the adoption of SFAS No. 123(R) under the fair value method of accounting and expense this amount in the statement of operations over the stock option’s remaining vesting period. The Company adopted this new standard, prospectively, on January 1, 2006. Because all options outstanding were fully vested at January 1, 2006, there was no impact on the Company’s financial statements. In addition, because all options were fully vested on

CDSI HOLDINGS INC.

Notes to Financial Statements — Continued

		January 1, 2005, there would have been no impact of the Company’s financial statements for the year ended December 31, 2005.
		As permitted by SFAS No. 123 and SFAS No. 123(R), the fair value of option grants is estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price characteristics which are significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of stock-based compensation awards.
		There were no option grants in the years ended December 31, 2006 and 2005. If options had been granted, the assumptions used in computing fair value under the Black-Scholes option pricing model would have been based on the expected option life considering both the contractual term of the option and expected employee exercise behavior, the interest rate associated with U.S. Treasury issues with a remaining term equal to the expected option life and the expected volatility of the Company’s common stock over the expected term of the option.
		A summary of the Company’s stock option activity during the years ended December 31, 2005 and 2006, respectively, are as follows:

										Weighted-
										Average
						Weighted-				Remaining
						Average				Contractual
						Exercise				Term				Aggregate Intrinsic
		Shares				Price				(in years)				Value(1)
Outstanding at January 1, 2005			153,333			$	2.03				3.2			$	—
Granted			—				—				—				—
Exercised			—				—				—				—
Forfeited or expired			—				—				—				—
Outstanding at December 31, 2005			153,333			$	2.03				2.2			$	—
Granted			—				—				—				—
Exercised			—				—				—				—
Forfeited or expired			—				—				—				—
Outstanding at December 31, 2006			153,333			$	2.03				1.2			$	—
Exercisable at December 31, 2006			153,333											$	—
Options vested during period			—											$	—

(7)		Preferred Stock
		The Company has the authority to issue 5,000,000 shares of Preferred Stock, which may be issued from time to time in one or more series.

CDSI HOLDINGS INC.

Notes to Financial Statements — Continued

(8)		Income Taxes
		During the years ended December 31, 2006 and 2005, the Company had no income and therefore made no provision for Federal and state income taxes.
		At December 31, 2006, the Company had approximately $6,980,000 of net operating loss carryforwards for federal and state tax reporting purposes available to offset future taxable income, if any; such carryforwards expire between 2009 and 2027 (federal) and 2006 and 2026 (state). At December 31, 2005, the Company had approximately $6,950,000 of net operating loss carryforwards for federal and state tax reporting purposes available to offset future taxable income, if any; such carryforwards expire between 2009 and 2026 (federal) and 2005 and 2027 (state). Deferred tax assets and liabilities principally relate to net operating loss carryforwards and aggregate approximately $2,485,000 before valuation allowance. In assessing the realizability of the net deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. As of December 31, 2006, the Company has provided a full valuation allowance against net deferred tax assets due to the Company’s uncertainty of future taxable income against which the deferred tax asset may be utilized. Accordingly, no deferred tax asset has been recorded on the accompanying balance sheet.
(9)		Contingencies
		As of December 31, 2006, the Company was not authorized to transact business in any state other than Delaware, which is its state of incorporation. The Company received an inquiry from the Florida Department of State (the “FDS”) inquiring whether the Company should have registered with the FDS in previous years, beginning in 1998. In March 2006, the Company responded to the inquiry and stated it believes its activities in previous years did not meet the requirements for such registration; however, no assurance can be provided that the Company’s position will be accepted by the FDS. The Company is unable to quantify the amount of any registration fees and other costs attributable to any failure to register and has not accrued any amounts in its financial statements related to such inquiry.
		The Company has recently filed for refunds of approximately $21,700 for unclaimed property in a state the Company previously conducted business. No assurance can be given that the Company will prevail in receiving such refund claims.