As filed with the Securities and Exchange Commission on June 7, 2002
Registration No. 333-
===============================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DATA CONVERSION LABORATORY, INC.
(Exact name of Registrant as specified in its charter)

New York 7374 11-2685851

(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)

184-13 Horace Harding Expressway
Fresh Meadows, New York 11365
(718) 357-8700
(718) 357-8776 Facsimile
(Address, including zip code, and telephone number, including area code, of
Registrant's executive offices)

----------------

MARK GROSS
President and Chief Executive Officer
Data Conversion Laboratory, Inc.
184-13 Horace Harding Expressway
Fresh Meadows, New York 11365
(718) 357-8700
(718) 357-8776 Facsimile
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

----------------

Copies to:

Joel J. Goldschmidt, Esq. Mark von Bergen, Esq.
Morse, Zelnick, Rose & Lander LLP Joshua E. Husbands, Esq.
450 Park Avenue Holland & Knight LLP
New York, New York 10022 2300 U.S. Bancorp Tower
(212) 838-8269 111 S.W. Fifth Avenue
(212) 838-9190 Facsimile Portland, Oregon 97204
(503) 243-2300
(503) 241-8014 Facsimile

----------------

Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. |X|

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|

(calculation of registration fee on next page)

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
===============================================================================

CALCULATION OF REGISTRATION FEE

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Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Aggregate Amount of
Securities to be Registered Registered Per Unit/Share (1) Offering Price (1) Registration Fee
- ---------------------------------------------------------------------------------------------------------------------------------

Units, consisting of one common
share, $.01 par value, and one
warrant to purchase one common share 1,437,500(2) $8.50 $12,218,750 $1,124.13
- ---------------------------------------------------------------------------------------------------------------------------------
Common shares included in the units 1,437,500(2) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Warrants to purchase common shares
included in the units 1,437,500(2) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Common shares underlying the warrants
included in the units(3) 1,437,500(2) $12.75 $18,328,125 $1,686.19
- ---------------------------------------------------------------------------------------------------------------------------------
Common shares issuable upon
declaration of dividend 287,500 -- -- (4)
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Representative's warrants 125,000 -- -- --(5)
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Units issuable upon exercise of the
representative's warrants 125,000 $10.20 $1,275,000 $117.30
- ---------------------------------------------------------------------------------------------------------------------------------
Common shares included in the units
underlying the representative's
warrants(3) 125,000 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Warrants to purchase common shares
included in units issuable upon
exercise of the representative's
warrants 125,000 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Common shares underlying the warrants
to purchase common shares included in
units issuable upon exercise of the
representative's warrants(3) 125,000 $12.75 $1,593,750 $146.63
- ---------------------------------------------------------------------------------------------------------------------------------
Total $33,415,625 $3,074.25
- ---------------------------------------------------------------------------------------------------------------------------------

- -----------------------
(1) Estimated solely for purposes of calculating the amount of the registration
fee paid pursuant to Rule 457(o) under the Securities Act.
(2) Includes 187,500 shares issuable upon exercise of underwriters' over-
allotment option.
(3) Pursuant to Rule 416 under the Securities Act, there are also being
registered hereby such additional indeterminate number of shares as may
become issuable pursuant to the antidilution provisions of the warrants.
(4) No registration fee required.
(5) No registration fee required pursuant to Rule 457(g) of the Securities Act.

PROSPECTUS (Subject to Completion)
Dated June 7, 2002

1,250,000 Units

[Data Conversion Laboratory LOGO]

----------------

This is our initial public offering. We are offering 1,250,000 units, each
unit consisting of one common share and one unit warrant. We expect that the
initial public offering price will be between $7.50 and $8.50 per unit. Each
unit warrant will entitle its holder to purchase one common share at an
exercise price equal to 150% of the unit offering price. The unit warrants are
exercisable at any time after they become separately tradable until their
expiration date, five years after the date of this prospectus. We may redeem
some or all of the unit warrants, beginning six months after the date of this
prospectus, at a price of $0.25 per unit warrant, if the closing price for our
stock, as reported on the Nasdaq SmallCap Market for any ten consecutive
trading days, is at or above 200% of the unit offering price.

The common shares and the unit warrants will trade only as a unit for 30
days following this offering. After that date, the common shares and the unit
warrants will trade separately.

If our audited pre-tax income for the year ending December 31, 2002 is less
than $1.3 million, we will promptly declare and pay a 10% stock dividend to
common shareholders of record as of the record date for that dividend. There
will be no increase in the number of, or decrease in the exercise price for,
the common shares underlying the unit warrants and the representative's
warrant as a result of this dividend. Our executive officers and one other
shareholder have agreed to immediately return any dividend shares they may
receive to us as a contribution to capital.

No public market currently exists for any of our securities. We are applying
to the Nasdaq SmallCap Market to list the units, common shares and unit
warrants under the symbols "DCLXU," "DCLX" and "DCLXW," respectively.

Investing in these units involves significant risks. See "Risk Factors"
beginning on page 7.

----------------

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the disclosures in this prospectus. Any representation
to the contrary is a criminal offense.
----------------

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Per Unit Total
- --------------------------------------------------------------------------------

Initial public
offering price........ $ $
- --------------------------------------------------------------------------------
Underwriting discount... $ $
- --------------------------------------------------------------------------------
Proceeds to us, before
expenses.............. $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

Paulson Investment Company, Inc. is the representative of the underwriters
of this offering. We have granted the representative a 45-day option to
purchase up to an additional 187,500 units to cover over-allotments.

----------------

PAULSON INVESTMENT COMPANY, INC.

The date of this Prospectus is , 2002

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.

INSIDE FRONT COVER

[GRAPHICS TO BE SUPPLIED]

This graphic illustrates the conversion process. The center of the graphic
is a circle symbolizing our proprietary conversion software. The core of the
circle is called "DCL Conversion Hub." Around the core are different segments
representing various modules to the software. Above the circle is the original
content, a short news article. Surrounding the article are graphics depicting
the original format in which the article could have been produced: on CD ROM;
in a book; as a newspaper article or on a computer in a word processing
format. Arrows lead from the article through the software circle to the same
article converted into XML with tags applied to describe the different
elements of the article. Graphics surround the XML version, depicting some of
the ways it can be viewed: on the Web, through a personal display unit, on a
laptop computer or on a personal digital assistant.

------------------------

We have rights to the following unregistered names and marks: Data
Conversion Laboratory and MindReader(sm). All other trademarks, trade names or
service marks appearing in this prospectus belong to their respective owners.

Prospectus Summary

This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully, including our financial
statements and the notes to those statements. Unless indicated to the
contrary, historical financial information has not been adjusted to reflect a
1.345641-for-1 stock split in the form of a dividend effected on May 30, 2002.
All other information regarding our securities has been adjusted to reflect
this dividend.

Unless stated to the contrary, references to "we," "us," "our," "DCL" or the
"company" in this prospectus refer to Data Conversion Laboratory, Inc. and,
where appropriate, its predecessors.

Data Conversion Laboratory

We are a leading independent provider of data conversion services. Since our
inception in 1981, we have converted content from one format to another in
response to evolving client preferences and advances in technology. Using our
proprietary conversion methodology and software, we specialize in implementing
and managing large, complex conversion projects, converting a broad range of
content to and from a variety of formats. Currently, the majority of our
business consists of converting content to the markup languages XML and SGML.
These services enable our clients to publish, distribute, search, store and
provide access to data and information over a wide range of electronic and
digital communication channels, including the Internet, intranets, extranets
and wireless personal communication devices. Our clients currently include
large manufacturing companies, professional societies, publishers, defense
contractors and the United States Department of Defense.

Over the last few years, we have benefited from the rapid growth of the data
conversion industry. From 2000 to 2001, our revenues grew 50.0%, increasing
from $3.3 million to $4.9 million, and our gross margin increased from 35.0%
to 42.9%. In 2001 we reported pre-tax income of $889,000 compared to a pre-tax
loss of $94,000 in 2000. The industry's growth is attributable to a number of
factors, including the increasing popularity of the Internet; the development
of various markup languages, such as SGML and XML, that make it easier to
publish, distribute, search, store and access content in digital format;
government regulations mandating or otherwise encouraging the use of digital
technology to publish and distribute content; and a general trend by large
organizations to outsource their data conversion needs.

We believe that we are well-positioned to capitalize on the anticipated
continued growth of the data conversion industry because of our competitive
advantages.

Reputation and brand identity. We believe that, as a result of more than 20
years in the industry, we have developed a reputation as a high-quality,
reliable and efficient provider of data conversion services.

Software technology. We have developed comprehensive proprietary conversion
software that automates substantially all of the conversion process.

Conversion methodology. Our proprietary conversion methodology is designed
to address the principal issues of a complex, large-scale conversion project.
It allows us to efficiently and accurately design each conversion project to
meet the client's requirements and provides a mechanism for the client to
review the results of the project and provide feedback.

Vendor network. Our network of high quality, low-cost vendors allows us to
outsource the non-automated portions of the conversion process. As a result,
we are able to reduce our costs, maintain flexibility and execute multiple
conversion projects simultaneously.

We intend to use these advantages to expand our existing client
relationships and develop new ones. We currently have an established position
in three large markets: scientific, technical and medical, or STM, publishing;
corporate technical documentation; and defense. Recently, we have expanded
into a fourth large market, educational publishing. We plan to use a portion
of the net proceeds to hire additional sales and marketing personnel and to
develop three new markets within the next year. We also intend to enter into
strategic relationships and pursue strategic acquisitions that will enable us
to expand our client base.

We commenced operations in 1981 and incorporated in 1984 under the name M.J.
Gross & Company, Inc. Since inception, we have operated under the name Data
Conversion Laboratory. In June 2002, we changed our name to Data Conversion
Laboratory, Inc. Our offices are located at 184-13 Horace Harding Expressway,
Fresh Meadows, New York 11365, and our telephone number is (718) 357-8700. Our
online address is www.dclab.com. None of the information on our Web site is
part of this prospectus.

The Offering

Securities offered. . . . . . . . . . 1,250,000 units, each unit consisting
of one common share and one redeemable
unit warrant, to purchase one common
share. The common shares and the unit
warrants will trade as units for 30
days following the effective date of
this prospectus. After that date, the
common shares and the unit warrants
will trade separately.

Common shares to be outstanding after
the offering . . . . . . . . . . . . 2,671,314

Stock dividend. . . . . . . . . . . . If our audited pre-tax income for the
year ending December 31, 2002 is less
than $1.3 million, we will promptly
declare and pay a 10% stock dividend to
common shareholders of record as of the
record date for that dividend. There
will be no increase in the number of,
or decrease in the exercise price for,
the common shares underlying the unit
warrants and the representative's
warrant as a result of this dividend.
Our executive officers and one other
shareholder have agreed to immediately
return any dividend shares they may
receive to us as a contribution to
capital.

Unit warrants:

Number to be outstanding after this
offering. . . . . . . . . . . . . 1,250,000

Exercise terms. . . . . . . . . . The unit warrants are exercisable at
any time after they become separately
tradable. Each unit warrant entitles
its holder to purchase one common share
at an exercise price equal to 150% of
the unit offering price.

Expiration date . . . . . . . . . , 2007

Redemption. . . . . . . . . . . . We may redeem some or all of the unit
warrants, commencing six months after
the effective date of this prospectus,
at a price of $0.25 per warrant, on 30
days notice to the holders of the unit
warrants. However, we may only redeem
the unit warrants if the closing price
for our stock, as reported on the
Nasdaq SmallCap Market, for any ten
consecutive trading days, is at or
above 200% of the initial unit offering
price.

Proposed Nasdaq SmallCap symbols. . . Units DCLXU
Common shares DCLX
Unit warrants DCLXW

Risk factors. . . . . . . . . . . . . An investment in the units involves a
high degree of risk. You should not
consider this offer if you cannot
afford to lose your entire investment.
Please refer to "Risk Factors" for a
description of the risk factors you
should consider.

Use of proceeds . . . . . . . . . . . We will use the net proceeds we receive
from this offering, which we estimate
will be approximately $8.3 million,
assuming an initial public offering
price of $8.00 per unit, to expand our
sales and marketing efforts, further
enhance our proprietary software and
make a final S corporation distribution
to our pre-offering shareholders and
for working capital and general
corporate purposes.

Unless otherwise stated, all information contained in this prospectus
assumes no exercise of:

o the unit warrants;

o the over-allotment option to purchase up to 187,500 units;

o warrants to purchase 125,000 units granted to the representative in
connection with this offering;

o outstanding options granted under our 2001 stock option plan to purchase
185,261 common shares, of which 134,530 have an exercise price of $2.60
per share and 50,731 have an exercise price of $8.00 per share; and

o options to purchase 78,720 common shares, having an exercise price of
$0.42359 per share.

This information also assumes that no common shares will be issued as a
dividend.

Summary Financial Information

Statement of Operations Data:

Three months ended
Years ended December 31, March 31,
----------------------- -----------------------
2000 2001 2001 2002
---------- ---------- ---------- ----------
(unaudited)
(in thousands, except share and per share data)

Revenue ........................................................... $ 3,252 $ 4,879 $ 1,071 $ 1,422
Gross margin ...................................................... $ 1,138 $ 2,096 $ 405 $ 631
Selling, general and administrative expenses ...................... $ 1,124 $ 1,017 $ 324 $ 326
Other expenses .................................................... $ 108 $ 190 $ 51 $ 73
Income (loss) before provision for (benefit from) taxes ........... $ (94) $ 889 $ 30 $ 232
Net income (loss) ................................................. $ (94) $ 800 $ 30 $ 214
Basic net income (loss) per common share .......................... $ (0.09) $ 0.80 $ 0.03 $ 0.21
Diluted net income (loss) per common share ........................ $ (0.09) $ 0.75 $ 0.03 $ 0.20
Weighted-average number of shares outstanding - basic ............. 1,000,000 1,000,000 1,000,000 1,000,000
Weighted-average number of shares outstanding - diluted ........... 1,000,000 1,063,521 1,047,608 1,062,896

Since our inception, we have been an S corporation for federal and state
income tax purposes. As a result, we do not pay federal and state corporate
income taxes. Immediately before this offering is consummated, we will
terminate our status as an S corporation. Had we been a C corporation in 2000
and 2001, income tax expense would have been materially different. The pro
forma statement of operations data for the year ended December 31, 2001 and
the three months ended March 31, 2002 set forth below reflects our operating
results assuming we were not an S corporation for those periods.

Pro Forma Statement of Operations Data:

Three months
Year ended ended
December 31, March 31,
2001 2002
------------ ------------
(unaudited)
(in thousands, except
share and per share
data)

Net income ...................................... $ 800 $ 214
Pro forma provision for income taxes ............ 349 69
---------- ----------
Pro forma net income ............................ $ 451 $ 145
========== ==========
Pro forma basic net income per share ............ $ 0.43 $ 0.14
---------- ----------
Pro forma diluted net income per share .......... $ 0.40 $ 0.13
========== ==========
Pro forma weighted-average number of shares -
basic.......................................... 1,056,250 1,056,250
========== ==========
Pro forma weighted-average number of shares -
diluted........................................ 1,119,771 1,119,146
========== ==========

The table below sets forth a summary of our balance sheet data as of
December 31, 2001 and on an actual basis and as adjusted for this offering as
of March 31, 2002. Balance sheet data as adjusted for this offering take into
account the following:

o the 1.345641-for-1 stock split effected as a dividend on May 30, 2002;

o 75,000 common shares to be issued to members of the firm of Morse,
Zelnick, Rose & Lander LLP, our attorneys, on the date of this
prospectus, which will be charged to paid-in capital as an expense of
this offering;

o 673 common shares purchased by a former employee in April 2002 for
$1,750;

o the receipt of $8.3 million of estimated net proceeds of this offering,
assuming an initial public offering price of $8.00 per unit; and

o an estimated final S corporation distribution of $450,000 to our pre-
offering shareholders.

Balance Sheet Data:

December 31, 2001 March 31, 2002
----------------- ----------------------
(in thousands) As adjusted
for
Actual this offering
------ -------------
(unaudited)
(in thousands)

Current assets.......................................... $1,058 $1,015 $ 8,867
Working capital......................................... $ 7 $ 178 $ 8,030
Total assets............................................ $2,334 $2,317 $10,169
Total liabilities....................................... $1,144 $ 913 $ 913
Shareholders' equity.................................... $1,190 $1,405 $ 9,256

RISK FACTORS

This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus,
including our financial statements and the notes to those statements, before
you purchase any units.

Risks Related to Our Business

Our revenue is derived entirely from providing data conversion services. The
data conversion industry is relatively new and evolving. If the market for
data conversion services does not grow, our business, operations and financial
condition will be adversely affected.

All of our revenue, is and is expected in the foreseeable future to be,
derived from providing data conversion services. As a consequence, our near-
term future success depends on the growth of this industry and our ability to
capitalize on this growth, neither of which may occur. The market for data
conversion services is relatively new and its growth and market acceptance is
uncertain. Content owners that have already adopted or that rely on other
means of exchanging information may be reluctant or slow to adopt a new
strategy that may render their existing structure obsolete. In anticipation of
the growth of this industry, we have expanded our operations significantly in
recent years. As a result, we have incurred new fixed operating expenses, such
as additional administrative and managerial personnel. To capitalize on this
investment, we need to develop new client relationships and expand existing
ones. A decrease in the demand for data conversion services or its failure to
achieve broad market acceptance would significantly harm our growth prospects,
operating results and financial condition. If our revenues do not increase
sufficiently to offset these increased expenses, our operating results may be
adversely affected.

Our operating history may not be indicative of our future prospects because
our business is constantly evolving through the development and introduction
of new products and services and changing client preferences. If we do not
keep pace with these changes, our current services may become obsolete or
unmarketable.

Our operating history may not be a meaningful indicator of our future
prospects. The data conversion industry is characterized by rapidly changing
technologies, evolving industry standards, new product and service
introductions and changing customer requirements. You should evaluate our
chances of financial and operational success in light of the risks,
uncertainties, expenses, delays and difficulties associated with operating a
business in a rapidly changing and highly competitive market. To be
competitive and serve our clients effectively, we must respond in a timely and
cost-efficient basis to changes in technology, industry standards, procedures
and client preferences. We may experience technical or other difficulties that
prevent or delay our responses. These delays could cause our current services
to become obsolete and unmarketable. In addition, we may incur substantial
costs if we need to modify our services or infrastructure to adapt to these
changes.

Our revenues are difficult to predict because they are generated on a project-
by-project basis and projects may be cancelled with little or no notice. Since
a large portion of our expenses is fixed, any decline in our revenues could
adversely impact our operating results.

Our revenues are derived primarily from fees for services generated from
project-based client engagements. These projects vary in size and scope. Once
we complete a project, we have no assurance that the client will retain us
again in the future. In addition, clients may cancel, change or delay
production requirements with little or no notice. As a result, our revenues
are difficult to predict from period to period. Other factors may also
contribute to fluctuations in our operating results including timing of client
projects; volume of projects; the timing of our expenditures in anticipation
of future projects; our effectiveness in managing the conversion process;
changes in economic conditions; and unforeseen events. We make significant
decisions based on our estimates of client requirements, including decisions
regarding the levels of business we will seek and accept, production
schedules, equipment procurement, personnel hiring and other resource
acquisition. The nature of our clients' commitments and the possibility of
changes in demand for

their products may reduce our ability to estimate accurately future client
requirements. On occasion, clients may require rapid increases in production,
which could stress our resources. We may not have sufficient capacity at all
times to meet all of our clients' requirements. Finally, a substantial portion
of our expenses, particularly those related to compensation, rent and
equipment, is fixed. Consequently, a reduction in client demand for our
services can adversely affect our operations and financial condition.

Our government customers are subject to budgetary and political constraints,
which may delay or prevent sales.

We do a significant amount of business with U.S. government agencies,
including the Department of Defense. These agencies often do not set their own
budgets and, therefore, have little control over the amount of money they can
spend. In addition, these agencies experience political pressure that may
dictate the manner in which they spend money. As a result, even if an agency
wants to use our services, it may be unable to do so as a result of budgetary
or political constraints. Some government agency orders may also be canceled
or substantially delayed due to budgetary, political or other scheduling
delays, which frequently occur in connection with the acquisition of products
and services by these agencies. Although military spending has recently
increased, particularly since the September 11, 2001 terrorist attacks, there
may be political pressure to use these funds for purposes other than data
conversion services.

The data conversion industry is highly competitive, and we expect competition
to intensify. If we cannot compete effectively, our business and operations
will be adversely affected.

The market for our services is extremely competitive and fragmented, and we
expect competition to intensify as the market evolves. As a result of this
competitive environment, we may lose clients or have difficulty acquiring new
ones. A significant source of competition is the in-house capability of our
targeted client base. We cannot assure you that these clients and potential
clients will outsource more of their needs or that they will not bring in-
house services that they currently outsource. Some of our competitors have
longer operating histories, larger client bases, more established
relationships with their clients, greater brand or name recognition and
significantly greater financial, technical and marketing resources than we do.
Consequently, they may be in a better position than we are to respond quickly
to new or emerging technologies, address changes in client requirements, adopt
more aggressive pricing policies, make attractive offers to potential
employees and strategic partners and devote resources to the development,
promotion and sale of products and services. In addition, existing or future
competitors may develop and offer competing services that are superior to, or
have greater market acceptance than, ours. Increased competition could result
in price reductions, reduced gross margins and loss of market share, any of
which would have a material and adverse effect on our business, results of
operations and financial condition.

We generate a large portion of our revenues from a small number of clients,
the loss of any one of which could adversely affect our business.

For the quarter ended March 31, 2002, our largest client accounted for
approximately 20.3% of our revenue, and our four largest clients, collectively
accounted for 45.6% of our revenue. In 2001, our largest client accounted for
approximately 13.7% of revenue, and our four largest clients, collectively,
accounted for 35.1% of revenue. In 2000, our three largest clients each
accounted for more than 10% of revenue and, collectively, accounted for 40.1%
of revenue. We expect the relatively high level of client concentration to
continue. We have no long-term contracts with any of these clients to ensure a
continued stream of revenue from them. We cannot assure you that the volume of
work performed for these clients will be sustained from year to year, and
there is a risk that these clients may not retain us in the future. To the
extent that any significant client uses less of our services or terminates its
relationship with us, our revenues in the relevant fiscal period could
substantially decline and our operating results could be adversely affected.

If we fail to maintain our reputation and expand our name recognition, we may
not be able to remain competitive.

We believe that establishing and maintaining a strong reputation and name
recognition as a high quality provider of data conversion services is critical
for attracting and retaining clients. We also believe that the

importance of reputation and name recognition will increase as competition
increases. If our reputation is damaged or if potential clients are not
familiar with the services we provide, we may lose market share. To maintain
and build our reputation, we must continue to provide high quality and
efficient service and must expand our marketing efforts. We cannot assure you
that we will be able to successfully and effectively maintain and expand our
reputation and brand recognition.

If we are unable to protect our proprietary technology and intellectual
property rights against infringement or misappropriation, we may lose our
competitive advantage and we may incur substantial costs to protect our
rights.

We believe that our future success and ability to compete depends, in part,
on our proprietary methodology and proprietary software. We have not obtained
or filed any applications for patents to protect these proprietary rights, and
we have not registered or applied to register any trademarks, trade names,
service marks, service names or copyrights that we may own. Essentially, we
rely on trade secret laws and confidentiality agreements with employees and
common law principles to protect our proprietary rights. These measures may
prove inadequate to protect our proprietary rights. Despite our efforts,
unauthorized parties may attempt to copy aspects of our methodology or the
source code to our software or to obtain or use information that we regard as
proprietary. In addition, the scope of any proprietary rights that we may have
is uncertain and may not be sufficient to prevent others from developing and
selling competing products and services, which could have a material adverse
effect on our business. If any of our proprietary rights are misappropriated,
we may have to incur substantial legal costs to enforce our rights, which
could also have a material adverse effect on our financial condition and
results of operations.

If third parties ever assert that we have infringed on their intellectual
property rights, we could incur substantial costs and experience diversion of
management's attention and disruption of our business.

In the future, third parties may assert infringement claims against us or
claim that we have violated their intellectual property rights. Any
intellectual property infringement claims against us, with or without merit,
could be costly and time-consuming to defend and divert our management's
attention from our business. While we know of no basis for any future claims
of this type, authorship of intellectual property rights can be difficult to
verify. Competitors could assert, for example, that their former employees
whom we have hired have misappropriated their proprietary information for our
benefit. In such an event, even if the claim were not true, we might be forced
to spend substantial amounts of management time and our available capital to
defend the action and perhaps to pay a judgment or settlement, which could
adversely impact our operations. If it is ultimately decided that we have
infringed on a third party's proprietary rights, we could be required to enter
into royalty or licensing agreements to continue using those rights. Royalty
and licensing agreements, if required, may not be available on terms
acceptable to us or at all.

As part of our growth strategy, we intend to expand into new markets, which
will require the expenditure of substantial sums of capital. If these efforts
are unsuccessful, our business, operations and financial condition will be
adversely affected.

As part of our growth strategy, we are broadening our sales and marketing
focus beyond our traditional base of customers. We believe that our future
success and growth depends, in part, on our ability to successfully penetrate
new markets. Our limited resources, the high cost of developing new markets
and the lengthy sales cycle, limit the number of markets we can target and
also limit our ability to effectively pursue marketing development activities
in multiple markets simultaneously.

As part of our growth strategy, we intend to seek strategic acquisitions.
Integrating an acquired business may not be successful and could be disruptive
to the historical parts of our operations.

Our future growth depends, to a certain extent, on our ability to identify
and acquire on acceptable terms businesses that enhance or complement our
current operations. We may not be able to identify or complete strategic
acquisitions or that any acquisitions that we do complete will have the
benefits that we anticipated at the outset. Acquisitions involve a number of
risks and challenges, including:

o expenses and difficulties in identifying appropriate targets and the
costs associated with aborted transactions;

o expenses, delays and difficulties of integrating an acquired business
into our existing operations;

o undisclosed or potential legal liabilities of the acquired business;

o diverting management's attention from existing operations;

o potential loss of key employees and clients of the acquired business;

o lack of experience in the market of the acquired business; and

o an increase in expenses and working capital requirements.

These and other factors could adversely affect our ability to achieve
anticipated levels of profitability or other anticipated benefits of an
acquisition. Furthermore, acquisitions may require us to incur debt or obtain
additional equity financing, which could increase our leverage or dilute the
interests of our existing shareholders. We cannot assure that we will
consummate any acquisitions in the future.

We depend on the continued services of our key executives.

Our future success depends to a large extent on the continued services of
our key executives. There is an intense competition for qualified
administrative and management personnel and skilled professionals, and we
cannot assure you that we will be able to retain these executives and other
employees. We could be materially and adversely affected by the loss of such
personnel. In addition, we cannot assure that any non-compete and non-
solicitation agreements that we may have with these employees are enforceable.

Since we depend on our direct sales force to sell our services, our future
growth will depend, in part, on our ability to hire, train and retain
qualified sales personnel.

We sell our services exclusively through our direct sales force, and we
expect to continue to do so for the foreseeable future. Currently, our entire
sales force consists of three people. Our ability to increase revenues
depends, in part, on our ability to attract, train and retain qualified sales
personnel. We believe that there is significant competition for qualified
sales personnel with the advanced sales skills and technical knowledge that we
need. If we are not able to attract, hire and retain experienced and competent
sales personnel, our business will be harmed. In addition, any significant
turnover in our sales force could harm our operations. Sales force turnover
tends to slow sales efforts until replacement personnel can be recruited and
trained.

Our continued growth may strain our resources, which could adversely affect
our business, financial condition and results of operations.

A key part of our strategy is to grow organically and through acquisition,
which could further strain our managerial, financial and other resources. We
cannot assure you that we will be able to manage our growth effectively. To
manage our future growth, we must continue to improve our operational and
financial systems, procedures and controls and expand, train, retain and
manage our employee base. If our systems, procedures, controls and management
resources are inadequate to support our operations, our growth would be halted
and we could lose the opportunity to gain significant market share. The
failure to manage our growth effectively may lead to inefficiencies and
redundancies and result in reduced growth prospects and profitability.

We may need additional capital in the future, which may not be available to
us. Raising additional capital would dilute the interests of our existing
shareholders.

In the future, we may need to raise additional capital through public or
private debt or equity financing to take advantage of expansion or acquisition
opportunities, enhance or upgrade our software, develop new solutions,
penetrate new markets or meet working capital requirements. Any additional
capital raised thought the sale of equity or equity-linked securities would
dilute the ownership percentage of our existing shareholders. These securities
could also have rights, preferences or privileges senior to those of our

outstanding capital stock. We cannot assure that we will be able to obtain
additional financing when needed on acceptable terms or at all. If we cannot
obtain additional financing when needed on acceptable terms, we may not be
able to take advantage of business opportunities or respond to competitive
developments, which could have a material adverse effect on our business,
operations and financial condition.

Terrorism and the uncertainty of war could have adverse effect on our
business.

The September 11, 2001 terrorist attacks and their aftermath have had and
may continue to have a negative effect on our country's political and economic
conditions and may adversely affect our business.

Risks Related to this Offering

The market price of our common shares could fluctuate significantly because of
various factors, some of which are beyond our control.

The stock market in recent years has experienced significant price and
volume fluctuations that have affected market prices for the stock of
technology companies. These fluctuations have often been unrelated to or
disproportionately affected by the operating performance of these companies.
In particular, the price levels at which many stocks were traded immediately
following their initial public offering were often difficult to sustain. The
market price of our common shares could fluctuate significantly after this
offering in response to a variety of factors, some of which may be beyond our
control. These factors may include one or more of the following:

o quarterly operating results falling below or exceeding analysts' or
investors' expectations in any given period;

o changes in financial estimates or investment recommendations by
securities analysts following our business;

o changes in market valuations of, or earnings and other announcements by,
our competitors;

o announcements by our competitors of new technological innovations,
service offerings, contracts, acquisitions or strategic relationships;

o departures of key personnel; and

o changes in business or regulatory conditions.

In the past, following periods of market volatility, stockholders have
instituted securities class action litigation. If we were to be involved in
securities litigation, we could incur a substantial cost and experience
diversion of resources and the attention of management away from our business.
We cannot predict the future performance of the capital markets in general and
the technology stocks in particular, and we cannot assure you that the price
for our common shares will not drop significantly subsequent to this offering,
whether related to our business or to the capital markets generally.

Our revenues and operating results may fluctuate unexpectedly from quarter to
quarter, which may cause our stock price to decline.

Our revenues and operating results have varied significantly in the past and
may vary significantly in the future due to various factors, including changes
in our operating expenses, market acceptance of our services, regulatory
changes that may affect the marketability of our services, budgetary cycles of
our principal clients, the mix and timing of client projects, and one-time
nonrecurring and unusual charges. As a result of these and other factors, we
believe that period-to-period comparisons of our operating results may not be
meaningful in the near term and that you should not rely upon our performance
in a particular period as indicative of our performance in any future period.

We are controlled by a limited number of shareholders.

Immediately after this offering, our principal shareholders, Mark and Judy
Gross, will own 46.2% of our issued and outstanding common shares. If the
over-allotment option is exercised in full, they will own 43.1%.

In either event, they will have the ability to exercise substantial control
over our affairs and corporate actions requiring shareholder approval,
including electing directors, selling all or substantially all of our assets,
merging with another entity or amending our certificate of incorporation. This
de facto control could delay, deter or prevent a change in control and could
adversely affect the price that investors might be willing to pay in the
future for our securities.

The initial public offering price of the units does not necessarily relate to
any established criteria of value so our securities may trade below the
initial public offering price.

The initial public offering price per unit in this offering has been
determined through negotiations between the representative of the underwriters
and us and does not necessarily relate to any established criteria of value.
We cannot assure you that the trading price of our securities after this
offering will equal or exceed the initial public offering price.

An active trading market for our securities may not develop after this
offering, and you may have difficulty selling your units, shares or unit
warrants.

There is currently no public market for the units, common shares or unit
warrants. We cannot assure that an active public trading market for our common
shares or unit warrants will develop or be sustained after this offering. If
an active and liquid trading market does not develop or is not sustained, you
may have difficulty selling your securities.

We do not anticipate paying cash dividends in the foreseeable future. This
could make our stock less attractive to potential investors.

Some investors prefer companies that pay cash dividends. We anticipate that
we will retain all future earnings and other cash resources for the future
operation and development of our business. Aside from a final distribution of
our S corporation profits to our pre-offering shareholders, we do not intend
to declare or pay any cash dividends in the foreseeable future. Future payment
of cash dividends will be at the discretion of our board of directors after
taking into account many factors, including our operating results, financial
condition and capital requirements.

If we pay a stock dividend that is not tax-free, you will have taxable income
in an amount equal to the fair market value of the stock to the extent of our
earnings and profits but we will not distribute cash with which you could pay
the tax.

We have agreed with the underwriters that, if our audited pre-tax income for
the year ending December 31, 2002 is less than $1.3 million, we will promptly
declare and pay a 10% stock dividend to common shareholders of record as of
the record date for that dividend. There will be no increase in the number of,
or decrease in the exercise price for, the common shares underlying the unit
warrants and the representative's warrant as a result of this dividend. Our
executive officers and one other shareholder have agreed to immediately return
any dividend shares they may receive to us as a contribution to capital. The
proper tax treatment of this dividend is not certain. If the dividend is
taxable, you will have ordinary income in an amount equal to the fair market
value of the common shares you receive on the date of the distribution to the
extent we have earnings and profits. We will not be distributing any cash that
you can use to pay the taxes due on this dividend. The sale of common shares
to generate cash to pay the taxes could have a depressing effect on the market
price of our securities.

You may not be able to exercise your unit warrants if we do not maintain an
effective registration statement covering the unit warrants.

We are required to use reasonable efforts to maintain a registration
statement relating to the offer and sale of the common shares underlying the
unit warrants and to qualify the unit warrants for sale in jurisdictions in
which the unit warrantholders reside unless an exemption from registration or
qualification exists. If registration is not maintained, you may not be able
to exercise the unit warrants and/or sell the underlying shares.

The unit warrants may be redeemed on short notice.

Following a six-month period after the date of this prospectus, we may
redeem the unit warrants for $.25 per unit warrant on 30 days notice, provided
the closing price for our stock, as reported on Nasdaq SmallCap, was, for any
ten consecutive trading days, at or above 200% of the unit price. If we give
notice of redemption, you will be forced to sell or exercise your unit
warrants or accept the redemption price. The notice of redemption could come
at a time when, under your personal circumstances, it is not advisable or
possible for you to exercise the unit warrants.

Future sales or the potential for sale of substantial number of our shares
could cause the trading price of our common shares and unit warrants to
decline.

Sales of a substantial number of our common shares after this offering, or
the perception that these sales may occur, could cause the market price of our
common shares to decline and could materially impair our ability to raise
capital through the sale of additional equity securities. The common shares
sold in this offering, as well as the common shares issued when the unit
warrants are exercised, other than shares held by an "affiliate," as that term
is defined by the rules and regulations issued under the Securities Act of
1933, will be freely tradable without restriction under the Securities Act.
The common shares held by existing shareholders are "restricted securities,"
as that term is defined in Rule 144 of the Securities Act, which are eligible
for sale 90 days after the date of this prospectus. Of the 1,421,314 common
shares that are restricted securities, 1,312,000 can be sold under Rule 144
and 33,641 may be sold without restriction under Rule 144(k). In addition, we
have granted demand and piggyback registration rights to shareholders owning
an aggregate of 112,731 common shares. If they exercise these rights, they
could force us to register for resale the shares that they own. While we, our
executive officers and directors and all of our existing shareholders have
agreed not to sell any shares for a period of one year after this offering
without the consent of the representative, the representative may waive that
restriction in its sole discretion.

The existence of outstanding unit warrants and previously issued options may
dilute your investment in our shares and impair our ability to obtain
additional equity financing.

Once this offering is completed, in addition to the 2,671,314 common shares
actually issued and outstanding, there will be another 2,203,720 common shares
reserved for future issuance as follows:

o up to 1,250,000 common shares underlying the unit warrants;

o up to 375,000 common shares underlying the representative's over-
allotment option, including the shares underlying the unit warrants
included in that option;

o up to 250,000 common shares underlying the representative's warrants,
including the shares underlying the unit warrants includable in the
representative's warrants;

o up to 250,000 common shares underlying stock options previously granted,
or to be granted, under our 2001 stock option plan; and

o up to 78,720 common shares underlying stock options that were not granted
under our stock option plan.

In addition, if our audited pre-tax income for 2002 is less than $1.3 million,
we will pay a 10% stock dividend to shareholders of record as of the record
date for that dividend. The existence of these options and warrants and the
possibility that we may have to issue the dividend shares could adversely
affect the terms at which we could obtain additional equity financing. The
holders of these options and warrants have the opportunity to profit from a
rise in the value or market price of our common shares and to exercise them at
a time when we could obtain equity capital on more favorable terms than those
contained in these securities.

Management has broad discretion over the use of proceeds from this offering.
We may use the proceeds of this offering in ways that do not improve our
operating results or the market value of our securities.

We currently have identified specific uses for only a small portion of the
net proceeds of this offering. We have significant flexibility as to the
timing and the use of the proceeds. You will rely on our judgment with only
limited information about our specific intentions regarding the use of
proceeds. We may spend most of the net proceeds of this offering in ways with
which you may not agree. If we fail to apply these

funds effectively, our business, results of operations and financial condition
may be materially and adversely affected.

You will experience immediate and substantial dilution of your investment.

We anticipate that the initial public offering price of the units will be
substantially higher than the net tangible book value per common share after
the offering. We estimate that each investor who purchases units in this
offering will incur immediate dilution of approximately $4.54, or 56.8% of the
initial public offering price per unit, assuming an $8.00 price, in net
tangible book value for each common share included in the units. In addition,
you may experience further dilution to the extent that common shares are
issued in connection with the exercise of existing stock options at exercise
prices less than the initial public offering price per unit.

Provisions of our certificate of incorporation and bylaws and New York law
could deter takeover attempts that may offer you a premium, which could
adversely affect our share price.

Provisions of our certificate of incorporation, our bylaws and New York
Business Corporation Law make acquiring control of us without the support of
our board of directors difficult for a third party, even if the change of
control would be beneficial to our shareholders. For example, our certificate
of incorporation authorizes our board of directors to issue up to five million
"blank check" preferred shares. This means that, without shareholder approval,
the board of directors has the authority to attach special rights to preferred
shares, including voting and dividend rights. With these rights, preferred
shareholders could make it more difficult for a third party to acquire our
company. In addition, a special meeting of shareholders may only be called by
a majority of the board of directors or by our president, chief executive
officer or chairman. Because shareholders do not have the ability to require
the calling of a special meeting of shareholders, any third-party takeover not
supported by the board of directors would be subject to significant delays and
difficulties. In addition, removal of directors may only be done for cause
upon the affirmative vote of the shareholders. The existence of these and
other provisions may deprive you of an opportunity to sell your shares at a
premium over prevailing prices. Your inability to obtain a control premium
could adversely affect the market price for our common shares.

You should not rely upon our forward-looking statements.

Some of the statements made in this prospectus discuss future events and
developments, including our future business strategy and our ability to
generate revenue, income and cash flow. In some cases, you can identify
forward-looking statements by words or phrases such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue," "our future success depends," "seek to
continue," or the negative of these words or phrases, or comparable words or
phrases. These statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various facts, including the risks outlined in this "Risk Factors"
section. These factors may cause our actual results to differ materially from
any forward-looking statement. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements. We
are under no duty to update any of the forward-looking statements after the
date of this prospectus to conform these statements to actual results.

USE OF PROCEEDS

Assuming an initial public offering price of $8.00 per unit and after
deducting the estimated underwriting discount, expense allowance, and
estimated offering expenses of $650,000 payable by us, we estimate that the
net proceeds to us from this offering will be approximately $8.3 million, or
$9.6 million if the representative exercises the over-allotment option in
full.

We expect to use these net proceeds substantially as follows:

Approximate
Approximate Percentage
Dollar Amount of Net Proceeds
------------- ---------------

Sales and marketing expenses ................ $3,500,000 42.2%
Capital expenditures ........................ 1,500,000 18.1%
Final S corporation distribution ............ 450,000 5.4%
Working capital and general corporate
purposes................................... 2,850,000 34.3%
---------- -----
$8,300,000 100.0%
========== =====

Sales and marketing expenses. This amount reflects the anticipated costs to
increase our market share by expanding our relationship with our existing
clients, increasing our presence in the markets we currently serve and
entering new markets. It includes the cost of hiring additional sales and
marketing personnel, consultant fees, and expenses relating to attending trade
shows and conventions and producing marketing materials.

Capital expenditures. This amount reflects the cost of new property, plant
and equipment, such as computer hardware, as well as the anticipated costs to
further upgrade, enhance and improve the functionality of our proprietary data
conversion software.

Final S corporation distribution. The actual amount of the final S
corporation distribution will include the estimated taxes payable by our
shareholders on our 2001 taxable income and on our 2002 taxable income from
January 1 through the date of this prospectus plus $150,000 of previously
taxed S corporation income. The estimated federal, state and local taxes
payable by our shareholders on our taxable income for 2001 and for the period
ended March 31, 2002 is $300,000.

Working capital and general corporate purposes. These costs include general
and administrative costs, including the cost of hiring additional
administrative, financial, technical, editorial and customer service
personnel, acquiring and enhancing our operating, support and management
systems and capital expenditures for computers and other equipment. We may use
the portion of the amount currently allocated to working capital and general
corporate purposes to reduce our current liabilities. Although we currently
have no agreements or commitments to do so, we may also use a portion of the
net proceeds to license or acquire new products, technologies or intellectual
property or to acquire or invest in businesses complementary to ours. If the
representative exercises the over-allotment option, the additional net
proceeds of approximately $1.3 million will be added to working capital.

The above allocation represents our best estimate of the allocation of the
net proceeds of this offering based upon the current status of our business.
We will retain broad discretion in the allocation of the net proceeds within
the categories listed above. The amounts actually expended for these purposes
may vary significantly and will depend on a number of factors, including our
rate of revenue growth, cash generated by operations, our overall financial
performance, evolving business needs and the other factors described in "Risk
Factors."

Pending their use, we intend to invest the net proceeds in interest-bearing,
investment grade securities.

We expect that the net proceeds from this offering, together with cash flow
from operations, will be sufficient to fund our operations and capital
requirements for at least 12 months following this offering. We may be
required to seek additional sources of capital sooner if our operating
assumptions change or prove to be inaccurate, or we complete any significant
strategic acquisitions.

DIVIDEND POLICY

As an S corporation, in the past we have, from time to time, distributed a
portion of our earnings to our shareholders. In general, these distributions
reflected the amount of taxes our shareholders were required to pay on their
share of our taxable income. Immediately after this offering, we intend to
make a final distribution to our pre-offering shareholders based on our 2001
taxable income and our 2002 taxable income through the date of this offering.
After this offering, our board of directors, in their discretion, will
determine whether and to what extent dividends should be paid based on factors
they deem to be relevant at the time. These factors may include our earnings,
financial condition and capital requirements, as well as other economic and
general conditions. At this time we expect to retain all of our earnings to
finance the expansion and development of our business.

S CORPORATION TERMINATION

Since our inception, we have been an S corporation for federal and state
income tax purposes. As a result, we do not pay federal or state corporate
income taxes. Immediately before this offering, we will terminate our S
corporation status and, as a result, we will, from that point on, be obligated
to pay federal and state corporate income taxes at the regular corporate
rates. Immediately after this offering is completed we will pay a final S
corporation distribution to our pre-offering shareholders in an amount equal
to the federal, state and local taxes they are obligated to pay on our 2001
taxable income and on our 2002 taxable income through the date of this
offering plus an additional $150,000 of previously taxed S corporation
income. Investors purchasing units in this offering will not receive any
portion of this final distribution. Assuming our S corporation status
terminated on March 31, 2002, the amount of the final S corporation
distribution would have been approximately $450,000.

CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2002 on an
actual basis and on an adjusted basis. Our capitalization as adjusted for this
offering takes into account the following:

o the 1.345641-for-1 stock split effected as a dividend on May 30, 2002;

o 673 common shares purchased by a former employee in April 2002 for
$1,750;

o the receipt of $8.3 million of estimated net proceeds of this offering,
assuming an initial public offering price of $8.00 per unit; and

o an estimated final S corporation distribution of $450,000 to our pre-
offering shareholders.

March 31, 2002
--------------------
Actual As adjusted
------ -----------
(in thousands)

Long-term obligations .................................. $ 76 $ 76
Shareholders' equity:
Preferred shares, $0.01 par value: no shares
authorized actual; 5,000,000 shares authorized, no
shares issued and outstanding as adjusted............ -- --
Common shares, $0.01 par value: 12,000,000 shares
authorized, 1,000,000 issued and outstanding actual;
25,000,000 authorized, 2,671,314 shares issued and
outstanding, as adjusted............................. 10 27
Additional paid-in capital ............................. 1,395 9,229
Retained earnings ...................................... -- --
------ ------
Total shareholders' equity ......................... 1,405 9,256
------ ------
Total capitalization ............................... $1,481 $9,332
====== ======

DILUTION

If you purchase units in this offering, your interest will be diluted to the
extent of the excess of the public offering price per common share over the as
adjusted net tangible book value per common share after this offering. Net
tangible book value per share represents the amount of our total tangible
assets reduced by the amount of our total liabilities, divided by the total
number of common shares outstanding. For purposes of the dilution computation
and the following tables, we have allocated the full purchase price of a unit
to the common share included in the unit and nothing to the unit warrant.

At March 31, 2002, our net tangible book value was approximately
$1.4 million, or $1.40 per common share. Our pro forma net tangible book value
at that date was $0.67 after giving effect to the following:

o the 1.345641-for-1 stock split effected as a dividend on May 30, 2002;

o 673 common shares purchased by a former employee in April 2002 for
$1,750; and

o an estimated final S corporation distribution of $450,000 to our pre-
offering shareholders.

After giving effect to the sale of the units in this offering at the assumed
initial public offering price of $8.00 per unit, our net tangible book value
of March 31, 2002 would have been approximately $9.3 million, or $3.46 per
share. This represents an immediate increase of $2.79 per share to existing
shareholders and immediate dilution of $4.54 per share to the new investors
who purchase units in this offering. The following table illustrates this per
share dilution:

Assumed initial public offering price per common share ........ $8.00
Pro forma net tangible book value per common share at March 31,
2002 ......................................................... $0.67
Increase in pro forma net tangible book value per common share
attributable to new investors ................................ 2.79
-----
Pro forma, as adjusted net tangible book value per common
share after the offering ..................................... 3.46
-----
Dilution per common share to new investors .................... $4.54
=====

The following table summarizes as of March 31, 2002 the differences between
the existing shareholders and the new investors with respect to the number of
common shares purchased, the total consideration paid and the average price
per share paid:

Shares Purchased Total Consideration Average
------------------- --------------------- Price per
Number Percent Amount Percent Share
--------- ------- ----------- ------- ---------

Existing shareholders.......................... 1,421,314 53.2% $ 56,750 0.6% $0.04
New investors.................................. 1,250,000 46.8% 10,000,000 99.4% $8.00
--------- ----- ----------- -----
Total....................................... 2,671,314 100.0% $10,056,750 100.0%
========= ===== =========== =====

If the representative exercises the over-allotment option in full, the new
investors will purchase 1,437,500 common shares. The total purchase price for
those shares would be $11,500,000, representing approximately 99.5% of the
total consideration for 50.3% of the total number of common shares
outstanding. In such event, our net tangible book value would be $3.71 per
common share and the dilution to new investors would be $4.29 per common
share.

To the extent any options or warrants outstanding on the date of this
prospectus are exercised, you will experience further dilution.

SELECTED FINANCIAL DATA

The selected financial data set forth below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The statement of operations
data for each of the years in the two-year period ended December 31, 2001 and
the balance sheet data at December 31, 2001 are derived from our financial
statements, which have been audited by Goldstein Golub Kessler LLP,
independent auditors, and are included elsewhere in this prospectus. The
statement of operations data for the three-month periods ended March 31, 2001
and 2002 and the balance sheet data for March 31, 2002 are derived from our
unaudited financial statements. The unaudited financial statements have been
prepared on substantially the same basis as the audited financial statements
and, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
results of operations for these periods. Historical results are not
necessarily indicative of the results to be expected in the future, and the
results of interim periods are not necessarily indicative of results for the
entire year.

Statement of Operations Data:
Three months ended
Years ended December 31, March 31,
----------------------- -----------------------
2000 2001 2001 2002
---------- ---------- ---------- ----------
(in thousands, except share and per share data)

Revenue ................................................................. $ 3,253 $ 4,879 $ 1,071 $ 1,422
Cost of revenue ......................................................... 2,115 2,784 666 791
---------- ---------- ---------- ----------
Gross margin ............................................................ 1,138 2,096 405 631
Selling expenses ........................................................ 552 455 101 139
General and administrative expenses ..................................... 572 562 223 187
Interest expense, net ................................................... 47 61 21 9
Depreciation and amortization expenses .................................. 60 129 30 64
---------- ---------- ---------- ----------
Income (loss) before provision for (benefit from) income taxes .......... (94) 889 30 232
Provision for taxes ..................................................... -- 89 -- 18
---------- ---------- ---------- ----------
Net income (loss) ....................................................... (94) 800 30 214
========== ========== ========== ==========
Basic net income (loss) per common share ................................ $ (0.09) $ 0.80 $ 0.03 $ 0.21
========== ========== ========== ==========
Diluted net income (loss) per common share .............................. $ (0.09) $ 0.75 $ 0.03 $ 0.20
========== ========== ========== ==========
Weighted-average number of common shares outstanding -- basic ........... 1,000,000 1,000,000 1,000,000 1,000,000
========== ========== ========== ==========
Weighted-average number of common shares outstanding -- diluted ......... 1,000,000 1,063,521 1,047,608 1,062,896
========== ========== ========== ==========

Since our inception we have been an S corporation for federal and state
income tax purposes. As a result, we do not pay federal and state corporate
income taxes. Immediately before this offering is completed, we will terminate
our status as an S corporation. Had we been a C corporation in 2000 and 2001,
our income tax expense would have been materially different.

Balance Sheet Data:
At At
December 31, 2001 March 31, 2002
----------------- --------------
(in thousands)

Current assets ........................... $1,058 $1,015
Working capital .......................... $ 7 $ 178
Total assets ............................. $2,334 $2,317
Total liabilities ........................ $1,144 $ 913
Shareholders' equity ..................... $1,190 $1,405

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Overview

We are a leading independent provider of electronic data conversion
services. Our primary focus is converting a broad range of content from any
format to XML and SGML. Our clients include large manufacturing corporations,
professional societies, publishers, defense contractors and the United States
Department of Defense.

The data conversion industry is relatively new but growing rapidly. In 1998
we recognized the potential growth in our industry and made the strategic
decision to invest in infrastructure improvements that would enable us to
exploit this opportunity. To that end, starting in late 1998 and continuing
through the end of 2000, we took the following critical steps:

o hired a chief operating officer for the first time in our history;

o reorganized and upgraded our staff;

o implemented new operational support systems, such as time sheets, project
management, cost accounting and production control;

o renovated and rewired our facility and invested in new capital equipment;

o received approval to be included on the General Services Administration
Schedule, which enables any federal employee to use our services at pre-
negotiated rates; and

o developed specialized capabilities and relationships in three high-margin
markets: STM publishing, corporate technical documentation and defense.

The cost of these initiatives, predominantly selling, general and
administrative expenses, resulted in a loss for 2000. However, we began to see
the benefits of these infrastructure improvements in 2001. In 2001, our
revenues increased by 50.0% from the previous year. In addition, our gross
margin increased to 42.9% from 35.0% and our profit margin for 2001 was 16.4%.
We expect to continue to realize the benefits from these infrastructure
improvements.

Generally, we derive revenue from performing services. Revenue is recognized
as the services are performed. When we accept a new project, we typically
receive a fixed "set-up" fee at the beginning of our engagement to analyze and
organize the conversion project. This fee is deferred and amortized over the
life of the project itself. Once the project goes into production, we bill the
client either twice per month or as batches of work packets are completed. Our
fees are usually defined as a price-per-page. The actual price depends on
various factors, particularly the complexity and degree of difficulty of the
conversion.

In 2000, 80.6% of our total revenue was attributable to four markets: STM
publishing, corporate technical documentation, defense and educational
publishing. Our STM publishing customers accounted for 56.9% of our total
revenue in 2000. In 2001, 83.7% of our total revenue was attributable to the
STM publishing, corporate technical documentation, defense and educational
markets. STM publishing customers still accounted for the greatest portion of
our revenue, 41.4%. However, the largest increases were generated from
corporate technical documentation customers, who accounted for 23.5% of total
revenue in 2001 compared to 10.3% in 2000, and educational publishing
customers, who accounted for 12.0% of total revenue in 2001 compared to 5.3%
in 2000. For the first quarter of 2002, STM publishing, corporate technical
documentation, defense and educational publishing customers accounted for
48.0%, 14.2%, 11.0% and 5.8%, respectively, of total revenue.

Historically, we have derived a significant amount of revenue from a limited
number of clients. In 2000, three clients accounted for 15%, 14% and 11%,
respectively, of total revenue. In 2001, our largest client accounted for 14%
of total revenue. No other customer accounted for more than 10% of total
revenue in 2001. For the first quarter of this year, our largest client
accounted for 20.3% of total revenue and our four largest clients accounted
for 45.6% of total revenue. However, we expect that, as the year progresses,
client

concentration for 2002 will approximate client concentration in 2001 and we
believe this trend will continue for the foreseeable future.

Cost of revenue consists primarily of compensation and benefits payable to
our employees who are directly involved in delivering services and payments to
independent contractors. These employees consist of analysts and programmers
as well as members of our production staff, including operators, editors,
proofreaders and supervisors. Generally, cost of revenue is expensed as
incurred. Similarly, costs associated with the start-up fee are expensed as
incurred.

Selling, general and administrative expenses consist primarily of
administrative salaries and benefits, sales commissions, facilities costs,
sales and marketing expenses, advertising expenses, professional fees, and
office expenses.

We have invested a considerable amount of capital in our proprietary
conversion software. Costs incurred to develop this software were expensed as
incurred. Direct costs incurred during the application stage are capitalized
and amortized over the estimated useful life of the software. Maintenance
costs are expensed as incurred.

At December 31, 2001 and March 31, 2002, the recorded amount of computer
software costs exceeded their tax basis by approximately $450,000 and
$430,000, respectively, resulting in a deferred tax liability of $44,000 at
December 31, 2001 and $41,000 at March 31, 2002. When our S corporation
status terminates immediately before this offering, we will record an
additional deferred tax liability of approximately $153,000.

Since our inception we have been an S corporation for federal and state
income tax purposes. As a result, we have not paid federal corporate income
taxes, nor have we paid state income taxes at the regular corporate income tax
rates. Immediately before this offering is consummated, we will terminate our
status as an S corporation and, as of that date, we will begin paying federal
and state corporate income taxes at the regular corporate tax rates. Provision
for income taxes as reflected on our financial statements primarily represents
New York City corporate income and franchise taxes.

Results of Operations

The following table sets forth for the periods presented, statement of
operations data as a percentage of revenues. The trends suggested by this
table may not be indicative of future operating results.

Year Three months
ended ended
December 31, March 31,
------------- -------------
2000 2001 2001 2002
----- ----- ----- -----

Revenue ........................................................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenue ................................................................ 65.0% 57.1% 62.2% 55.6%
----- ----- ----- -----
Gross margin ................................................................... 35.0% 42.9% 37.8% 44.4%
Selling expenses ............................................................... 17.0% 9.3% 9.4% 9.8%
General and administrative expenses ............................................ 17.6% 11.6% 20.8% 13.1%
Interest expense ............................................................... 1.4% 1.2% 2.0% 0.6%
Depreciation and amortization expense .......................................... 1.9% 2.6% 2.8% 4.5%
----- ----- ----- -----
Income (loss) before provision for (benefit from) income taxes ................. (2.9)% 18.2% 2.8% 16.4%
Provision for (benefit from) income taxes ...................................... 0.0% 1.8% 0.0% 1.3%
----- ----- ----- -----
Net income (loss) .............................................................. (2.9)% 16.4% 2.8% 15.1%
===== ===== ===== =====

Three months ended March 31, 2002 and 2001

Revenue. Revenue for the three months ended March 31, 2002 was $1.4 million,
an increase of $350,000, or 32.7%, from revenue of $1.1 million for the
comparable 2001 period.

Cost of revenue. Cost of revenue for the three months ended March 31, 2002
was $791,000, an increase of $125,000, or 18.7%, over cost of revenue of
$666,000 for the comparable 2001 period. In general, the increase in cost of
revenue corresponds to the increase in revenue.

Gross margin. Gross profit for the three months ended March 31, 2002 was
$631,000, or 44.4% of revenue, compared to gross profit of $405,000, or 37.8%
of revenue, for the comparable 2001 period.

Selling, general and administrative expenses. Total selling, general and
administrative expenses for the three months ended March 31, 2002 and 2001
were $326,000 and $323,000, respectively. As a percentage of revenue, selling,
general and administrative expenses for the 2002 period were 22.9% compared to
30.2% for the comparable 2001 period. Selling expenses for the 2002 period
were $139,000 compared to selling expenses for the 2001 period of $101,000.
This increase is attributable to additional travel expenses and higher sales
commissions based on a higher level of sales. General and administrative
expenses in the 2002 period were lower than they were in the 2001 period, both
in absolute terms and as a percentage of revenue, because of a bad debt
expense of $78,000 in 2001.

Other expenses. Other expenses include net interest expense and
depreciation and amortization. For the period ended March 31, 2002, net
interest expense was $9,000 compared to $21,000 for the period ended March 31,
2001. This decrease reflects a reduction in the amount due under our working
capital line of credit. Depreciation and amortization expense for the first
quarter of 2002 was $64,000 compared to $30,000 for the first quarter of 2001.
The increase is attributable to the amortization of capitalized software
development costs.

Income before provision for income taxes. For the period ended March 31,
2002, income from operations was $232,000 compared to $30,000 for the
comparable 2001 period. As a percentage of revenues, income from operations
for the three months ended March 31, 2002 and 2001 was 16.4% and 2.8%,
respectively.

Income taxes. For the period ended March 31, 2002, we recorded an income
tax expense of $18,000 representing New York City corporate income franchise
taxes.

Net income. Net income for the three months ended March 31, 2002 and 2001
was $214,000 and $30,000, respectively. As a percentage of revenue, net income
for the two periods was 15.1% and 2.8%, respectively.

Years ended December 31, 2001 and 2000

Revenue. Revenue for 2001 was $4.9 million, an increase of $1.6 million, or
50.0%, over 2000 revenue of $3.3 million.

Cost of revenue. Cost of revenue for 2001 was $2.8 million, an increase of
$700,000, or 31.6%, over 2000 cost of revenue of $2.1 million.

Gross margin. Our gross margin for 2001 was $2.1 million, or 42.9% of
revenue, compared to a gross margin of $1.1 million, or 35.0% of revenue, for
2000. We believe that our increased gross margin is a direct result of the
infrastructure improvements that were implemented in prior years. These
improvements enabled us to handle a larger volume of work without a
corresponding increase in cost.

Selling, general and administrative expenses. Selling, general and
administrative expenses for 2001 were $1.0 million compared to $1.1 million
for 2000. As a percentage of revenue, these expenses for 2001 were 20.8%
compared to 34.6% in 2000. The higher level of selling, general and
administrative expenses in 2000, both in absolute terms and as a percentage of
revenue, reflects our ramp-up efforts that began in late 1998 and continued
through 2000.

Other expenses. In 2001, net interest expense was $61,000 compared to
$47,000 in 2000. The additional interest expense in 2001 reflects additional
borrowings under our line of credit. As our business has grown, so have our
working capital needs. In 2001, depreciation and amortization expense was
$129,000 compared to $60,000 in 2000. The additional depreciation and
amortization expense is attributable to costs

incurred to enhance and upgrade the functionality of our proprietary software
toolkit. In 2001, we capitalized $547,000 of software development costs
compared to $199,000 in 2000.

Income (loss) before provision for income taxes. In 2001 income from
operations was $889,000 compared to a loss of $94,000 in 2000. The loss in
2000 was directly attributable to the selling, general and administrative
costs in that year that allowed us to expand our business in 2001.

Income taxes. Provision for taxes in 2001 and 2000 was $88,000 and $325,
respectively.

Net income (loss). For 2001 we had net income of $800,000, or 16.4% of
revenue, compared to a net loss of $94,000 in 2000.

Liquidity and Capital Resources

To finance our business, we use a combination of cash flow from operations
and bank debt. We have a $575,000 working capital line of credit with Merrill
Lynch. Draw downs on this credit line bear interest at the rate of one percent
above the prime rate. As of June 1, 2002, the rate was 5.75%. The balance due
on the credit line was $515,000 at December 31, 2001 and $385,000 at March 31,
2002. The credit line expires April 30, 2003.

In April 2000, we borrowed $150,000 from Merrill Lynch. The loan is
evidenced by a note, bears interest at one percent above prime and matures in
April 2004. Principal is payable in equal monthly installments of $3,125. At
March 31, 2002, the balance due on this loan was $81,250.

Our working capital at March 31, 2002was $178,000 and $6,899 at December 31,
2001.

For the three months ended March 31, 2002, net cash provided by operating
activities was $238,000. Net cash provided by operating activities for the
years ended December 31, 2001 and 2000 was $757,000 and $10,000, respectively.
The primary components of operating cash flows are net income, increases in
accounts receivable, depreciation and amortization and increases in income tax
payable.

Capital expenditures include capitalized software development costs and
purchases of property, plant and equipment and are funded out of cash flow
from operations. For the three months ended March 31, 2002, capital
expenditures, all of which were software development costs, were $89,000.
Capital expenditures for the years ended December 31, 2001 and 2000 were
$657,000 and $357,000, respectively. Capitalized software development costs
for 2001 and 2000 were $547,000 and $199,000, respectively.

Net cash used in financing activities for the three months ended March 31,
2002 was $147,000. For the year ended December 31, 2001, net cash used in
financing activities was $92,000. Net cash used in financing activities
reflects repayments on the working capital and term loans as well as, in the
case of 2001, distributions to shareholders. For the year ended December 31,
2000, net cash provided by financing activities was $348,000, reflecting
primarily the proceeds from draws on our line of credit.

We intend to use the net proceeds from this offering to expand our sales and
marketing efforts, enhance our proprietary software, make a final S
corporation distribution to our pre-offering shareholders and for working
capital and general corporate purposes to fund the further expansion of our
business. As part of our growth strategy, we continuously evaluate potential
acquisitions and the net proceeds from this offering may be used, in part, to
fund such acquisitions. We have no current plans, agreements or commitments
and are not currently engaged in any negotiations regarding any acquisition
transactions. We believe that the net proceeds of this offering together with
cash flow from operations will be sufficient to meet our working capital and
capital expenditure requirements for the next 12 months.

Seasonality and Cyclicality

Generally, our revenue has been lowest in the first quarter and highest in
the fourth quarter. We believe that this is due to the fact that most
organizations that we deal with define projects on an annual basis and the
pressure to get projects completed increases progressively as the year goes
on. In addition, as the year develops and they have excess funds available,
additional projects are proposed that would not have been considered earlier
in the year.

We have not detected any decrease in the volume of business during the most
recent recession. To the contrary, our business has increased. We attribute
this to a number of factors, including the competitive environment in the
industries in which our clients operate. We believe that once a competitor
within a market migrates to an XML-based format, other organizations in that
market will follow in order to stay competitive. In addition, our services
allow our clients to reduce their costs. Nevertheless, we anticipate that in
the future our business will be impacted by general economic conditions.

Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," the effective
date of which was deferred for all fiscal quarters of all fiscal years
beginning after June 15, 2000 by SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities--Deferral of Effective Date of SFAS 133."
Our effective date was January 1, 2001. SFAS 133 establishes accounting and
reporting standards of derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded for
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it
is, the type of hedge transaction. We do not believe that this standard will
impact our financial statements since we do not currently hold any derivative
instruments or engage in hedging activities.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets," effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill and
indefinite life intangible assets are no longer amortized but are reviewed
annually for impairment. Separable intangible assets that are not deemed to
have an indefinite life will continue to be amortized over their useful lives.
We do not believe these standards will impact our financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is applicable to
financial statements issued for fiscal years beginning after December 15,
2001. This statement supersedes SFAS No. 121 and provides a single accounting
model for long-lived assets to be disposed of. SFAS No. 144 also supersedes
the provisions of APB No. 30 with regard to reporting the effects of a
disposal of a segment of a business and requires expected future operating
losses from discontinued operations to be displayed in discontinued operations
in the period in which the losses are incurred. We do not believe this
standard will impact our financial statements.

BUSINESS

We are a leading independent provider of data conversion services. Since our
inception in 1981, we have converted content from one format to another in
response to evolving client preferences and advances in technology. Initially,
we helped our clients convert their content as they migrated from mainframes
and minicomputers to desktop personal computers. Next, we helped our clients
convert their content from older word-processing formats to the newer ones
such as WordPerfect and Microsoft Word. In the early 1990's, a significant
portion of our business involved converting content to and from desktop
publishing systems, such as Quark, Ventura and FrameMaker, and large-scale
publishing systems, such as Xyvision.

Today, using our proprietary conversion methodology and conversion software,
we specialize in implementing and managing large, complex content conversion
and enrichment projects. Our primary focus is converting a broad range of
content to the markup languages, XML, SGML and HTML. These services enable our
clients, including affiliates of Wolters Kluwer, Reed Elsevier, General
Electric, Rolls Royce, Bombardier, Schlumberger and the United States
Department of Defense, to publish, distribute, search, store and provide
access to vast amounts of rich data and information over a variety of
electronic and digital communication channels, including the Internet,
intranets, extranets and wireless personal communication devices. We believe
that a growing number of private and public sector content owners will look to
convert their legacy and newly created content into XML or SGML and will
recognize the advantages of outsourcing these projects.

Industry Background

Data conversion is the process by which content is converted from one format
to another. As part of the conversion process, the content is tagged or
"marked up" to increase its functionality. Once content has been tagged, it
can be searched, stored and indexed more efficiently. In addition, the content
can be used in multiple ways that were not possible when it was produced in
its original format and for different purposes than originally intended.
Examples of the things we do to make content more functional include adding
hyperlinks and cross-references, identifying sections that can be used for
multiple publications, and tagging elements, such as dates, names and parts
numbers, to facilitate specialized indexing and searching functions.

We believe that over the last decade, the data conversion industry has grown
rapidly. The principal drivers of this growth have been the development and
acceptance of a variety of electronic media, such as the Internet, as an
accepted means to distribute and gather information, do research, communicate
and interact, as well as the development of markup languages that facilitate
the use of information.

Converting content into a markup language is a key component for effectively
utilizing data in the age of electronic communication. Until the development
of markup languages, written content that was converted into digital format
was difficult to index, catalogue and search and to repurpose for new uses.
Commercial enterprises, from manufacturers to professional firms, as well as
governmental units are addressing online strategies for making better and more
efficient use of their data. Whether for the distribution and updating of
equipment maintenance manuals, collecting and sharing of technical research
and instructional documentation, searching legacy data or simply managing
knowledge in a more cost efficient and non-duplicative way, markup languages
are becoming necessary in many commercial and governmental sectors.

Over the past 10 years, there has been a gradual migration from print
publishing to electronic publishing. In particular, this migration has been
gathering momentum in the case of scientific and technical publications,
educational materials, encyclopedias and almanacs. For example, Forrester
Research predicts that sales of digital textbooks will hit $1.3 billion, or
14% of all textbook sales, in 2003. By 2005, it estimates that digital
textbooks will account for 25% of all textbook sales. Additionally, we have
recently detected a trend by some of our clients to convert their content
immediately into a markup language before it goes to composition, rather than
wait until the printing function has been completed, leading us to believe
that our services will become integral to the publishing process.

Markup Languages

Generally, users of information expect to be able to access and use
information quickly and easily. As a result, owners of content who have their
content accessible in a flexible, easily revisable and easily transmittable
format have a distinct competitive advantage. Content owners face a number of
obstacles if they want to take full advantage of electronic media as a means
to distribute their content. First, there is a substantial body of existing
content that is in paper form. Converting this legacy material into an
acceptable digital format can be a time-consuming and costly process. Second,
even legacy material that is currently in a digital format may not be suitable
for distribution over the Internet or other electronic media. For example, the
content may have been produced in a format that is not recognized by or
compatible with all of the various computer operating systems in use today.
This is particularly true regarding content produced for distribution over the
Internet, which may not be distributable over wireless personal communication
devices or other forms of new media technology. Third, in the conversion
process itself the integrity of the information may be compromised. For
example, tables, charts, graphs and diagrams often get corrupted in the
conversion process and formatting features, such as fonts, pitch and page
breaks may be lost in the conversion process. Finally, to get the optimum use
out of the opportunities offered by electronic media, the end user must be
able to navigate easily through the document and any related documents. This
is difficult to do with the most common digital formats, including the most
popular word processing programs, WordPerfect and Microsoft Word, as well as
the most commonly used data formats other than markup languages, TIFF and
Adobe's PDF.

The solution to these problems is the use of markup languages. With a markup
language, descriptive tags are applied to text and data in a standard way to
identify and facilitate the use of the content. There are three standard,
commonly used, nonproprietary markup languages.

o SGML -- Standard General Markup Language. SGML was developed in the
1980's as a non-proprietary, platform-independent method of describing
the structure and elements of a document rather than its appearance. It
provides an architecture for defining document tag sets, which allow the
appearance and text to be separated and reformatted for different uses.
The tags tell the viewer what the information means rather than how it
looks. This allows for greater flexibility in terms of the way the
information can be used and displayed. The content creator can design a
customized markup language for limitless different types of documents.
SGML has been adopted and implemented by many industries in many
applications.

o HTML -- Hyper Text Markup Language. HTML was developed in the early
1990's specifically to support files for display on the Web. HTML is a
simple, predefined SGML tag set, which tells a Web browser how to display
text and images. Since its tag set is limited, HTML is easy to implement.
However, since HTML does not normally define the structure and elements
of the content, only its appearance, it does not provide for complex
searching, linking and document maintenance.

o XML -- Extensible Markup Language. XML, developed in the late 1990's, is
a streamlined version of SGML. It omits much of the complexity and the
rarely used features of SGML while maintaining its core flexibility. At
the same time, XML provides new features that make it more suitable for
delivery and interoperability over the Web and other communication
devices.

Trends Affecting Growth

We believe that the following factors have contributed to the recent growth
of the data conversion industry and will continue to drive our growth in the
future:

Development of the Internet and other electronic media

Over the last several years, the popularity of the Internet, particularly as
a means to publish, distribute and search content has increased rapidly. As a
result, commercial enterprises, from manufacturers to professional firms, as
well as governmental units are addressing online strategies for making better
and more efficient use of their data. For many organizations, digital media
has been a key element in their distribution

strategies. We believe that the development and acceptance of other
communication devices, particularly wireless and hand-held devices, is
contributing to this trend.

Widespread use of XML

The development and increasing popularity of XML have contributed greatly to
the growth of the data conversion industry. Since it was introduced, many
large and influential corporations, including IBM Corp., Microsoft Corp. and
General Electric, have been lending their support to XML, making it the de
facto standard for data transfer.

XML has a number of important advantages over the other markup languages.

o XML is a media neutral format. XML is a robust, non-proprietary,
verifiable file format for storing and transmitting text and data both on
and off the Web. With XML, content is created once and can be easily
distributed through a variety of media, including the Web, handheld and
wireless devices and print. Also, XML can be used to store any kind of
structured information and to enclose or encapsulate information to pass
it between different computing systems, which would otherwise be unable
to communicate. If implemented broadly and consistently, XML can make it
significantly easier for organizations and individuals to identify,
integrate and process complex information that may be widely dispersed
among systems and organizations.

o XML is a flexible format. Since XML is not limited to a predetermined set
of tags, it allows for the flexible development of user-defined document
types. The content creator can design its own markup language with as few
or as many tags as it deems appropriate. Also, XML allows a user to
modify the text and to have those modifications automatically reflected
in every medium in which the content is published. In addition, XML
content can be "repurposed," meaning it can be distributed over a variety
of devices without having to be modified. For example, XML content can be
published on the Web as well as downloaded onto a personal digital
assistant simultaneously. Because of the tag sets, XML protects the
integrity of the content and each page is distributed and produced in a
manner most appropriate for that medium. With XML the content creator is
assured that the information will be produced consistently and conforms
to organizational standards. Finally, portions of the data can be reused
and selectively combined with other data to create entirely different
content. This is known as "component reuse."

o XML enhances functionality. XML improves the functionality of content by
providing more adaptable information identification. Content that is
stored in XML format can be searched, selectively retrieved, enhanced,
modified and reorganized in accordance with an infinite number of
programmable applications.

o XML is easy to render. The current versions of both Microsoft Internet
Explorer and Netscape Navigator include support for XML natively within
the software. Both implement a standard document transformation
technology that allows the browser to seamlessly display an XML document
as a Web page by converting it into an HTML document. In addition,
traditional paper publishing of XML documents can now be accomplished
directly with commercially available software that allows a user to
transform an XML document directly to a sophisticated page layout. Both
of these technologies are significant because they make it considerably
easier to deliver XML documents to end-users.

Government regulations and proposed initiatives

Government regulation and initiatives have contributed to the growth of the
data conversion industry. For example, the United States Department of Defense
has adopted regulations requiring that all technical manuals be published in
electronic format. As a result, all of the various branches of the United
States military have started to convert significant portions of their
technical documentation into SGML and XML. In addition, from time to time,
members of Congress have proposed initiatives that would require the federal
government to develop a plan that would enable information sharing through
government-wide adoption of XML. Similarly, provisions of the E-Government Act
of 2002, if enacted, would require better government management of XML
initiatives. For example, the legislation calls for the administrator of a new
Office of

Electronic Government, in coordination with the National Institute of
Standards and Technology, to develop a policy framework and set standards for
implementing XML.

In addition, regulations mandating equal access for the disabled have had a
direct impact on the educational publishing industry. As a result, many
companies in this industry have been adopting an XML standard. In April 2002
the Instruction Materials Accessibility Act of 2002, or IMAA, was introduced
in both the U.S. House of Representatives and the U.S. Senate. This
legislation mandates the adoption of a standardized, national electronic file
format to improve access to textbooks for students who are blind or who have
other print disabilities. Publishers of instructional material will be
required to submit an electronic file of all textbooks in this universal file
format, such as a markup language, which will facilitate their conversion into
accessible formats, such as Braille, synthesized speech and digital text and
audio.

Trend to outsourcing

Until recently, most organizations, particularly large manufacturing
companies, have been satisfying their data conversion needs largely through
in-house solutions. In-house solutions, however, can be expensive and
difficult to maintain, particularly since they are often manual operations
that rely on fairly large labor pools. While this approach was suitable for
small conversion projects, it is less efficient for large-scale, complex
conversion projects. As a result, many of these businesses have begun to use
third-party service providers to satisfy their data conversion needs. We
believe this trend will continue as organizations continue to look for
efficiencies in an increasingly competitive global economy.

The DCL Solution

Over the last 15 years, we have developed a business model that enables us
to tailor the data conversion process to the specific needs of the client and
manage the process efficiently in terms of speed, consistency and accuracy.
This model has three basic components, each of which is discussed below.

The DCL Conversion Methodology

Our conversion methodology divides a conversion project into four distinct
phases. The end of each phase represents a checkpoint at which the client can
evaluate the project in terms of the client's expectations and the project's
feasibility and cost. We believe that our conversion methodology identifies
and addresses most potential problems as early as possible. In addition, our
methodology reliably deals with the major issues in any large-scale conversion
effort: time to completion; quality; cost; and reliability.

o Phase 1: Planning and Concept. The purpose of this phase is to establish
project goals and expectations, define the success criteria, lay out a
preliminary approach, identify potential problem areas and prepare a
preliminary budget. During this phase, we also undertake a preliminary
evaluation of the content to be converted. Based on the information
developed during this phase, we determine if the project is feasible and
cost effective in light of the client's expectations. This phase
typically takes several weeks to complete.

o Phase 2: Proof of Concept. The purpose of this phase is to test the
approach developed in Phase 1 on a limited scale, paying particular
attention to areas identified as potential problems. It includes defining
the sample set, analyzing requirements, inventorying materials, preparing
the conversion specification document, developing proof of concept
software and developing a hand-tagged sample. This phase typically lasts
two to four weeks.

o Phase 3: Analysis, Design and Engineering. The purpose of this phase is
to prepare for volume production. We build on what was done in Phase 2
and expand the analysis, design and engineering components of the project
to handle the full set of materials. The project specifications and the
conversion software and production process for large-scale production are
finalized. This phase typically takes four to six weeks.

o Phase 4: Production. This phase includes full volume production, quality
control, process improvement feedback, exception handling mechanisms,
materials trafficking, packaging and delivery.

The DCL Software

We have developed proprietary conversion software that automates
substantially all of the conversion process. We own all the rights to this
software and, we believe, none of our competitors has software that is
adaptable to as many formats as ours or that automates the data conversion
process to the extent that ours does.

Our software is a "suite" of modules that can be combined and applied to
different projects based on the specifications for that project. The software
drives the data conversion process and also tags elements such as hyperlinks,
cross-references and tables. Our software is designed to accommodate all major
sources and target formats with specific modules to deal with complex
scientific, technical and medical documentation. These types of documents are
usually characterized by elaborate tables, charts, diagrams, equations, cross-
referencing, footnotes and special characters, making them difficult to
publish electronically in their original format and difficult to access,
search and store. Utilizing a vast library of specially developed conversion
modules that we have developed, we can adapt and modify our software to handle
most data sets.

We believe that our software provides us with a significant competitive
advantage and also creates a significant barrier to entry. Our software allows
us to achieve speed, consistency and accuracy. It also gives us greater
control over the costs of a project. Since we are less dependent on manual
labor than most, if not all, of our competitors, we are less susceptible to
labor shortages and rising labor costs. In addition, our software enables us
to pursue various government projects that many other data conversion service
providers cannot. Many of our competitors are based offshore to take advantage
of lower labor costs outside the United States. However, the Department of
Defense, for example, requires that all its contractors perform their services
in the United States.

The DCL Vendor Network

We have established relationships with a number of high-quality, low-cost
vendors to whom we outsource the labor-intensive functions that cannot be done
with our software. Some of these vendors are U.S.-based and others are located
offshore. We believe that our network of vendors is a competitive advantage.
By outsourcing the manual functions of the conversion process, we eliminate
the overhead and capital investment associated with these functions, giving us
greater flexibility to respond to variations in workflow. Also, outsourcing
allows us to choose the vendor that is best suited for the particular task.

Our Clients

Our clients operate in the following markets:

o STM Publishing. This market includes publishers of scientific, technical
and medical journals and textbooks, such as Wolters Kluwer, Reed
Elsevier, the British Medical Association and Blackwell Science Ltd., as
well as content aggregators, who build Web sites that are dedicated to a
single topic by collecting written content from multiple publishers. The
STM market represents a substantial portion of the 150,000 journals
listed on publist.com and the approximately 975,000 books published
annually worldwide. Both STM publishers and content aggregators convert
their content to SGML or XML so their users, both institutional, such as
universities, hospitals and research centers, and individuals, such as
doctors and engineers, can more effectively access and use their
materials. For example, we currently convert articles in more than 600
journals and periodicals on an ongoing basis and, to date, have converted
over 200 medical textbooks.

o Corporate Technical Documentation. Manufacturers whose products have many
parts, such as aviation and transportation, produce complex technical
documentation like maintenance manuals, parts manuals and instruction
manuals. By converting these manuals to SGML or XML, these manufacturers
can maintain existing manuals and create new manuals more efficiently,
distribute them more effectively and build "smart" manuals that make it
easier to diagnose and fix their products, reducing their maintenance and
help desk staffs and parts inventories. Many large manufacturers have
committed themselves to SGML- or XML-based publishing systems for their
new content. In addition, they have a substantial volume of legacy
documentation that they want to convert to SGML or XML as well. Our
primary focus to date has been the aviation industry, although we have
some customers in

the automotive industry and heavy manufacturing industries. Our clients
include affiliates of the Boeing Company, Delta Air Lines, Inc.,
Bombardier, Rolls Royce, General Electric, Saab AB, Deere & Co. and
Schlumberger.

o Defense. This market includes U.S. military agencies, such as the Army,
Air Force and Marines, as well as the major system integrators like
Lockheed Martin Corporation, Boeing, United Defense Industries, Inc. and
CACI International Inc. Military technical manuals are converted to SGML
or XML for the same reasons that corporate technical manuals are
converted, as well as enhancing the readiness and safety of the United
States armed services. We are currently involved in converting
documentation relating to major weapons systems such as the B-52 and B1
bombers, the Blackhawk helicopter and the KC-135 tanker. We are also
converting documentation relating to missile and communication systems.
We have been advised that there are tens of millions of pages of
technical manuals in the Department of Defense, of which only a small
fraction have been converted to SGML or XML. In addition, as a result of
new regulations, all documentation that is currently used by the U.S.
military must be available in electronic format by a specific date. We
believe that SGML or XML will be adopted as the standard by the military
for a significant portion of its electronic documentation.

o Educational Publishing. Publishers of educational materials, such as
Pearson plc, McGraw-Hill, Inc. and Houghton Mifflin Company, are
converting both legacy and newly-created content to XML to remain
competitive and to comply with U.S. government regulations regarding
equal access to the disabled.

The DCL Growth Strategy

Our objective is to become the leading independent provider of data
conversion and associated editorial services. The key elements of our strategy
are as follows:

o Further develop and enhance our reputation and brand identity. We believe
that we are a recognized leader in the market for data conversion and
associated services. We have been in this business for almost 20 years
and have consistently delivered high-quality data conversion services to
our customers. In particular, we are known for our ability to
successfully manage and complete large conversion projects involving
highly complex and technical documents. Our senior executives regularly
participate in trade shows and industry conferences and have written
articles and textual materials on data conversion. For example, Mark
Gross, our chief executive officer, is the author of the chapter on
document conversions for Charles Goldfarb's XML Handbook (Prentice Hall,
3rd Edition, 2001). Mr. Goldfarb is widely recognized as one of the
leading experts on SGML and XML. We will continue to focus on developing
and enhancing our corporate identity by pursuing a targeted advertising
and public relations campaign to enhance recognition of our brand and
differentiate ourselves from our competitors. We plan to remain visible
in the industry and to further the collective expertise of our staff
through continuing education and new hires.

o Continue to invest in software technology to maintain our leadership
position. Our ability to deliver high quality services is a function of
our proprietary software toolkit and associated production control
software. Our software can convert from and to a majority of the most
popular digital formats as well as perform a variety of associated
content enrichment functions. To maintain this competitive advantage, in
2001 we spent $547,000 on software enhancements. We believe that further
enhancements can be made to the software that will result in an even
greater percentage of the conversion process being automated. We will
continue to enhance and upgrade our software and maintain our
technological leadership in the industry.

o Continue to refine our conversion methodology. As part of our growth
strategy we will continue to refine our conversion methodology, which, we
believe, has been a significant contributor to our success to date. It
enables us to define and carefully plan each conversion project. This not
only helps us complete a project in a timely and efficient manner but
also helps us understand our clients' needs and helps our clients
understand the conversion process itself, what the end product will look
like and the ultimate cost of the project. We believe this leads to
greater client satisfaction.

o Expand our vendor network. Our vendor network is a key component of our
overall strategy. It helps us reduce our costs, gives us flexibility and
allows us to execute multiple large complex conversion projects
simultaneously. As part of our growth strategy we plan to expand our
existing relationships with these vendors as well as add new vendors to
the network.

o Develop current markets and new vertical markets. This aspect of our
growth strategy has three parts and we intend to pursue all of them
simultaneously. First, we believe that we can achieve significant growth
simply by expanding our relationship with our existing clients. We
recognize that, in most cases, we only account for a fraction of the data
conversion needs of our existing clients. We further believe that
expanding our relationship with existing clients would not require
significant expenditures of working capital and could be achieved in a
relatively short period of time. Second, we intend to expand our presence
in the markets we already serve by offering our services to new clients
within those markets. While this would require a greater expenditure of
capital than the first part of this strategy, it can still be achieved
economically and we will be able to see results fairly quickly. We will
develop new vertical markets. Potential new markets include, libraries,
transportation, financial services, pharmaceuticals and technical
societies. This approach will require significant expenditures of working
capital and will take the most time to develop.

o Develop strategic relationships and pursue strategic acquisitions. We may
develop new vertical markets through strategic relationships and
acquisitions that will enable us to expand our client base. Potential
strategic partners include printers, system integrators and other
Internet professional services firms. We believe that content is being
converted to XML much earlier in the publishing process -- in some cases
even before or simultaneously with the printing process. By partnering
with large commercial printers we will be able to take advantage of this
trend. Similarly, we think system integrators represent a potential
source of new business. These firms provide consulting services to assist
their clients with issues relating to interoperability of different
computing systems. Our data conversion services are a solution to this
problem. In evaluating acquisition opportunities we will focus on
entering new markets, expanding our client base, and acquiring
technological expertise.

Sales and Marketing

Currently our sales and marketing staff consists of four people, including
our vice president of sales. We obtain visibility through our Web site, which
includes company and industry information, and by way of articles published in
the trade press, through active participation in industry conferences and
standards organizations and by speaking engagements at industry events. We
also produce an industry newsletter that is distributed to over 6,000 readers.
Sales and marketing activities also consists of trade show exhibitions and
direct sales calls to decision makers at existing and prospective clients. Our
project managers work closely with our sales and marketing staff to support
the sales effort. These individuals assist the sales force in understanding
the technical needs of the clients and providing solutions to these needs,
including demonstrations, prototypes, pricing quotations and time estimates.
In addition, account managers from our customer service group support our
direct sales effort by providing ongoing project-level post-sale support to
customers.

Our sales and marketing efforts target our existing clients, for the purpose
of expanding our existing relationships, as well potential clients in the same
markets that we currently serve. After this offering is completed, we intend
to expand our sales and marketing efforts to develop new markets. We have
developed a marketing plan that divides the process of developing a new market
into three stages. This will allow us to limit the risk involved to develop a
new market.

o Market Study. The market study allows us to determine if the targeted
market is a viable one for us. The principal activity during this stage
is developing a comprehensive study of the potential number of customers
and the level of demand.

o Market Development. The next step is to develop that market in a generic
fashion by introducing our services to the major organizations in that
market by participating in trade shows and conferences and by direct
mailing of marketing materials to potential customers.

o Market Penetration. During this stage, we hire sales representatives to
make direct calls on potential clients.

Competition

The data conversion industry is highly fragmented and extremely competitive.
Some of our competitors are larger than we are and have significantly greater
financial and human resources. Our competitors include independent data
conversion services providers such as Innodata Corporation, SPI, Inc., Jouve,
S.A. and IHS Corp., and systems integrators and consulting firms such as
Electronic Data Systems Corp., KPMG Consulting, Inc. and Computer Sciences
Corporation. In addition, some of our strongest competition comes from our
existing and potential clients who still do a significant amount of data
conversion internally.

The most significant competitive factors are price, quality, reliability,
scope and scale, and technical competence for complex conversion projects. We
believe that we compete favorably on all of these factors. Our ability to
compete favorably is due primarily to our proprietary conversion software and
conversion methodology and our extensive vendor network. One of the advantages
of a software-driven process like ours is that we rely less on manual labor.
Software-driven processes are more dependable, produce consistent results and
are less expensive. To compensate for the higher cost of manual labor relative
to automated processing, many of our competitors are located offshore to take
advantage of lower labor costs. However, we believe that global rising labor
costs are increasing as the global economy continues to develop, decreasing
the advantage of locating offshore. In addition, U.S. government contracts
often require that the work be performed by U.S.-based vendors for both
security-related and competitive reasons as well as a general desire to
support U.S.-based businesses. For example, conversion of technical manuals
for the Department of Defense must be performed in the United States. As a
result, we can pursue projects that many of our competitors cannot.

Government Regulation

Aside from regulations that apply to all businesses in general, there are no
specific government regulations that dictate how or limit our ability to
conduct our business. However, specific regulations indirectly affect our
business. For example, we believe that federal regulations requiring equal
access for the disabled have a positive effect on our industry. In addition,
various government initiatives have been proposed that would establish XML as
the official computer language for the entire federal government. For example,
proposed legislation would require the federal government to develop a policy
framework and set standards for the implementation of XML. If any of these
initiatives, proposals or legislation are ever adopted or enacted, we would
expect that the demand for services such as ours would increase dramatically.
For these reasons we intend to monitor these regulatory and legislative
developments carefully. We are also affected by regulations that apply to our
clients. For example, federal regulations that apply to the Department of
Defense prohibit us from outsourcing labor-intensive tasks to offshore vendors
in connection with services rendered to the U.S. military.

Finally, federal, state, local and foreign governmental organizations also
are considering, and may consider in the future, other legislative and
regulatory proposals that would regulate the Internet. Areas of potential
regulation include libel, pricing, product and service quality, taxation and
intellectual property ownership. We cannot predict how courts will interpret
both existing and new laws and, as a result, we do not know the effect new
laws or the application of existing laws will have on our business. Increased
regulation of the Internet may decrease the growth in the use of the Internet,
which could decrease the demand for our services, increase our cost of doing
business or otherwise have a material adverse effect on our business, results
of operations and financial condition.

Intellectual Property

Our success depends to a significant degree on our ability to maintain the
proprietary aspects of our software toolkit and the DCL methodology and
related documentation. We have not obtained any federal registration of the
copyrights relating to those assets. Rather, we rely primarily on common law
principles relating to trade secrets, proprietary methodology and copyrights
as well as confidentiality agreements and contractual provisions with our
employees to protect our intellectual property rights relating to these
assets. In addition, we believe that there is significant value in the name
"Data Conversion Laboratory." However, we

have not registered or attempted to register that name as a trademark, trade
name, service mark or service name. Rather, we rely on common law principles
to protect our rights to our name.

Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights are uncertain and still evolving, and we
cannot give you any assurance as to the future viability of value of any of
our intellectual property rights or that the steps we have taken to protect
our proprietary rights will be adequate. In addition, we cannot assure you
that our common law rights, confidentiality agreements with employees and
other contractual provisions purporting to protect our rights to intellectual
property will provide adequate protection in the event of any unauthorized use
or disclosure, that our employees, consultants, advisors or others will honor
their obligations as set forth in those agreements and provisions or that
proprietary information will not otherwise become known or be independently
developed by our competitors. Any infringement or misappropriation of our
proprietary rights or if they are developed independently could have a
material adverse effect on our business, results of operations and financial
condition.

Operational Support Technology

We have built a reliable, scalable infrastructure to support a growing,
rapid-turnaround, high-volume production environment. The core of our system
is our internally developed Production Control System that allows us to track
the progress and location of every work packet and document through the entire
production process. The system, built using industry standards and platforms
such as Win2000, SQL server and IIS, is integrated with our timesheet,
disbursement, and accounting systems to allow accurate collection of costs and
accounting information. Additionally, through secure Web access, the system
allows customers to access real-time information to track the progress of
their projects. We continue to upgrade and enhance this system to provide more
advanced workflow capabilities and greater automation of the production
process.

Our network architecture uses a combination of Windows and Macintosh
workstations, supported by a switched 10/100 Base T Ethernet configuration
using CAT 5 wiring. Virus protection is provided through multi-level virus
scanning with an automated updating scheme. The system is backed up daily with
regular offsite backups. Internet access is provided through dedicated high
speed (T1) Internet connection with a backup ISDN line. Security is provided
with a back-to-back firewall configuration with secure, encrypted connections
for specific Web services.

Employees

As of June 1, 2002, we had 55 employees, one of which is part-time. All but
two of our employees are based in our facility in Fresh Meadows, New York. We
have one salesperson located in New Mexico and one in Virginia. In addition to
our five senior executives, our employees include 11 production people, nine
analysts, 15 editors, three sales and marketing people, 10 programmers and two
administrative personnel. Our employees are not represented by any union and
are retained on an at-will basis. We consider our relations with our employees
to be good.

Facilities

Our executive and principal operating office is located in Fresh Meadows,
New York. We occupy approximately 7000 square feet under a lease that expires
October 31, 2002. The rent is $6,748.38 per month, which includes all
additions to rent for real estate taxes and other expenses. We do not own any
real property nor do we consider any specific location material to our
operations; we believe that equally suitable alternative locations are
available throughout the New York metropolitan area. We have had preliminary
discussions with our landlord for a new lease, and we believe that we will be
able to enter into a new lease before the current one expires.

Legal Proceedings

We are not a party to any material legal proceeding.

MANAGEMENT

Executive Officers and Directors

Our executive officers, director and director-nominees, and their ages, as
of June 1, 2002, are as follows:

Name Age Position
---- --- --------

Mark Gross ..................... 50 Chairman of the board of directors,
president, and chief
executive officer

Judy Gross ..................... 49 Vice president -- finance and
administration, secretary,
treasurer and director-nominee

Amy Finfer ..................... 39 Vice president, chief operating
officer and director-nominee

Michael Gross .................. 46 Vice president, chief technology
officer and director-nominee

David Skurnik .................. 39 Vice president -- sales and director-
nominee

Andrew Weiss ................... 50 Director-nominee

Donna Lynn ..................... 61 Director-nominee

All directors hold office until the next annual meeting of shareholders and
until their successors are duly elected and qualified. Officers are elected to
service subject to the discretion of the board of directors.

Set forth below is a brief description of the background and business
experience of our executive officers and directors.

Mark Gross, chairman of the board, president and chief executive officer, is
one of our founding shareholders. He is married to Judy Gross. His experience
spans various areas of the field of information technology, including software
development, networking and training, and he is a frequent speaker on the
topic of automated conversions to XML and SGML. Mark Gross holds a Bachelor of
Science degree in engineering from Columbia University and a Masters of
Business Administration degree from New York University.

Judy Gross, vice president -- finance and administration, secretary,
treasurer and a director-nominee, is one of our founding shareholders. She is
married to Mark Gross. Mrs. Gross holds a Bachelor of Arts Degree in Economics
and Psychology from Syracuse University and a Masters in Business
Administration from New York University.

Amy Finfer, vice president, chief operating officer and a director-nominee,
joined us in 1998. Before then she was a management consultant at American
Management Systems, providing consulting services in the areas of technology,
strategy, business processes and organizational performance for leading
organizations worldwide. Ms. Finfer holds a Bachelor of Science degree in
Computer Science from the University of Florida and a Masters of Business
Administration degree from the University of Maryland.

Michael Gross, vice president, chief technology officer and a director-
nominee, joined us in 1986. He is not related to Mark Gross or Judy Gross.
Michael Gross holds a Bachelor of Science degree in Computer Engineering from
the Case Institute of Technology at Case Western Reserve University.

David Skurnik, vice president -- sales and a director-nominee, joined us in
1997. Before then he served as director of sales for the consumer Internet
division at IDT Corp. Mr. Skurnik holds a Bachelor of Arts Degree in
Psychology from Queens College at The City University of New York and a
Masters of Business Administration Degree from Baruch College at The City
University of New York.

Andrew Weiss, director-nominee, is an executive vice president at The Trump
Organization and has been in charge of all of its major development and
construction projects in New York City. Mr. Weiss holds a Bachelor of Science
degree in Civil Engineering from Columbia University and a Masters of Business
Administration from New York University.

Donna Lynn, director-nominee, is the chief operating officer and a member of
the Board of Directors of KnowledgeMax, Inc., which she had co-founded in
1998. From 1996 to 1997 she was president of Silver Platter Information, Inc.
Before then, she was the chief executive officer of Online Computer Systems,
Inc., which was later merged with Reed Elsevier.

Judy Gross, Amy Finfer, Michael Gross, David Skurnik, Andrew Weiss and Donna
Lynn will join our board of directors immediately after this offering is
completed.

We do not have a chief financial officer. We expect to hire someone to fill
that position soon after this offering is completed. Until we hire a chief
financial officer, Judy Gross is acting as our chief accounting officer.

Committees of the Board of Directors

Our board of directors has established compensation and audit committees.
The members of the audit committee will be Mark Gross, Andrew Weiss and Donna
Lynn. The members of the compensation committee will be Mr. Weiss and Ms.
Lynn. The audit committee will meet with management and our independent public
accountants to determine the adequacy of internal controls and other financial
reporting matters. The compensation committee will review and recommend to the
board of directors the compensation and benefits of all of our officers and
general policy matters relating to compensation and benefits of our employees
and will administer our stock option plans and the issuance of discretionary
cash bonuses to our officers, employees, directors and consultants.

Compensation of Directors

Before this offering, directors were not compensated for their service on
the board. Once this offering is completed, each non-employee director will be
reimbursed for travel costs and other out-of-pocket expenses incurred in
attending each directors' meeting. In addition, each non-employee director,
upon election to the board, will receive options to purchase 5,000 common
shares having an exercise price equal to the fair market value on the date of
grant. These options will vest one-fourth on the date of grant and one-fourth
at the end of each subsequent year of service on the board. Also, each non-
employee director will receive options to purchase an additional 1,500 common
shares on the date of our annual shareholders' meeting. These options will
have an exercise price equal to the fair market value of the common shares on
the date of grant and will vest one-third upon grant and one-third at the end
of each subsequent year of service on the board.

401(k) and Cafeteria Plans

We maintain a retirement plan intended to qualify under section 401(k) of
the Internal Revenue Code. The 401(k) plan is a defined contribution plan that
covers our employees who are at least 21 years of age and who have been
employed by us for at least 90 days. Employees may contribute up to 15% of
their annual wages as pre-tax salary deferral contributions. We have no
obligation to make any contribution to the 401(k) plan on behalf of any of our
employees.

We also maintain a cafeteria plan intended to qualify under section 125 of
the Internal Revenue Code. All employees who work at least 24 hours per week
and who qualify to participate in our medical plan are eligible to participate
in the cafeteria plan. Employees who participate in the cafeteria plan may
choose to have a portion of their cash compensation applied to the cost of one
or more fringe benefits that we make available to our employees, such as our
medical plan.

Executive Compensation

Summary compensation. The following table sets forth information regarding
compensation earned by or paid to our chief executive officer and our other
most highly compensated executive officers whose compensation exceeded
$100,000 in 2001 for all services rendered to us in all capacities during
2001.

Annual Compensation
-----------------------
Other Securities
Name Annual Underlying
---- Year Salary Compensation Options
---- -------- ------------ ----------

Mark Gross, chairman of the board, president and chief executive officer .......... 2001 $128,000 $16,700(1) -0-
Amy Finfer, vice president and chief operating officer ............................ 2001 $131,750 * -0-
Michael Gross, vice president and chief technology officer ........................ 2001 $121,000 * 639
David Skurnik, vice president -- sales ............................................ 2001 $130,370(2) * 10,092

- ---------------
* Less than $50,000 or 10% of the total annual salary.
(1) Includes $7,150 for health insurance premiums, $1,430 for life insurance
premiums, $1,192 for disability insurance premiums, $3,250 for a car lease
and $3,677 for car insurance.
(2) Includes $31,370 of commission income.

The following tables provide information with respect to stock options
granted during the fiscal year ended December 31, 2001 to each of the
executives named in the summary compensation table above and the number and
aggregate value of unexercised options held by those executives as of
December 31, 2001. The per share exercise price of all options was equal to
the estimated fair market value of a share of common stock on the date of
grant. No options granted to any named executives have been exercised.

Option Grants in Fiscal Year Ended December 31, 2001

Number of
Securities Percent of Total
Underlying Options Granted to Exercise Price Expiration
Name Options Employees in Fiscal Year ($/Sh) Date
---- ---------- ------------------------ -------------- ----------

Mark Gross ................................................ -0- -0- -0- -0-
Amy Finfer ................................................ -0- -0- -0- -0-
Michael Gross ............................................. 639 0.5% $2.60 1/2/2011
David Skurnik ............................................. 20,185 13.4% $2.60 1/2/2011

2001 Year-End Option Values

Number of Shares Underlying Value of Unexercised In-
Unexercised the-Money
Options at Fiscal Year-End Options At Fiscal Year-End
(#) ($)
--------------------------- ---------------------------
Name
---- Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------

Mark Gross .......................................................... -0- -0- -0- -0-
Amy Finfer .......................................................... -0- -0- -0- -0-
Michael Gross ....................................................... 79,354 -0- $599,866 -0-
David Skurnik ....................................................... 6,055 14,130 $ 32,697 $76,302

Employment Agreements

We have not entered into employment agreements with any of our employees.
However, all employees, including our senior executives, have signed an
Employee's Confidentiality Agreement. Under this agreement, the employee
agrees to devote all working time to the company, not to disclose any of our
confidential information and, in the event of termination of employment, not
to compete with us for one year following termination.

Stock Option Plans

To attract and retain persons necessary for our success, in January 2001 we
adopted our 2001 stock option plan and reserved 250,000 common shares for
future grants. Under the plan, employees and consultants are eligible to
receive incentive and/or non-qualified stock options. The plan has a term of
10 years and is administered by the board of directors or by a committee
appointed for this purpose by the board of directors. The board of directors
or the committee, as the case may be, has the sole discretion to determine who
is eligible to receive options, how many options they will receive, the
exercise price for the options and other conditions relating to the exercise
of the options. Incentive stock options granted under the plans must be
exercised within 10 years from the date of grant at an exercise price that is
not less than the fair market value of the common shares on the date of the
grant. The exercise price of options granted to shareholders owning more than
10% of our outstanding common shares must be at least 110% of the fair market
value of the common shares on the date of the grant, and the options must be
exercised within five years from the date of grant to qualify as incentive
stock options.

In 2001, we granted options under our 2001 plan covering 150,678 common
shares. These options have an exercise price of $2.60 per share, a ten-year
term and, generally, vest ratably in four equal annual installments beginning
with the date of grant. In April 2002, a former employee exercised options
covering 673 common shares. As of the date of this prospectus, options
covering 134,530 remain outstanding. In 2002, we granted options under our
2001 plan covering 50,731 common shares. These options have an exercise price
of $8.00 per share, a ten-year term and vest ratably in four equal annual
installments beginning with the date of grant. All of these options are
outstanding. In addition, in June 1999, we granted options covering 78,720
common shares. These options have an exercise price of $0.42359 per share and
can be exercised at any time before January 1, 2011.

Limitation of Directors' Liability and Indemnification

Our certificate of incorporation limits the liability of individual
directors for specified breaches of their fiduciary duty. The effect of this
provision is to eliminate the liability of directors for monetary damages
arising out of their failure, through negligent or grossly negligent conduct,
to satisfy their duty of care, which requires them to exercise informed
business judgment. The liability of directors under the federal securities
laws is not affected. A director may be liable for monetary damages only if a
claimant can show a breach of the individual director's duty of loyalty to us,
a failure to act in good faith, intentional misconduct, a knowing violation of
the law, an improper personal benefit or an illegal dividend or stock
purchase.

There is no pending litigation or proceeding involving any of our directors,
officers, employees or agents in which we are required or permitted to provide
indemnification. We are not aware of any threatened litigation or proceeding
that may result in a claim for such indemnification.

Our certificate of incorporation also provides that we will indemnify and
hold harmless each of our directors or officers against all expense, liability
and loss, including attorneys fees, judgments, fines, Employee Retirement
Income Security Act excise taxes or penalties and amounts paid or to be paid
in settlement, reasonably incurred or suffered by such person by reason of the
fact that he or she was an officer or director, to the fullest extent
authorized by the New York Business Corporation Law.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons under our
certificate of incorporation, we have been informed that, in the opinion of
the SEC, indemnification is against public policy as expressed in the
Securities Act and is unenforceable.

CERTAIN TRANSACTIONS

Mark Gross, our principal stockholder and chief executive officer, has
personally guaranteed repayment of the term loan and amounts due under the
credit line facility to Merrill Lynch.

We have adopted a policy that, in the future, all transactions with any
officer, director or 5% shareholder must be approved by the audit committee.

PRINCIPAL SHAREHOLDERS

The following table sets forth information regarding the beneficial
ownership of our common shares as of the date of this prospectus by:

o each person known by us to be the beneficial owner of more than 5% of our
outstanding common shares;

o each of our director and director-nominees;

o each executive officer named in the summary compensation table above; and

o all of our directors, director-nominees and executive officers as a
group.

The following table does not take into account any common shares sold as a
result of the exercise of the over-allotment option granted to the
underwriters. Except as otherwise indicated, the persons listed below have
sole voting and investment power with respect to all of the common shares
owned by them. All information concerning their respective beneficial
ownership has been furnished to us by the individual shareholders.

Percent of Common Shares
Beneficially Owned
-----------------------------------
Name and Address of Beneficial Owner (1) Common Shares
---------------------------------------- Beneficially Owned(2) Before Offering(3) After Offering
--------------------- ------------------ --------------

Mark Gross......................................................... 1,232,910(4) 91.6% 46.2%
Judy Gross......................................................... 1,232,910(4) 91.6% 46.2%
Amy Finfer......................................................... 79,090 5.9% 3.0%
Michael Gross...................................................... 79,359(5) 5.6% 2.9%
David Skurnik...................................................... 10,765(5) * *
Andrew Weiss....................................................... 1,250(5) * *
Donna Lynn......................................................... 1,250(5) * *
All directors, director-nominees and executive officers as a group
(7 persons)...................................................... 1,404,624(6) 97.6% 50.8%

- ---------------
* Less than 1%
(1) All addresses are c/o Data Conversion Laboratory, Inc., 184-13 Horace
Harding Expressway, Fresh Meadows, New York 11365.
(2) According to the rules and regulations of the SEC, common shares that a
person has a right to acquire within 60 days of the date of this prospectus
are deemed to be outstanding for the purpose of computing the percentage
ownership of that person but are not deemed outstanding for the purpose of
computing the percentage ownership of any other person.
(3) Percent of common shares beneficially owned before offering does not
include 75,000 common shares to be issued to members of Morse, Zelnick,
Rose & Lander LLP in connection with this offering.
(4) Mark Gross and Judy Gross are husband and wife. Common shares beneficially
owned includes the aggregate number of shares owned by both of them.
(5) Represents shares underlying options exercisable within 60 days of the date
of this prospectus.
(6) Includes 92,624 common shares underlying options exercisable within 60 days
of this prospectus.

All of the common shares set forth in the above table are covered by lock-up
agreements prohibiting their sale, assignment or transfer for one year from
the date of this prospectus without the prior written consent of the
representative.

DESCRIPTION OF SECURITIES

As of the date of this prospectus, our authorized capital stock consists of
25,000,000 common shares, par value $.01 per share and 5,000,000 preferred
shares, par value of $.01 per share. After this offering, we will have
2,671,314 common shares issued and outstanding, 2,858,814 if the over-
allotment option is exercised in full, and no preferred shares outstanding. As
of the date of this prospectus, we have outstanding 1,346,314 common shares
held of record by five shareholders.

Units

Each unit consists of one common share and one warrant to purchase one
common share. The common shares and the unit warrants will trade only as units
for 30 days following the effective date of this offering, after which time
they will trade separately. We will announce in advance the separation of the
units by a public press release. Upon separation, unit holders who wish to
hold physical certificates will receive certificates for common shares and for
unit warrants in exchange for their unit certificates.

Common Shares

The holders of outstanding common shares are entitled to receive dividends
out of legally available assets when and to the extent determined by our board
of directors from time to time. Each shareholder is entitled to one vote for
each common share held by him on all matters submitted to a vote of
shareholders. The holders of a majority of the common shares voting can elect
all of the directors then standing for election. The common shares are not
entitled to preemptive rights and are not convertible or redeemable. If we are
liquidated or dissolved or our business is otherwise wound up, the holders of
common shares would be entitled to share ratably in the distribution of all of
our assets remaining available for distribution after satisfaction of all our
liabilities and the payment of the liquidation preference of any outstanding
preferred shares. Each outstanding common share is, and all common shares to
be outstanding upon completion of this offering will be, fully paid and
nonassessable.

The rights of the holders of common shares are subordinate to the rights of
any holders of preferred shares outstanding from time to time.

Preferred Shares

The board of directors has the authority, within the limitations and
restrictions stated in our certificate of incorporation, to provide by
resolution for the issuance of preferred shares, in one or more classes or
series, and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. The issuance of preferred shares
could have the effect of decreasing the market price of our common shares and
could adversely affect the voting and other rights of the holders of our
common shares. There are no preferred shares outstanding.

Warrants

Unit Warrants

General. The unit warrants issued in this offering may be exercised at any
time beginning 30 days after this offering and ending on _____________ ___,
2007. Each unit warrant entitles the holder to purchase one common share at an
exercise price of $_______ per share (150% of the initial public offering
price of the units). This exercise price will be adjusted if specific events,
summarized below, occur. A unit warrantholder will not be deemed a holder of
the underlying common share for any purpose until the unit warrant is
exercised.

Redemption. Beginning six months after the effective date of this offering,
we will have the right to redeem the unit warrants at a price of $0.25 per
unit warrant, after providing 30 days' prior written notice to the unit
warrantholders, at any time after the closing price for our common stock, as
reported on the Nasdaq SmallCap Market, was at or above 200% of the initial
unit offering price for any ten consecutive trading days. We will send a
written notice of redemption by first class mail to unit warrantholders at
their last known addresses appearing on the registration records maintained by
the transfer agent for our unit warrants. No other form of notice or
publication or otherwise will be required. If we call the unit warrants for
redemption, the unit warrantholders will then have to decide whether to sell
the unit warrants, exercise the unit warrants before the close of business on
the business day preceding the specified redemption date or hold them for
redemption.

Exercise. The unit warrantholders may exercise the unit warrants only if an
appropriate registration statement is then in effect with the SEC and if the
common shares underlying the unit warrants are qualified for sale under the
securities laws of the state in which the holder resides. To exercise a unit
warrant, the holder must deliver to our transfer agent the unit warrant
certificate on or prior to the expiration date or the redemption date, as
applicable, with the form on the reverse side of the certificate executed as
indicated, accompanied by payment of the full exercise price for the number of
unit warrants being exercised. Fractional shares of common stock will not be
issued upon exercise of our redeemable unit warrants.

Adjustments of exercise price. The exercise price of the unit warrants will
be adjusted if we declare any stock dividend to stockholders, other than the
10% stock dividend issuable if our audited pre-tax income for the year ending
December 31, 2002 is less than $1.3 million, or effect any split or share
combination with respect to our common stock. Therefore, if we effect any
stock split or stock combination with respect to our common stock, the
exercise price in effect immediately prior to this stock split or combination
will be proportionately reduced or increased, as the case may be. Any
adjustment of the exercise price will also result in an adjustment of the
number of shares purchasable upon exercise of a unit warrant or, if we elect,
an adjustment of the number of unit warrants outstanding.

Options

As of the date of this prospectus, under our 2001 stock option plan, there
are outstanding options to purchase 185,261 common shares of which 134,530
have an exercise price of $2.60 and 50,731 have an exercise price of $8.00.
There are an additional 64,739 common shares reserved for issuance under our
2001 plan. In addition, options to purchase 78,720 common shares at an
exercise price of $0.42359 per share are also outstanding. These options were
not granted under the option plan.

Authorized But Unissued Shares

The authorized but unissued common shares and all of the preferred shares
are available for future issuance without shareholder approval. These
additional shares may be utilized for a variety of corporate purposes,
including future public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. The existence of authorized but
unissued common shares and preferred shares could render more difficult or
discourage an attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.

The New York Business Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws,
unless the corporation's certificate of incorporation or bylaws, as the case
may be, requires a greater percentage. Our certificate of incorporation does
not impose any supermajority vote requirements.

Anti-takeover Effects of Our Certificate of Incorporation and Bylaws

Certain provisions of our certificate of incorporation and bylaws may be
deemed to have an anti-takeover effect and may delay, deter or prevent a
tender offer or takeover attempt, including attempts that might result in a
premium being paid over the market price for the shares held by shareholders.

Special meetings of shareholders. Special meetings of our shareholders may
be called only by the president, the chief executive officer, the chairman of
the board of directors or by a majority of the board of directors then in
office. This provision could make it more difficult for shareholders to take
actions opposed by the board of directors.

Issuance of "blank check" preferred shares. As of the date of this
prospectus, our certificate of incorporation authorizes our board of directors
to issue up to five million "blank check" preferred shares. This means that,
without shareholder approval, the board of directors has the authority to
attach special rights to preferred shares, including voting and dividend
rights. With these rights, preferred shareholders could make it more difficult
for a third party to acquire our company.

Removal of directors only "for cause." Our bylaws provide that members of
our board of directors may only be removed for "cause" by the affirmative vote
of holders of at least a majority of the shares of the company entitled to
vote.

Listing on The Nasdaq SmallCap Market

We are applying to list the units, common shares and the unit warrants on
The Nasdaq SmallCap Market under the symbols "DCLXU," "DCLX" and "DCLXW,"
respectively.

Transfer Agent, Warrant Agent and Registrar

The transfer agent and registrar for our common shares and the warrant agent
for our unit warrants will be Continental Stock Transfer & Trust Company, 17
Battery Place, New York, New York 10004.

SHARES ELIGIBLE FOR FUTURE SALE

Before this offering there was no public market for our common shares. We
cannot predict the effect, if any, that sales of, or the availability for sale
of, our common shares will have on the market price of our common shares from
time to time. Future sales of substantial amounts of our common shares in the
public market, including shares issuable upon the exercise of the unit
warrants or options granted or to be granted under our stock option plans,
could adversely affect the prevailing market price of our common shares and
could impair our ability to raise capital in the future through the sale of
securities.

When this offering is completed, we will have outstanding 2,671,314 common
shares. Of these shares, all of the shares sold in this offering, as well as
any dividend shares that will be issued if our audited pre-tax income for the
year ending December 31, 2002 is less than $1.3 million, will be freely
tradable without restriction or further registration under the Securities Act,
unless they are purchased by an "affiliate" of us as that term is defined in
Rule 144 under the Securities Act. The remaining 1,421,314 common shares held
by existing shareholders are "restricted securities" as that term is defined
in Rule 144. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rule
144 or Rule 701 under the Securities Act. Under Rule 144, without regard to
the lock-up agreements described below, 1,345,641 of the "restricted
securities" will be eligible for sale 90 days after the date of this
prospectus, 673 common shares will be eligible for sale in April 2003 and
75,000 common shares will be eligible for sale one year from the date of this
prospectus.

In addition to the common shares actually issued and outstanding, on the
date of this prospectus there are 263,981 common shares issuable upon exercise
of outstanding options. This does not include common shares underlying the
unit warrants and the representative's warrants issued in connection with this
offering.

Lock-Up Agreements

All of our officers, directors and shareholders have signed lock-up
agreements under which they agreed not to transfer or dispose of, directly or
indirectly, any shares of common stock, or any securities convertible into or
exercisable or exchangeable for shares of common stock, for a period of one
year after the date of this prospectus. Transfer or dispositions can be made
sooner with the prior written consent of the representative or to any trust
for the benefit of the transferring shareholders or members of their families.
At the expiration of the lock-up period, one year after the date of this
prospectus, all of the restricted shares, other than restricted shares that
are also "144(k) shares," will be available for resale to the public in
accordance with the volume and trading limitations of Rule 144.

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:

o 1% of the number of shares of common stock then outstanding which will
equal approximately 26,714 shares immediately after this offering; or

o the average weekly trading volume of the common stock on The Nasdaq
SmallCap Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.

Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information
about us.

Rule 144(k)

Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding
period of any prior owner other than an affiliate, is entitled to sell shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.

Therefore, unless otherwise restricted, "144(k) shares" may be sold
immediately upon the completion of this offering. Of the restricted
securities, 33,641 common shares are eligible for sale under Rule 144(k).

Rule 701

In general, under Rule 701 of the Securities Act as currently in effect,
some of our employees, consultants or advisors who purchase shares from us in
connection with a compensatory stock plan or other written agreement may be
eligible to resell these shares. Resales under Rule 701 must be effected 90
days after the effective date of this offering in reliance on Rule 144, but
without compliance with many of the restrictions, including the holding
period, contained in Rule 144.

Registration Rights

We have granted registration rights to two of our shareholders owning
112,731 common shares in the aggregate. As a result, we may be required to
register some or all of their common shares for sale if they exercise their
rights. Both shareholders have waived their registration rights to the extent
they apply to this offering and have agreed not to exercise those rights for
the one-year period beginning on the date of this prospectus.

UNITED STATES INCOME TAX CONSEQUENCES

The following summary describes the material United States federal income
tax consequences of the ownership of our securities applicable to holders who
are natural persons. This discussion does not address all aspects of United
States federal income taxation in light of a holder's particular facts and
circumstances, nor does it address foreign, state or local income tax
consequences or estate tax consequences that apply to a holder of our
securities. Furthermore, this discussion is based on provisions of the
Internal Revenue Code of 1986, as amended, or the Code, and the income tax
regulations, Internal Revenue Service rulings and judicial decisions
promulgated and issued as of the date of this prospectus. The provisions,
regulations, rulings and decisions may be amended, repealed, revoked, modified
or overturned with retroactive effect so as to result in tax consequences
different from those discussed below.

Persons considering purchasing our securities should consult with their own
tax advisors concerning the United States federal income tax consequences of
their ownership of our securities in light of their particular circumstances
as well as under the laws of any other taxing jurisdiction.

As used in this section, a "U.S. holder" is a an individual who holds any of
our securities and is either a U.S. citizen or a resident alien of the United
States and a "non-U.S. holder" is an individual who holds any of our
securities and is neither a U.S. citizen nor a resident alien of the United
States.

Dividends

A U.S. holder will be required to include in gross income and taxed as
ordinary income the amount of any distribution paid on our common shares to
the extent the distribution is paid out of our current and accumulated
earnings and profits, as determined for U.S. federal income tax purposes. The
amount of the distribution that exceeds our current and accumulated earnings
and profits will be applied against and will reduce the U.S. holder's tax
basis in his common shares until the basis is reduced to zero. The amount of
the distribution that exceeds our current and accumulated earnings and profits
and the U.S. holder's tax basis is treated as capital gain and taxed
accordingly. The amount of the distribution is the cash distributed and the
fair market value of any property distributed.

In the case of a non-U.S. holder, the portion of a distribution that
constitutes a dividend will be subject to a withholding tax of 30% of a such
lower rate as may be specified by an applicable income tax treaty. However,
dividends that are effectively connected with the conduct of a trade or
business by the non-U.S. holder within the United States and, generally, where
a treaty applies, are attributable to a United States permanent establishment
of the non-U.S. holder, are not subject to withholding tax, but instead are
subject to United States federal income tax on a net basis at the applicable
graduated rates. Certain certification and disclosure requirements must be
complied with in order for effectively connected income to be exempt from
withholding. A non-U.S. holder of common shares who wishes to claim the
benefit of an applicable treaty rate (and avoid backup withholding) for
dividends paid will be required to satisfy applicable certification and other
requirements and may be required to obtain a United States taxpayer
identification number. A non-U.S. holder of common shares eligible for a
reduced rate of United States withholding tax may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service.

If our audited pre-tax income for the year ending December 31, 2002 is less
than $1.3 million, we will promptly declare and pay a 10% stock dividend to
common shareholders of record as of the record date for that dividend. There
will be no increase in the number of or decrease in the exercise price for the
common shares underlying the unit warrants and the representative's warrant as
a result of this dividend. Our executive officers and one other shareholder
have agreed to immediately return any dividend shares they may receive to us
as a contribution to capital.

The proper tax treatment of this dividend is not certain. Generally, stock
dividends are tax free. In this case, however, the dividend may be deemed
disproportionate among the shareholders since some shareholders have agreed to
return any dividend shares they may receive to us, in which case the dividend
would be taxable to the recipient. If the dividend is taxable, you will have
ordinary income in an amount equal to the value of the dividend shares on the
date they are distributed to the extent of our earnings and profits. We will
not distribute any cash as part of this dividend.

Basis

The measure of income or loss from a sale or exchange of the unit or the
securities underlying the unit depends on the tax basis of the unit and the
common share and the unit warrant underlying the unit. Each unit will have a
tax basis equal to the initial public offering price per unit. The tax basis
for the securities underlying the unit will be determined by allocated the
initial public offering price for the unit to the common share and the unit
warrant included in the unit in proportion to the relative fair market values
of these securities at the time of the offering.

In the case of common shares received as a result of a stock dividend, the
basis of those shares would depend on whether or not the dividend was taxable.
If the dividend were tax-free, a pro rata portion of the basis of the common
shares to which they relate would be allocated to the dividend shares. If the
dividend were taxable, your basis in those dividend shares would be their fair
market value on the date of the distribution.

Dispositions

A U.S. holder will recognize gain or loss when he sells or otherwise
disposes of a security in a taxable transaction in an amount equal to the
difference between the amount realized by the U.S. holder and the U.S.
holder's tax basis in that security. The gain or loss will be a capital gain
or loss if the security is a capital asset in the hands of the U.S. holder and
will be long-term capital gain or loss if the U.S. holder has held the
security for more than one year.

A non-U.S. holder generally will not be subject to U.S. federal income tax
on the gain recognized from the sale or other disposition of the security
unless the (1) gain is effectively connected with a trade or business of the
non-U.S. holder in the United States and, generally, where a tax treaty
applies, is attributable to a United States permanent establishment of the
non-U.S. holder or (2) the non-U.S. holder is present in the United States for
183 or more days in the taxable year of the sale or other disposition and
other conditions are met. A non-U.S. holder described in clause (1) above will
be subject to tax on the net gain derived from the sale under regular
graduated United States federal income tax rates. A non-U.S. holder described
in clause (2) above will be subject to a flat 30% tax on gain derived from the
sale, which may be offset by United Source capital losses even though the
individual is not considered a resident of the United States.

If the holder of a unit warrant allows the unit warrant to expire without
exercise, the expiration will be treated as a sale or exchange of the unit
warrant on the expiration date. The holder will have a taxable loss in an
amount equal to the holder's tax basis in the unit warrant at the time of the
lapse.

No gain or loss will be recognized when the holder exercises the unit
warrant. The tax basis of the common share received upon exercise of the unit
warrant will equal the sum of the holder's tax basis for unit warrant and the
exercise price. The holding period of the common share underlying for purposes
of determining whether any gain or loss recognized upon a subsequent sale or
other disposition of the underlying common share will begin on the date the
unit warrant was acquired.

Information Reporting and Backup Withholding

We must report annually to the Internal Revenue Service and to each holder
the amount of dividends paid to such holder and the tax withheld with respect
to such dividends, regardless of whether withholding as required. Copies of
the information returns, reporting such dividends and withholding may also be
made available to the tax authorities in the country in which a non-U.S.
holder resides under the provisions of an applicable income tax treaty.

A non-U.S. holder may be subject to backup withholding at the rate of 31%
unless applicable certification requirements are met.

Payment of the proceeds of a sale of the securities within the United States
or conducted through certain United States related financial intermediaries is
subject to both backup withholding and information reporting unless the
beneficial owner certifies under penalties of perjury that it is a non-U.S.
holder and the payor does not have actual knowledge or reason to know that the
beneficial owner is a United States person or the holder otherwise establishes
an exemption.

Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the Internal
Revenue Service.

UNDERWRITING

Paulson Investment Company, Inc. is acting as the representative of the
underwriters of this offering. We and the underwriter have entered into an
underwriting agreement with respect to the units being offered. In connection
with this offering and subject to certain conditions, each of the underwriters
named below has agreed to purchase, and we have agreed to sell, the number of
units set forth opposite the name of each underwriter.

Underwriter Number of Units
----------- ---------------

Paulson Investment Company, Inc. ............................

---------
Total ..................................................... 1,250,000
=========

The underwriting agreement provides that the underwriters are obligated to
purchase all of the units offered by this prospectus, other than those covered
by the over-allotment option, if any units are purchased. The underwriting
agreement also provides that the obligations of the underwriters to pay for
and accept delivery of the units are subject to the approval of certain legal
matters by counsel and certain other conditions. These conditions include the
requirements that no stop order suspending the effectiveness of the
registration statement be in effect and that no proceedings for such purpose
have been instituted or threatened by the Securities and Exchange Commission.

The representative has advised us that the underwriters propose to offer our
units to the public initially at the offering price set forth on the cover
page of this prospectus and to selected dealers at such price less a
concession of not more than $_____ per unit. The underwriters and selected
dealers may reallow a concession to other dealers, including the underwriters,
of not more than $_____ per unit. After completion of the initial public
offering of the units, the offering price, the concessions to selected dealers
and the reallowance to their dealers may be changed by the underwriters.

The underwriters have informed us that they do not expect to confirm sales
of our units offered by this prospectus to any accounts over which they
exercise discretionary authority.

Over-allotment option

Pursuant to the underwriting agreement, we have granted Paulson Investment
Company, Inc. an option, exercisable for 45 days from the date of this
prospectus, to purchase up to an additional 187,500 units on the same terms as
the units being purchased by the underwriters from us. Paulson Investment
Company, Inc. may exercise the option solely to cover over-allotments, if any,
in the sale of the units that the underwriters have agreed to purchase. If the
over-allotment option is exercised in full, the total public offering price,
underwriting discount and proceeds to us before offering expenses will be
$________, $________ and $________, respectively.

Stabilization

Until the distribution of the units offered by this prospectus is completed,
rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for and to purchase units. As an exception to these rules,
the underwriters may engage in transactions that stabilize the price of the
units. The underwriters may engage in over-allotment sales, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Securities Exchange Act of 1934.

o Over-allotment sales involve syndicate sales in excess of the offering
size, which creates a syndicate short position.

o Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.

o Syndicate covering transactions involve purchases of the common stock and
public warrants in the open market after the distribution has been
completed in order to cover syndicate short positions. The

underwriters may also elect to reduce any short position by exercising
all or part of the over-allotment option to purchase additional units as
described above.

o Penalty bids permit the underwriters to reclaim a selling concession from
a syndicate member when the units originally sold by the syndicate member
are purchased in a syndicate covering transaction to cover syndicate
short positions.

Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Covered short
sales are sales made in an amount not greater than the representative's over-
allotment option to purchase additional shares in this offering. In
determining the source of shares to close out the covered short position, the
underwriter will consider, among other things, the price of shares available
for purchase in the open market as compared with the price at which they may
purchase shares through the over-allotment option. Naked short sales are sales
in excess of the over-allotment option. A naked short position is more likely
to be created if the underwriters are concerned that there may be downward
pressure on the price of the shares in the open market after pricing that
could adversely affect investors who purchase in this offering.

In general, the purchase of a security to stabilize or to reduce a short
position could cause the price of the security to be higher than it might be
otherwise. These transactions may be effected on the Nasdaq Smallcap Market or
otherwise. Neither we nor the underwriters can predict the direction or
magnitude of any effect that the transactions described above may have on the
price of the units. In addition, neither we nor the underwriters can represent
that the underwriters will engage in these types of transactions or that these
types of transactions, once commenced, will not be discontinued without
notice.

Indemnification

The underwriting agreement provides for indemnification between us and the
underwriters against specified liabilities, including liabilities under the
Securities Act, and for contribution by us and the underwriters to payments
that may be required to be made with respect to those liabilities. We have
been advised that, in the opinion of the Securities and Exchange Commission,
indemnification for liabilities under the Securities Act is against public
policy as expressed in the Securities Act and is therefore unenforceable.

Underwriters' compensation

We have agreed to sell the units to the underwriters at the initial offering
price of $_____, less the __% underwriting discount. The underwriting
agreement also provides that upon the closing of the units offered, the
representative will be paid a nonaccountable expense allowance equal to __% of
the gross proceeds from the sale of the units offered by this prospectus,
including the over-allotment option.

We have also agreed to issue warrants to the representative to purchase from
us up to 125,000 units at an exercise price per unit equal to 120% of the
offering price per unit. These warrants and the securities underlying the
warrants are exercisable during the four-year period beginning one year from
the date of effectiveness of the registration statement and are not
redeemable. These warrants are not transferable for one year following the
effective date of the registration, except to an individual who is an officer
or partner of an underwriter, by will or by the laws of descent and
distribution. These warrants will have registration rights. We will cause the
registration statement to remain effective until the earlier of the time that
all of the representative's warrants have been exercised and the date which is
five years after the effective date of this offering. The common stock and
warrants issued to the representative upon exercise of these warrants will be
freely tradeable.

The holders of the representative's warrants will have, in that capacity, no
voting, dividend or other stockholder rights. Any profit realized by the
representative on the sale of the securities issuable upon exercise of the
representative's warrants may be deemed to be additional underwriting
compensation. The securities underlying the representative's warrants are
being registered on the registration statement. During the term of the
representative's warrants, the holders thereof are given the opportunity to
profit from a rise in the market price of our common stock. We may find it
more difficult to raise additional equity capital while

the representative's warrants are outstanding. At any time at which the
representative's warrants are likely to be exercised, we may be able to obtain
additional equity capital on more favorable terms.

Lock-up agreements

Our officers, directors and other stockholders have agreed that for a period
of one year from the date this registration statement becomes effective that
they will not sell, contract to sell, grant any option for the sale or
otherwise dispose of any of our equity securities, or any securities
convertible into or exercisable or exchangeable for our equity securities,
other than through intra-family transfers or transfers to trusts for estate
planning purposes, without the consent of the representative, which consent
will not be unreasonably withheld. The representative may consent to an early
release from the one-year lock-up period if in its opinion the market for the
common stock would not be adversely impacted by such sales and in cases of an
officer, director or other stockholder's financial emergency. We are unaware
of any officer, director or current stockholder who intends to ask for consent
to dispose of any of our equity securities during the lock-up period.

Determination of offering price

Before this offering, there has been no public market for the units and the
common stock and unit warrants contained in the units. Accordingly, the
initial public offering price of the units offered by this prospectus and the
exercise price of the unit warrants were determined by negotiation between us
and the representative. Among the factors considered in determining the
initial public offering price of the units and the exercise price of the unit
warrants were:

o our history and our prospects;

o the industry in which we operate;

o the status and development prospects for our proposed products and
services;

o our past and present operating results;

o the previous experience of our executive officers; and

o the general condition of the securities markets at the time of this
offering.

The offering price stated on the cover page of this prospectus should not be
considered an indication of the actual value of the units. That price is
subject to change as a result of market conditions and other factors, and we
cannot assure you that the units, or the common stock and unit warrants
contained in the units, can be resold at or above the initial public offering
price.

LEGAL MATTERS

The validity of the common shares offered by this prospectus will be passed
upon for us by Morse, Zelnick, Rose & Lander LLP, New York, New York. Partners
of Morse, Zelnick et al. own 75,000 common shares. Holland & Knight LLP will
pass upon certain matters for the underwriters named in this prospectus in
connection with this offering.

EXPERTS

Goldstein Golub Kessler LLP, independent auditors, have audited our
financial statements as of December 31, 2001 and for each of the two years in
the period then ended as set forth in their report. We have included these
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Goldstein Golub Kessler LLP's report, given on their
authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

In connection with the units offered by this prospectus, we have filed a
registration statement on Form SB-2 under the Securities Act with the SEC.
This prospectus, filed as part of the registration statement, does not contain
all of the information included in the registration statement and the
accompanying exhibits and schedules. For further information with respect to
us and our units, shares and unit warrants, you should refer to the
registration statement and the accompanying exhibits and schedules. Statements
contained in this prospectus regarding the contents of any contract or any
other document are not necessarily complete, and you should refer to the copy
of the contract or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by the actual
contents of the contract or other document referred to. You may inspect a copy
of the registration statement and the accompanying exhibits and schedules
without charge at the Securities and Exchange Commission's public reference
facilities, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its regional offices located at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and you may obtain copies
of all or any part of the registration statement from those offices for a fee.
You may obtain information on the operation of the Public Reference Room by
calling the Securities and Exchange Commission at 1-800-SEC-0330. The SEC
maintains a Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically. The
address of the site is http://www.sec.gov.

We intend to furnish our shareholders with annual reports containing
financial statements audited by our independent certified public accountants.

DATA CONVERSION LABORATORY, INC.

INDEX TO FINANCIAL STATEMENTS

Page
----

Independent Auditor's Report ............................................ F-2
Balance Sheet as of December 31, 2001 and March 31, 2002 (unaudited)
and March 31, 2002 (unaudited pro forma)............................... F-3
Statement of Operations for the years ended December 31, 2001 and 2000
and the three month periods ended March 31, 2002 (unaudited) and 2001
(unaudited)............................................................ F-4
Statement of Shareholders' Equity for the years ended December 31, 2001
and 2000 and the three month period ended March 31, 2002 (unaudited)... F-5
Statement of Cash Flows for the years ended December 31, 2001 and 2000
and the three month periods ended March 31, 2002 (unaudited) and 2001
(unaudited)............................................................ F-6
Notes to Financial Statements .......................................... F-7

F-1

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
Data Conversion Laboratory, Inc.

We have audited the accompanying balance sheet of Data Conversion Laboratory,
Inc. as of December 31, 2001, and the related statements of operations,
shareholders' equity, and cash flows for each of the two years in the period
then ended. 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 audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. 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 Data Conversion Laboratory,
Inc. as of December 31, 2001 and the results of its operations and its cash
flows for the each of the two years in the period then ended in conformity
with accounting principles generally accepted in the United States of America.

Goldstein Golub Kessler LLP
New York, New York
May 8, 2002

F-2

DATA CONVERSION LABORATORY, INC.

BALANCE SHEET

December 31, March 31, March 31,
2001 2002 2002
------------ ----------- ----------
(Unaudited) (Unaudited
pro forma)

ASSETS
Current Assets:
Cash.................................................................................. $ 14,836 $ 16,271 $ 16,271
Accounts receivable................................................................... 1,042,823 998,603 998,603
---------- ---------- ----------
Total current assets............................................................... 1,057,659 1,014,874 1,014,874
Property and Equipment--net............................................................ 1,262,532 1,288,417 1,288,417
Other Assets........................................................................... 13,982 13,982 13,982
---------- ---------- ----------
Total Assets....................................................................... $2,334,173 $2,317,273 $2,317,273
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit............................................................. $ 515,328 $ 385,410 $ 385,410
Accounts payable and accrued expenses................................................ 330,886 277,111 277,111
Income taxes payable................................................................. 44,102 65,244 65,244
Current portion of term loan payable................................................. 37,500 37,500 37,500
Current portion of capital lease obligation.......................................... 18,452 18,901 18,901
S corporation distributions payable.................................................. -- -- 450,000
Deferred revenue..................................................................... 60,455 11,751 11,751
Deferred tax liability............................................................... 44,037 40,837 40,837
---------- ---------- ----------
Total current liabilities.......................................................... 1,050,760 836,754 1,286,754
Term Loan Payable--net of current portion.............................................. 56,250 43,750 43,750
Capital Lease Obligation--net of current portion....................................... 36,955 32,058 32,058
---------- ---------- ----------
Total liabilities.................................................................. 1,143,965 912,562 1,362,562
---------- ---------- ----------
Commitments
Shareholders' Equity:
Common stock--.01 par value; authorized 12,000,000 shares; issued
and outstanding 1,000,000 shares.................................................... 10,000 10,000 10,000
Additional paid-in capital........................................................... 1,180,208 1,394,711 944,711
Retained earnings.................................................................... -- -- --
---------- ---------- ----------
Shareholders' equity............................................................... 1,190,208 1,404,711 954,711
---------- ---------- ----------
Total Liabilities and Shareholders' equity....................................... $2,334,173 $2,317,273 $2,317,273
========== ========== ==========

See Notes to Financial Statements

F-3

DATA CONVERSION LABORATORY, INC.

STATEMENT OF OPERATIONS

Year Ended Three Month Period
December 31, Ended March 31,
----------------------- -----------------------
2000 2001 2001 2002
---------- ---------- ---------- ----------
(Unaudited)

Revenue ..................................................................... $3,252,735 $4,879,109 $1,071,310 $1,421,605
Cost of revenue ............................................................. 2,115,006 2,783,606 666,424 790,940
---------- ---------- ---------- ----------
Gross margin ................................................................ 1,137,729 2,095,503 404,886 630,665
Selling expenses ............................................................ 551,794 455,474 100,608 138,850
General and administrative expenses ......................................... 572,357 561,772 222,855 187,050
Interest expense ............................................................ 47,231 60,784 21,032 8,771
Depreciation and amortization expense ....................................... 60,454 128,913 30,068 63,549
---------- ---------- ---------- ----------
Income (loss) before provision for (benefit from)
income taxes............................................................... (94,107) 888,560 30,323 232,445
Provision for (benefit from) income taxes ................................... (325) 88,251 -- 17,942
---------- ---------- ---------- ----------
Net income (loss) ........................................................... $ (93,782) $ 800,309 $ 30,323 $ 214,503
========== ========== ========== ==========
Basic net income (loss) per common share .................................... $ (0.09) $ 0.80 $ 0.03 $ 0.21
========== ========== ========== ==========
Diluted net income (loss) per common share .................................. $ (0.09) $ 0.75 $ 0.03 $ 0.20
========== ========== ========== ==========
Weighted-average number of shares outstanding--basic ........................ 1,000,000 1,000,000 1,000,000 1,000,000
========== ========== ========== ==========
Weighted-average number of shares outstanding--diluted ...................... 1,000,000 1,063,521 1,047,608 1,062,896
========== ========== ========== ==========
Pro forma information (unaudited):
Net income, as above....................................................... $ 800,309 $ 214,503
Pro forma adjustment to provision for income taxes......................... 349,000 69,000
---------- ----------
Pro forma net income....................................................... $ 451,309 $ 145,503
========== ==========
Pro forma basic net income per common share ................................. $ 0.43 $ 0.14
========== ==========
Pro forma diluted net income per common share ............................... $ 0.40 $ 0.13
========== ==========
Weighted-average number of shares outstanding--basic ........................ 1,056,250 1,056,250
========== ==========
Weighted-average number of shares outstanding--diluted ...................... 1,119,771 1,119,146
========== ==========

See Notes to Financial Statements

F-4

DATA CONVERSION LABORATORY, INC.

STATEMENT OF SHAREHOLDERS' EQUITY

Year Ended December 31, 2001
----------------------------------------------------------------
Common Stock
---------------------
Number of Additional Total
Shares Paid-in Retained Stockholders'
Outstanding Amount Capital Earnings Equity
----------- ------- ---------- --------- -------------

Balance at January 1, 2000..................................... 1,000,000 $10,000 $ 45,000 $ 493,892 $ 548,892
Net loss....................................................... (93,782) (93,782)
Distributions to shareholders.................................. (19,128) (19,128)
Undistributed earnings of S Corporation....................... 380,982 (380,982) --
--------- ------- ---------- --------- ----------
Balance at December 31, 2000................................... 1,000,000 $10,000 $ 425,982 -- 435,982
Net income..................................................... 800,309 800,309
Distributions to shareholders.................................. (46,083) (46,083)
Undistributed earnings of S Corporation....................... 754,226 (754,226) --
--------- ------- ---------- --------- ----------
Balance at December 31, 2001................................... 1,000,000 $10,000 $1,180,208 $ -- $1,190,208
Unaudited:
Net income for three month period............................. 214,503 214,503
Undistributed earnings of S Corporation....................... 214,503 (214,503) --
--------- ------- ---------- --------- ----------
Balance at March 31, 2002...................................... 1,000,000 $10,000 $1,394,711 $ -- $1,404,711
========= ======= ========== ========= ==========

See Notes to Financial Statements

F-5

DATA CONVERSION LABORATORY, INC.

STATEMENT OF CASH FLOWS

Year Ended Three Month Periods
December 31, Ended March 31,
--------------------- ---------------------
2000 2001 2001 2002
--------- --------- --------- ---------
(Unaudited)

Cash flows from operating activities:
Net income (loss).............................................................. $ (93,782) $ 800,309 $ 30,323 $ 214,503
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization ............................................... 60,454 128,913 30,068 63,549
Bad debt expense ............................................................ 77,971 77,971
Deferred income taxes ....................................................... 44,037 (3,200)
Changes in operating assets and liabilities:
Increase in accounts receivable............................................ (228,486) (424,109) 45,423 44,220
Decrease in prepaid expenses............................................... 12,427
Increase in other assets................................................... (3,982)
Increase in accounts payable and accrued expenses.......................... 234,080 55,301 44,410 (53,775)
Increase in income taxes payable........................................... 44,102 (4,106) 21,142
Increase in deferred revenue............................................... 25,599 34,856 (7,888) (48,704)
--------- --------- --------- ---------

Net cash provided by operating activities.................................. 10,292 757,398 216,201 237,734
--------- --------- --------- ---------
Cash flows used in investing activity--purchase of
property and equipment and capitalized software costs.......................... (357,131) (656,879) (136,728) (89,434)

Cash flows from financing activities:
Net (repayments) proceeds on revolving line of credit.......................... 367,177 (10,050) (59,584) (129,918)
Principal payments on term loan................................................ (31,250) (6,250) (12,500)
Principal payments on capital lease obligations................................ (4,343) (4,448)
Advance from shareholder....................................................... 6,000
Distributions to shareholders.................................................. (19,128) (46,083)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities........................ 348,049 (91,726) (59,834) (146,866)
Net increase in cash ............................................................ 1,210 8,793 19,639 1,435
Cash at beginning of period ..................................................... 4,833 6,043 6,043 14,836
--------- --------- --------- ---------
Cash at end of period ........................................................... $ 6,043 $ 14,836 $ 25,682 $ 16,271
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ....................................... $ 47,231 $ 61,299 $ 21,032 $ 8,798
========= ========= ========= =========
Supplemental schedule of noncash investing and
financing activity:
Property and equipment acquired under capital lease ............................ $ 59,750
=========

See Notes to Financial Statements

F-6

DATA CONVERSION LABORATORY, INC.

NOTES TO FINANCIAL STATEMENTS

1. Organization, Principal Business Activity and Summary of Significant
Accounting Policies:

Data Conversion Laboratory, Inc. (the "Company") is a leading independent
provider of data conversion services.

Revenue is recognized in the period in which the service is provided.
Amounts billed at the beginning of a contract as a setup fee are deferred and
amortized over the term of the project.

Depreciation of property and equipment is provided for using the straight-
line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the asset's useful life or the
remaining term of the lease.

The Company identifies and records impairment on long-lived assets when
events and circumstances indicate that such assets have been impaired. The
Company periodically evaluates the recoverability of its long-lived assets
based on expected nondiscounted cash flows, and recognizes impairment, if any,
based on expected discounted cash flows.

The costs of software developed for internal use incurred during the
preliminary project stage of software development are expensed as incurred.
Direct costs incurred during the application stage are capitalized and
amortized over the estimated useful life of the software. Costs incurred
during the post-implementation/operation stage are expensed as incurred.

The Company has elected to be treated as an S Corporation under Subchapter S
of the Internal Revenue Code (the "Code") and New York State franchise tax
law. Accordingly, there is no provision for federal income taxes as such
earnings are taxed directly to the shareholders, and New York State income
taxes are payable at reduced rates. The Company is subject to other state and
local income taxes. The Company's S Corporation status will be terminated and
will revert to C Corporation status immediately before its Initial Public
Offering ("IPO"). (See note 12.) Pursuant to Staff Accounting Bulletin Topic
4B, the undistributed S Corporation earnings have been retroactively
reclassified to additional paid in capital.

Deferred income tax liability represents the tax effect of temporary
differences between the basis of assets and liabilities for income tax and
financial reporting purposes. The component of the deferral arises primarily
from the tax base difference of capitalized software costs.

The Company expenses advertising costs in the period incurred and these
amounts are included in selling expenses. Advertising expenses approximated
$54,000 and $24,000 for the years ended December 31, 2000 and 2001,
respectively, and $11,000 and $9,000 for the three-month-periods ended
March 31, 2001 and 2002, respectively.

Basic earnings per common share is computed using weighted-average number of
shares outstanding. Diluted earnings per common share is computed using
weighted-average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common shares.
Incremental shares of 62,584 were used in the calculation of diluted earnings
per common share for the year ended December 31, 2001 and the quarter ended
March 31, 2002. Incremental shares of 47,608 were used in the calculation of
diluted earnings per common share for the quarter ended March 31, 2001.
Options to purchase 58,500 shares of common stock at $.57 per share were
outstanding at all times during 2000 but were not included in the computation
of diluted EPS because the effect of these options would have been
antidilutive. These options expire in 2011. For the year ended December 31,
2000, diluted loss per common share is not presented as the result is
antidilutive.

Pursuant to SAB No. 55, the weighted average number of common shares
outstanding for the proforma net income in the accompanying statement of
operations has been increased to reflect the number of shares whose proceeds
would have been necessary to fund the estimated final S Corporation
distribution of $450,000 to be paid to pre-offering shareholders from the
proceeds upon successful completion of the IPO.

F-7

DATA CONVERSION LABORATORY, INC.

NOTES TO FINANCIAL STATEMENTS -- (Continued)

1. Organization, Principal Business Activity and Summary of Significant
Accounting Policies: -- (Continued)

The accompanying pro forma balance sheet at March 31, 2002 reflects the
Company's March 31, 2002 balance sheet adjusted for the accrual of an
estimated final S Corporation distribution of $450,000.

The Company performs ongoing credit evaluations of its customers and
generally does not require collateral.

The Company maintains cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses on
these accounts.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates by management. Actual results could differ from these estimates.

Management does not believe that any recently issued, but not yet effective,
accounting standards, if currently adopted, would have a material effect on
the accompanying financial statements.

The results of operations for the three-month period ended March 31, 2002
are not necessarily indicative of the results of operations expected for the
year ended December 31, 2002. Amounts related to March 31, 2002 and the periods
ended March 31, 2001 and 2002 are unaudited.

In the opinion of management, the accompanying unaudited interim financial
statements include all adjustments (consisting only of those of a normal
recurring nature) necessary for a fair statement of the results of the interim
period.

2. Property and Equipment:

Property and equipment, at cost, consists of the following:

December 31, March 31, Estimated
2001 2002 Useful Life
------------ ---------- -------------

Machinery and equipment........................................................ $ 649,447 $ 649,447 5 to 10 years
Computer software.............................................................. 1,117,636 1,207,060 3 to 5 years
Furniture and fixtures......................................................... 182,869 182,869 5 to 10 years
Leasehold improvements......................................................... 231,225 231,225 Term of lease
2,181,177 2,270,601
------------ ----------
Less accumulated depreciation and amortization................................. (918,645) (982,184)
---------- ----------
$1,262,532 $1,288,417
========== ==========

Property and equipment includes amounts acquired under capital leases, of
approximately $59,750 and $59,750, net of accumulated depreciation of
approximately $4,979 and $9,958 at December 31, 2001 and March 31, 2002,
respectively.

3. Accounts Payable and Accrued Expenses:

Accounts payable and accrued expenses consist of the following at December
31, 2001:

Trade accounts payable.............................................. $266,691
Accrued vacation.................................................... 16,444
Accrued payroll taxes............................................... 25,030
Accrued pension..................................................... 22,721
--------
$330,886
========

F-8

DATA CONVERSION LABORATORY, INC.

NOTES TO FINANCIAL STATEMENTS -- (Continued)

4. Revolving Line of Credit:

The Company has a revolving line of credit with a financial institution with
maximum borrowings not to exceed $575,000. Borrowings under this line bear
interest at the bank's prime lending rate (4.75% at December 31, 2001) plus 1%
and are payable on demand. Borrowings are collateralized by all of the assets
of the Company. At December 31, 2001 and March 31, 2002, the Company had
approximately $515,000 and $385,000, respectively, payable to the financial
institution. Interest expense charged to operations amounted to approximately
$47,000 and $54,000 for the years ended December 31, 2000 and 2001,
respectively, and $21,000 and $7,000 for the three-month periods ended
March 31, 2001 and 2002, respectively.

The estimated fair value of the revolving line of credit approximates the
carrying amount due to the short-term nature of the instrument.

5. Term Loan Payable:

Term loan payable consists of a loan payable in monthly installments of
$3,125, plus interest, at the bank's prime lending rate (4.75% at December 31,
2001 and March 31, 2002) plus 1% through June 2004. The term loan is secured
by all of the assets of the Company. There is a balance due of $93,750 and
$81,250 at December 31, 2001 and March 31, 2002, respectively, of which
$37,500 is the current portion at both December 31, 2001 and March 31, 2002.

Aggregate maturities on term loan payable at December 31, 2001 are as
follows:

Year ending December 31,
2002................................................................. $37,500
2003................................................................. 37,500
2004................................................................. 18,750
-------
$93,750
=======

Because the interest rate adjusts with changes in the prime rate, the fair
value of the long-term debt is equal to the carrying amount.

6. Capital Lease Obligations:

The Company leases equipment under a capital lease which expires in 2004.
The lease requires monthly payments of $1,916 including interest at 9.64% per
annum.

Aggregate future minimum payments under the capital lease at December 31,
2001 are as follows:

Year ending December 31,
2002................................................................. $22,992
2003................................................................. 22,992
2004................................................................. 17,322
-------
63,306
Less amount representing interest.................................... 7,899
-------
55,407
Less current portion................................................. 18,452
-------
Capital lease obligations, net of current portion................... $36,955
=======

F-9

DATA CONVERSION LABORATORY, INC.

NOTES TO FINANCIAL STATEMENTS -- (Continued)

7. Income Taxes:

The provision for income taxes differs from the amount computed using the
federal statutory rate of 34% as a result of the following:

December 31,
----------- 2001 2000
--- ---

Tax at federal statutory rate ................................... 34% (34)%
Flow through of S Corporation taxable income or loss
to stockholders ............................................... (34) 34
State and local income taxes .................................... 10 --
--- ---
Provision for income taxes ...................................... 10% 0%
=== ===

At December 31, 2001 and March 31, 2002, the recorded amount of computer
software costs exceeded their tax basis by approximately $450,000 and
$430,000, respectively. This temporary difference gave rise to a deferred tax
liability of $44,037 and $40,837, respectively.

Upon termination of its S Corporation status, the Company will record an
additional deferred tax liability of approximately $153,000.

The accompanying statement of operations for the year ended December 31,
2001 includes a pro forma adjustment to the provision for income taxes on a C
Corporation basis as follows:

Current:
Federal ..................................................... $137,000
State and local ............................................. 31,000
Deferred .................................................... 181,000
--------
Pro forma adjustment to the provision for incomes taxes.... $349,000
========

8. Employee Benefit Plan:

The Company has a noncontributory defined contribution plan under
Section 401(k) of the Internal Revenue Code (the "Code") covering all
qualified employees. An officer of the Company serves as trustee of the plan.

9. Stock Options:

During 1999, an employee of the Company was granted options to purchase
58,500 shares of the Company's common stock at an exercise price of $.57 per
share, which were fully vested at the date of issuance and are exercisable
through 2011.

During 2001, the Company adopted a stock option plan (the "Plan") which
allows the board of directors to grant incentives to employees and directors
in the form of incentive stock options and nonqualified stock options. At
December 31, 2001, options to purchase 104,500 common shares at an exercise
price of $3.50 per share, which vested 25% on the date of grant and 25% on
each of the three subsequent anniversary dates, were outstanding and
exerciseable at various dates through 2011. Also, an employee of the Company
was granted options to purchase 475 shares of the Company's common stock at an
exercise price of $3.50 per share, which were fully vested at the date of
issuance and are exercisable through 2011. As of December 31, 2001, the
Company has reserved 250,000 shares of common stock to be issued under the
Plan.

A summary of the status of the Company's options as of December 31, 2001 and
2000, and changes during the years then ended are presented below:

F-10

DATA CONVERSION LABORATORY, INC.

NOTES TO FINANCIAL STATEMENTS -- (Continued)

9. Stock Options: -- (Continued)

2000 2001
------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------ ----- ------- -----

Outstanding at beginning of year .............................................. 58,500 $0.57 58,500 $0.57
Granted ....................................................................... 111,975 $3.50
Canceled ...................................................................... (7,000) $3.50
------ ----- ------- -----
Outstanding at end of year .................................................... 58,500 $0.57 163,475 $2.45
====== ===== ======= =====

The following table summarizes information about stock options outstanding
and exercisable at December 31, 2001:

Weighted-
Average
Remaining
Number Number Contractual
Exercise Price Outstanding Exercisable Life
-------------- ----------- ----------- ----

$0.57............................................................................ 58,500 58,500 9 years
$3.50............................................................................ 104,975 475 9 years
------- ------ -------
$2.45............................................................................ 163,475 58,975 9 years
======= ====== =======

The Company has elected to apply APB Opinion No. 25 and related
interpretations in accounting for its stock options issued to employees and
has adopted the disclosure-only provisions of SFAS No. 123. Had the Company
elected to recognize compensation cost based on the fair value of the options
granted at the grant date as prescribed by SFAS No. 123, the Company's net
income (loss) and income (loss) per common share would have been as follows:

Year ended December 31,
---------------------- 2000 2001
-------- --------

Net income (loss)--as reported .......................... $(93,782) $800,309
======== ========
Net income (loss)--pro forma ............................ $(93,782) $763,678
======== ========
Basic earnings (loss) per share--as reported ............ $ (0.09) $ .80
======== ========
Basic earnings (loss) per share--pro forma .............. $ (0.11) $ .75
======== ========
Diluted earnings (loss) per share--as reported .......... $ (0.09) $ .75
======== ========
Diluted earnings (loss) per share--pro forma ............ $ (0.11) $ .72
======== ========

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: expected volatility of .1%, risk-free interest rates of 5.0%,
expected option life of 5 years and no expected dividends.

10. Commitments:

The Company is obligated under a noncancelable operating lease for office
space expiring October 31, 2002. The lease provides for escalations for real
estate taxes and operating costs. The minimum annual rental commitment in 2002
amounts to $54,490.

Rent expense charged to operations, including escalation charges for real
estate taxes and other expenses, amounted to approximately $78,000 and $80,000
for the years ended December 31, 2000 and 2001, respectively, and
approximately $19,000 and $27,000 for the three-month periods ended March 31,
2001 and 2002, respectively.

F-11

DATA CONVERSION LABORATORY, INC.

NOTES TO FINANCIAL STATEMENTS -- (Continued)

11. Major Customers:

For the year ended December 31, 2001, one customer accounted for
approximately 14% of total revenue and approximately 16% of the Company's
accounts receivable at December 31, 2001. For the year ended December 31,
2000, three customers accounted for approximately 15%, 14%, and 11% of total
revenue, respectively.

12. Subsequent Events:

The Company has filed a Registration Statement on Form SB-2 under the
Securities Act of 1933. The Registration Statement contemplates an offering of
1,250,000 units at an estimated offering price ranging from $7.50 to $8.50 per
unit. Each unit will have one common share of the Company and a warrant which
will entitle the holder to purchase one common share at an exercise price of
150% of the initial public offering price per unit. The stock and warrant will
separate 30 days after the effective date of the registration statement.

The Company will effect a stock dividend pursuant to which the existing
shareholders of the Company will receive .345640833 common shares for each
common share outstanding. The financial statements do not give retroactive
effect to the dividend.

If the Company's audited pre-tax income for the year ending December 31, 2002
is less than $1.3 million, the Company will promptly declare and pay a 10% stock
dividend to common shareholders of record as of the record date for that
dividend. There will be no increase in the number of, or decrease in the
exercise price for, the common shares underlying the unit warrants and the
representative's warrant as a result of this dividend. The Company's executive
officers and one other shareholder have agreed to immediately return any
dividend shares they may receive to the Company as a contribution to capital.

F-12

INSIDE BACK COVER

[GRAPHICS TO BE SUPPLIED]

This graphic, titled "Conversion Capabilities," illustrates the hub and
spoke concept of our proprietary data conversion software. The center of the
graphic is a circle symbolizing our proprietary conversion software. The core
of the circle is called "DCL Conversion Hub." Around the core are different
segments representing various modules of the software. Above the software
circle are other circles with the names of various popular formats in which
content is prepared. These circles represent possible input formats. Arrows
lead from these input circles through the software circle and exit to another
group of circles. These circles have the names XML, SGML, HTML, PDF and Other
and represent the most common output formats generated by our proprietary
software.

You may rely on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor sale of common shares
means that information contained in this prospectus is correct after the date
of this prospectus. This prospectus is not an offer to sell or solicitation of
an offer to buy our common shares in any circumstances under which the offer
or solicitation is unlawful.

----------------

TABLE OF CONTENTS

Page
----

Prospectus Summary ...................................................... 3
Risk Factors ............................................................ 7
Use of Proceeds ......................................................... 15
Dividend Policy ......................................................... 16
S Corporation Termination ............................................... 16
Capitalization .......................................................... 17
Dilution ................................................................ 18
Selected Financial Data ................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 20
Business ................................................................ 25
Management .............................................................. 34
Certain Transactions .................................................... 37
Principal Shareholders .................................................. 38
Description of Securities ............................................... 39
Shares Eligible for Future Sale ......................................... 42
United States Income Tax Consequences ................................... 44
Underwriting ............................................................ 46
Legal Matters ........................................................... 48
Experts ................................................................. 48
Where You Can Find
More Information....................................................... 49
Index to Financial Statements ........................................... F-1

----------------

Until , 2002 (the 25th day after the date of this prospectus) all
dealers effecting transactions in our units, whether or not participating in
this distribution, may be required to deliver a prospectus. This is in
addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.

1,250,000 Units

[Data Conversion Laboratory LOGO]

--------------------

PROSPECTUS

--------------------

PAULSON INVESTMENT

COMPANY, INC.

, 2002

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers

Sections 722 and 723 of the New York Business Corporation Law grants us the
power to indemnify our officers and directors as follows:

(a) A corporation may indemnify any person made, or threatened to be made,
a party to an action or proceeding other than one by or in the right of the
corporation to procure a judgment in its favor, whether civil or criminal,
including an action by or in the right of any other corporation of any type or
kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, which any director or officer of the
corporation served in any capacity at the request of the corporation, by
reason of the fact that he, his testator or intestate, was a director or
officer of the corporation, or served such other corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise in any
capacity, against judgments, fines, amounts paid in settlement and reasonable
expenses, including attorney's fees actually and necessarily incurred as a
result of such action or proceeding, or any appeal therein, if such director
or officer acted, in good faith, for a purpose which he reasonably believed to
be in, or, in the case of service for any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
not opposed to, the best interests of the corporation and, in criminal actions
or proceedings, in addition, had no reasonable cause to believe that his
conduct was unlawful.

(b) The termination of any such civil or criminal action or proceeding by
judgment, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not in itself create a presumption that any such director or
officer did not act, in good faith, for a purpose which he reasonably believed
to be in, or, in the case of service for any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
not opposed to, the best interests of the corporation or that he had
reasonable cause to believe that his conduct was unlawful.

(c) A corporation may indemnify any person made, or threatened to be made,
a party to an action by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he, his testator or
intestate, is or was a director or officer of the corporation, or is or was
serving at the request of the corporation as a director or officer of any
other corporation of any type or kind, domestic or foreign, or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
against amounts paid in settlement and reasonable expenses, including
attorneys' fees, actually and necessarily incurred by him in connection with
the defense or settlement of such action, or in connection with an appeal
therein if such director or officer acted, in good faith, for a purpose which
he reasonably believed to be in, or, in the case of service for any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise, not opposed to, the best interest of the corporation, except
that no indemnification under this paragraph shall be made in respect of (1) a
threatened action, or a pending action which is settled or otherwise disposed
of, or (2) any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation, unless and only to the extent that
the court on which the action was brought, or, if no action was brought, any
court of competent jurisdiction, determines upon application that, in view of
all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such portion of the settlement amount and expenses
as the court deems proper.

(d) For the purpose of this section, a corporation shall be deemed to have
requested a person to serve an employee benefit plan where the performance by
such person of his duties to the corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan; excise taxes assessed on a person with respect to
an employee benefit plan pursuant to applicable law shall be considered fines;
and action taken or omitted by a person with respect to an employee benefit
plan in the performance of such person's duties for a purpose reasonably
believed by such person to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is not
opposed to the best interests of the corporation.

II-1

Payment of indemnification other than by court award is as follows:

(a) A person who has been successful, on the merits or otherwise, in the
defense of a civil or criminal action or proceeding of the character described
in section 722 shall be entitled to indemnification as authorized in such
section.

(b) Except as provided in paragraph (a), any indemnification under section
722 or otherwise permitted by section 721, unless ordered by a court under
section 724 (Indemnification of directors and officers by a court), shall be
made by the corporation, only if authorized in the specific case:

(1) By the board acting by a quorum consisting of directors who are not
parties to such action or proceeding upon a finding that the director or
officer has met the standard of conduct set forth in section 722 or
established pursuant to section 721, as the case may be, or,

(2) If a quorum under subparagraph (1) is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs:

(A) By the board upon the opinion in writing of independent legal
counsel that indemnification is proper in the circumstances because the
applicable standard of conduct set forth in such sections has been met by
such director or officer, or

(B) By the shareholders upon a finding that the director or officer
has met the applicable standard of conduct set forth in such sections.

(C) Expenses incurred in defending a civil or criminal action or
proceeding may be paid by the corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking
by or on behalf of such director or officer to repay such amounts as, and
to the extent, required by paragraph (a) of section 725.

Our certificate of incorporation provides as follows:

"SEVENTH: (a) Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigation
(hereinafter a "proceeding"), by reason of the fact that he or she, or a
person of whom he or she is the legal representative, is or was a director or
officer, of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Business Corporation Law,
as the same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights that said law permitted the Corporation
to provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid or to be paid in settlement) reasonably incurred or suffered
by such person in connection therewith and such indemnification shall continue
as to a person who has ceased to be a director, officer, employee or agent and
shall incur to the benefit of his or her heirs, executors and administrators;
provided, however, that, except as provided in paragraph (b) hereof, the
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only
if such proceeding (or part thereof) was authorized by the Board of Directors
of the Corporation. The right to indemnification conferred in this
Section shall be a contract right and shall include the right to be paid by
the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that if the Business
Corporation Law requires, the payment of such expenses incurred by a director
or officer (in his or her capacity as a director or officer and not in any
other capacity in which service was or is rendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of a proceeding, shall be
made only upon delivery to the Corporation of an undertaking, by or on behalf
of such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified under this Section or otherwise. The Corporation may, by action of
its Board of Directors, provide indemnification to employees and agents of the
Corporation with the same scope and effect as the foregoing indemnification of
directors and officers.

II-2

(b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of this
Section is not paid in full by the Corporation within thirty days after a
written claim has been received by the Corporation, the claimant may at any
time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim and, if successful in whole or in part, the claimant shall
be entitled to be paid also the expense of prosecuting such claim. It shall be
a defense to any such action (other than an action brought to enforce a claim
for expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the Business Corporation Law for the
corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the Corporation. Neither the failure of
the Corporation (including its Board of Directors, independent legal counsel,
or its stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in the Business Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) that the claimant has not met such applicable standard or
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.

(c) Non-Exclusivity of Rights. The right to indemnification and the payment
of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.

(d) Insurance. The Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Company or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Company would
have the power to indemnify such person against such expense, liability or
loss under the Business Corporation Law.

EIGHTH: A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for damages for any breach of duty in such
capacity, except for the liability of any director if a judgment or other
final adjudication adverse to him establishes that his acts or omissions were
in bad faith or involved intentional misconduct or a knowing violation of law
or that he personally gained in fact a financial profit or other advantage to
which he was not legally entitled or that his acts violated Section 719 of the
New York Business Corporation Law."

The Underwriting Agreement provides for reciprocal indemnification between
us and our controlling persons, on the one hand, and the underwriters and
their respective controlling persons, on the other hand, against certain
liabilities in connection with this offering, including liabilities under the
Securities Act of 1933, as amended.

Item 25. Other Expenses of Issuance and Distribution.

The following are the expenses of the issuance and distribution of the
securities being registered, other than underwriting commissions and expenses,
all of which will be paid by the Company. Other than the SEC registration fee
and the NASD filing fees all of such expenses are estimated.

Registration fee ................................................. $ 3,074.25
NASD fee ......................................................... 3,841.56
Nasdaq Smallcap Market listing fee ............................... 19,500.00
Printing expenses ................................................ 110,000.00**
Accounting fees and expenses ..................................... 125,000.00**
Legal fees and expenses .......................................... 250,000.00**
Blue sky filing fees and related attorney fees and expenses ...... 60,000.00**
Transfer agent and registrar fees and expenses ................... 1,000.00**
"Roadshow" expenses and related consultant fees .................. 75,000.00**
Miscellaneous .................................................... 2,584.19**
-----------
Total ......................................................... $650,000.00**
===========

- ---------------
** Estimated.

II-3

Item 26. Recent Sales of Unregistered Securities.

On April 10, 2002 a former employee exercised options to purchase 673 common
shares. The purchase price for these shares was $1,750.00. The transaction was
exempt under Rule 701 of the Securities Act.

Item 27. Exhibits

Exhibit Description
No. -----------
- ----------

1.1 Form of Underwriting Agreement
3.1 Form of Restated Certificate of Incorporation of Data Conversion Laboratory, Inc.
3.2 Restated Bylaws of Data Conversion Laboratory, Inc.
4.1 Specimen stock certificate*
4.2 Form of warrant agreement, including form of unit warrant
4.3 Form of unit certificate*
4.4 Form of representative's warrant
5.1 Opinion of Morse, Zelnick, Rose & Lander, LLP
10.1 Data Conversion Laboratory, Inc. 2001 Stock Option Plan, as amended
10.2 Form of Employee's Confidentiality Agreement
10.3 WCMA Note, Loan and Security Agreement*
10.4 Term Loan and Security Agreement*
10.5 Lock-Up and Stock Dividend Return Agreement
23.1 Consent of Goldstein Golub Kessler LLP
23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit 5.1)
24 Power of Attorney (included in signature page)
99.1 Consent of director-nominee (Judy Gross)
99.2 Consent of director-nominee (Amy Finfer)
99.3 Consent of director-nominee (Andrew Weiss)
99.4 Consent of director-nominee (Donna Lynn)
99.5 Consent of director-nominee (Michael Gross)
99.6 Consent of director-nominee (David Skurnik)

- ---------------
* To be filed by amendment.

Item 28. Undertakings

A. The undersigned Registrant hereby undertakes:

(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:

(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement; and

(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the Securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

II-4

(3) To remove from registration by means of a post-effective amendment
any of the Securities being registered which remain unsold at the
termination of the Offering.

(4) To provide to the Underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.

(5) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.

(6) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the Securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

B. Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

II-5

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form SB-2 and authorized
this Registration Statement to be signed on its behalf by the undersigned, in
the City of New York, State of New York on June 7, 2002.

DATA CONVERSION LABORATORY, INC.

By: /s/ MARK GROSS
------------------------------------
Mark Gross
President

ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Mark Gross his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all pre- or
post-effective amendments to this Registration Statement, and to file the same
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any one of them, or their or his substitutes, may lawfully do or
cause to be done by virtue hereof.

In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities indicated on June 7, 2002.

Signature Title(s)
--------- --------

/s/ MARK GROSS President, Chief Executive Officer and Director
-----------------------------------------------
Mark Gross

/s/ JUDY GROSS Principal Accounting Officer
-----------------------------------------------
Judy Gross

II-6