###### Exhibit 99.1

### VILLAGEEDOCS

###  

** **

** **

Financial StatementsForthe Years December 31, 2004 and 2003Togetherwith Report of Independent Registered Public Accounting Firm

** **

----

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Boardof Directors of VillageEDOCS

We haveaudited the accompanying consolidated balance sheet of VillageEDOCS andsubsidiaries (the"Company") as of December 31,2004, and the related consolidated statements of operations, stockholders'deficit and cash flows for each of the years in the two-year period then ended.These consolidated financial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits. 

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of the Company'sinternal control over financial reporting. Accordingly, we express no suchopinion.  An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of VillageEDOCS andsubsidiaries at December 31, 2004, and the results of their operations andtheir cash flows for each of the years in the two-year period then ended inconformity with accounting principles generally accepted in the United Statesof America.

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern.  As discussed in Note 2 to theconsolidated financial statements, the Company has incurred recurring losses,and has a working capital deficit of $528,587 and a stockholders' deficit of$2,116,554 at December 31, 2004.  These factors, among others, raisesubstantial doubt as to the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2.  The consolidatedfinancial statements do not include any adjustments relating to therecoverability and classification of asset carrying amounts or the amount andclassification of liabilities that might result should the Company be unable tocontinue as a going concern.

/s/Corbin& Company, LLPIrvine,CaliforniaMarch 30, 2005

----

 

 

| **VillageEDOCS and subsidiaries**                                                            |  |                        |
|----------------------------------------------------------------------------------------------|--|------------------------|
| **Consolidated Balance Sheet**                                                               |  |                        |
|                                                                                              |  |                        |
|                                                                                              |  | **December 31, ** |
|                                                                                              |  | **2004 **         |
|                                                                                              |  |                        |
| **ASSETS**                                                                                   |  |                        |
| Current assets:                                                                              |  |                        |
|    Cash                                                                       |  |  $                | 458,009  |
|    Accounts receivable, net of allowance for  doubtful                        |  |                        |
|       accounts of $68,000                                      |  | 707,489           |
|    Inventories                                                                |  | 54,154            |
|    Other current assets                                                       |  | 5,537             |
|          Total  current assets                  |  | 1,225,189         |
|                                                                                              |  |                        |
| Property and equipment, net                                                                  |  | 350,467           |
| Other assets                                                                                 |  | 14,632            |
| Other intangibles, net                                                                       |  | 497,500           |
| Goodwill                                                                                     |  | 2,127,306         |
|                                                                                              |  |  $                | 4,215,094  |
|                                                                                              |  |                        |
|                                                                                              |  |                        |
| **LIABILITIES AND STOCKHOLDERS' DEFICIT**                                                    |  |                        |
| Current liabilities:                                                                         |  |                        |
|    Accounts payable                                                           |  |  $                | 200,981  |
|    Accrued expenses                                                           |  | 431,296           |
|    Deferred revenue                                                           |  | 154,924           |
|    Capital lease obligations                                                  |  | 4,963             |
| Note payable                                                                                 |  | 3,455             |
| Current portion of convertible notes and accrued interest                                    |  |                        |
|    payable to related parties                                                 |  | 958,157           |
|         Total current liabilities                         |  | 1,753,776         |
|                                                                                              |  |                        |
| Long term convertible notes and accrued interest                                             |  |                        |
|    payable to related parties, net of unamortized                             |  |                        |
|    debt discount of $214,872                                                  |  | 1,185,128         |
| Long term convertible notes and accrued interest                                             |  |                        |
|    payable to related parties converted to common  stock                      |  |                        |
|    in 2005, net of unamortized debt discount of  $289,865                     |  | 3,392,744         |
|         Total  liabilities                           |  | 6,331,648         |
|                                                                                              |  |                        |
| Commitments and contingencies                                                                |  |                        |
|                                                                                              |  |                        |
| Stockholders' deficit:                                                                       |  |                        |
|    Common stock, no par value:                                                |  |                        |
|       Authorized -- 175,000,000  shares                        |  |                        |
|          Issued and outstanding -- 36,036,544 shares |  | 7,464,373         |
| Additional paid-in capital                                                                   |  | 2,780,841         |
| Accumulated deficit                                                                          |  | (12,361,768)           |
|          Total  stockholders' deficit           |  | (2,116,554)            |
|                                                                                              |  |  $                | 4,215,094  |
|                                                                                              |  |                        |
| See accompanying notes to consolidated financial statements.                                 |  |

----

 

| **VillageEDOCS and subsidiaries**                                                                       | ** ** |                              |                 |                  |
|---------------------------------------------------------------------------------------------------------|------------|------------------------------|-----------------|------------------|
| **Consolidated Statements of Operations**                                                               | ** ** |                              |                 |                  |
|                                                                                                         | ** ** |                              |                 |                  |
| ** **                                                                                              | ** ** | **Years Ended December 31,** |
|                                                                                                         |            | **2004**                     | ** **      | **2003**         |
| Net sales                                                                                               |            |  $                      | 6,014,269  |                  |  $ | 1,882,027  |
| Cost of sales                                                                                           |            | 2,367,789               |                 | 920,410     |
|          Gross  profit                                     |            | 3,646,480               |                 | 961,617     |
| Operating expenses:                                                                                     |            |                              |                 |                  |
|       Product and technology                                              |            |                              |                 |                  |
|          development                                       |            | 418,444                 |                 | 488,115     |
|       Sales and marketing                                                 |            | 725,155                 |                 | 806,138     |
|       General and administrative                                          |            | 1,990,744               |                 | 922,332     |
|       Depreciation and  amortization                                      |            | 234,327                 |                 | 148,975     |
|          Total  operating expenses                         |            | 3,368,670               |                 | 2,365,560   |
|          Income  (loss) from operations                    |            | 277,810                 |                 | (1,403,943)      |
|                                                                                                         |            |                              |                 |                  |
| Interest expense                                                                                        |            | (666,623)                    |                 | (661,659)        |
| Loss on buyout of leased equipment                                                                      |            | -                       |                 | (39,943)         |
|          Loss  before provision for                        |            |                              |                 |                  |
|                income  taxes |            | (388,813)                    |                 | (2,105,545)      |
|                                                                                                         |            |                              |                 |                  |
| Provision for income taxes                                                                              |            | 2,400                   |                 | 800         |
|          Net loss                                          |            |  $                      | (391,213)       |                  |  $ | (2,106,345) |
|                                                                                                         |            |                              |                 |                  |
| Basic and diluted loss available to                                                                     |            |                              |                 |                  |
|       common stockholders per  common                                     |            |                              |                 |                  |
|       share                                                               |            |  $                      | (0.01)          |                  |  $ | (0.07) |
|                                                                                                         |            |                              |                 |                  |
| Weighted average shares outstanding -                                                                   |            |                              |                 |                  |
|        basic and diluted                                             |            | 35,321,760              |                 | 30,828,738  |
|                                                                                                         |            |                              |                 |                  |
| See accompanying notes to consolidated financial statements.                                            |            |                              |

----

| **VillageEDOCS and    subsidiaries**
**Statements of    Stockholders' Deficit**
**For the Years Ended    December 31, 2004 and 2003**
    Common Stock
    Additional
    Accumulated 
    Shares
    Amount
    Paid-in Capital
    Deficit
    Total
Balances, January 1, 2003
29,981,487 
 $
6,805,550 
 $
1,505,118 
 $
    (9,864,210)
$
    (1,553,542)
Common stock issued to    employees and 
  non-employees for    services
1,154,038 
167,133 
- 
- 
167,133 
Estimated value of    beneficial conversion
  feature on new    convertible notes payable
- 
- 
471,586 
- 
471,586 
Estimated fair value of
  options granted to    employees and 
  non-employees for    services
- 
- 
80,028 
- 
80,028 
Net loss
- 
- 
- 
    (2,106,345)
    (2,106,345)
Balances, December 31, 2003
31,135,525 
6,972,683 
2,056,732 
    (11,970,555)
    (2,941,140)
Estimated fair value of    common stock
   issued in acquisition
4,400,000 
440,000 
- 
- 
440,000 
Estimated fair value of    common stock
   issued as acquisition    cost
352,000 
35,200 
- 
- 
35,200 
Estimated fair value of    common stock    issued to employees and non-employees    for services
125,000 
16,250 
- 
- 
16,250 
Estimated fair value of    common stock     issued for exercise of warrants
24,019 
240 
- 
- 
240 
Estimated value of    beneficial conversion
  feature on new    convertible notes payable
- 
- 
394,989 
- 
394,989 
Estimated fair value of    warrants granted   in connection with convertible notes   payable
- 
- 
323,810 
- 
323,810 
Estimated fair value of    options granted to
 employees and    non-employees for  services
- 
- 
5,310 
- 
5,310 
Net loss
- 
- 
- 
    (391,213)
    (391,213)
Balances, December 31, 2004
36,036,544 
 $
7,464,373 
 $
    2,780,841 
 $
    (12,361,768)
 $
    (2,116,554)
See accompanying notes to    consolidated financial statements.
**VillageEDOCS and subsidiaries**

**Consolidated Statements of Cash Flows**

**For the Years Ended December 31, 2004 and 2003**

** **

**2004**

** **

**2003**

Cash Flows from Operating Activities:

   Net loss

 $

(391,213)

 $

(2,106,345)

   Adjustments to reconcile net loss to net cash

      provided by (used in)  operating activities:

         Depreciation  and amortization

234,327 

148,975 

         Provision  for doubtful accounts receivable

40,000 

16,502 

         Estimated  fair value of stock options issued 

             to  employees and non-employees for services rendered

5,310 

80,028 

         Common  stock issued to employees and 

            non-employees  for services rendered

16,250 

143,133 

            Amortization  of beneficial conversion feature and

               warrant  issued with convertible notes

214,062 

471,586 

            Common  stock issued for settlement of debt

- 

24,000 

            Loss  on buyout of leased equipment

- 

39,943 

            Changes  in operating assets and liabilities, net of

               acquisition:

                  Accounts  receivable

(270,905)

(112,630)

                  Inventories

(35,608)

- 

                  Other  current assets

5,147 

18,487 

                  Accounts  payable

(119,329)

(53,940)

                  Accrued  expenses and accrued interest

318,607 

330,500 

                  Deferred  revenue

154,924 

- 

                     Net  cash provided by (used in) operating activities

171,572 

(999,761)

Cash Flows from Investing Activities:

   Purchases of property and equipment

(90,710)

(69,263)

   Payments for buyout of leased equipment

- 

(10,919)

   Cash paid for acquisition of TBS, net of cash  acquired

(1,389,444)

- 

   Costs incurred for purchase of TBS

(180,216)

- 

                     Net  cash used in investing activities

(1,660,370)

(80,182)

Cash Flows from Financing Activities:

   Proceeds from convertible notes payable to  related parties

2,045,000 

1,132,000 

   Principal payments under capital leases

(14,055)

(40,682)

   Payments on notes payable

(9,080)

- 

   Payments on notes payable to related parties

(140,000)

- 

   Proceeds from exercise of warrants

240 

- 

                     Net  cash provided by financing activities

1,882,105

1,091,318 

   Net change in cash

393,307 

11,375 

   Cash, beginning of year

64,702 

53,327 

   Cash, end of year

 $

458,009 

 $

64,702 

Supplemental disclosure of cash flow information -

   Cash paid during the year for:

               Interest

 $

39,341 

 $

5,284 

               Income  taxes

 $

800 

 $

800 

continued.

 

** 2004**

** **

** 2003**

Supplemental Schedule of  Noncash Investing and Financing Activities:

   Issuance  of common stock as acquisition cost

 $

35,200 

 $

- 

   Issuance  of notes payable in acquisition

 $

2,100,000 

 $

- 

   Goodwill  and other intangibles acquired in acquisition

 $

2,497,090 

 $

- 

   Issuance  of common stock in acquisition

 $

440,000 

 $

- 

   Debt  assumed in acquisition

 $

152,535 

 $

- 

   Debt  discount in issuance of convertible notes payable 

      to  related party

 $

718,799 

 $

- 

   Equipment  financed through capital lease

 $

-   

 $

21,233 

See accompanying notes to  consolidated financial statements.

*** ***

*** ***

**VillageEDOCSand subsidiaries**Notesto Financial StatementsFor the Years Ended December 31, 2004 and 2003

**1.              Background,Organization and Basis of Presentation**

VillageEDOCSwas incorporated in 1995 in Delaware and reincorporated in California in 1997.The Company operates an electronic document delivery service marketed toorganizations throughout the United States and internationally.  On February17, 2004, the Company acquired Tailored Business Systems, Inc.("TBS").  TBS provides various programming, processing and printingservices to governmental entities, including installing software, hardware,printing and mailing of property tax forms.  On June 16, 2004, the holders of amajority of the voting capital stock of the Company voted to approve a Plan of Restructuringthat includes the reorganization of the Company's electronic document deliverybusiness into a wholly owned subsidiary of the Company.  In connection with thereorganization, the Company formed MessageVision, Inc. ("MVI") onOctober 25, 2004.  The consolidated financial statements include the accountsof the Company and those of MVI and TBS, its wholly owned subsidiaries, since October25, 2004 and February 17, 2004, respectively.   All significant inter-companytransactions and balances have been eliminated in consolidation.

 

**2.              GoingConcern**

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. The Company has incurred significantlosses since inception.  The Company's losses are continuing and are expectedto continue until such time as the Company is able to sufficiently expand itsexisting businesses or is able to consummate business combination transactionswith other businesses whose profits are sufficient to offset any ongoing lossesfrom operating the holding company that owns TBS and MVI.

TheCompany's success is dependent upon numerous items, certain of which are thesuccessful growth of revenues from its products and services, its ability toobtain new customers in order to achieve levels of revenues adequate to supportthe Company's current and future cost structure, and its success in obtainingfinancing for equipment and operations, for which there is no assurance.Unanticipated problems, expenses, and delays are frequently encountered inestablishing and maintaining profitable operations.  These include, but are notlimited to, competition, the need to develop customer support capabilities andmarket expertise, setbacks in product development, technical difficulties,market acceptance and sales and marketing.  The failure of the Company to meetany of these conditions could have a materially adverse effect on the Companyand may force the Company to reduce or curtail operations. No assurance can begiven that the Company can achieve or maintain profitable operations.

 

The Companybelieves it will have adequate cash to sustain operations until it achievessustained profitability.  However, until the Company has a history ofmaintaining revenue levels sufficient to support its operations and repay itsworking capital deficit, the Company may require additional financing. Sourcesof financing could include capital infusions, additional equity financing ordebt offerings.

 

Although cash flowsfrom operations have recently improved to a level sufficient to supportoperating expenses, should such cash flows decrease for any reason, managementplans to obtain convertible debt and equity financing from existing shareholdersand equity financing from new shareholders.    There can be noassurance that funding will be available on acceptable terms, if at all, or thatsuch funds, if raised, would enable the Company to achieve or sustain profitableoperations.

 

Thesefactors, among others, raise substantial doubt about the Company's ability tocontinue as a going concern.  The financial statements do not include anyadjustments to reflect the possible future effects on the recoverability andclassification of assets or the classification of liabilities that might resultfrom the outcome of these uncertainties.

 

 

**3.               Summaryof Significant Accounting Policies**

 

a.      Segmentsof an Enterprise and Related Information

 

The Company has adopted Statement of FinancialAccounting Standards ("SFAS") No. 131, "*Disclosures aboutSegments of an Enterprise and Related Information*." SFAS No. 131requires the Company to report information about segments of its business inannual financial statements and requires it to report selected segmentinformation in its quarterly reports issued to shareholders. SFAS No. 131 alsorequires entity-wide disclosures about the products and services an entity provides,the material countries in which it holds assets and reports revenues and itsmajor customers. The Company's two reportable segments are managed separatelybased on fundamental differences in their operations. Since February 17, 2004,the Company has operated in the following two reportable segments (see Note 13):

 

(a)  Electronic document delivery services. 

(b)  Government accounting products andservices. 

 

The Company evaluates performance and allocatesresources based upon operating income. The accounting policies of thereportable segments are the same as those described in this summary of significantaccounting policies.

 

b.     Concentrationof Credit Risk

The Company extends credit to its customers andperforms ongoing credit evaluations of such customers.  The Company does notobtain collateral to secure its accounts receivable.  The Company evaluates itsaccounts receivable on a regular basis for collectibility and provides for anallowance for potential credit losses as deemed necessary.  At December 31,2004, the Company has recorded an allowance for doubtful accounts of $68,000.

  

One customer accounted for 10% of total accountsreceivable as of December 31, 2004.  No single customer accounted for more than10% of total sales for 2004 or 2003.  

 

c.      Useof Estimates in the Preparation of Financial Statements

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Significant estimatesmade by management are, among others, the realizability of accounts receivable,inventories, long-lived assets, goodwill, and valuation of stock options,warrants, and deferred tax assets.   Actual results could differ from thoseestimates.

d.     Propertyand Equipment

Property and equipment arestated at cost and are depreciated using the straight-line method over theestimated useful lives of the assets, ranging from three to seven years. Equipment under capital lease obligations is depreciated over the shorter ofthe estimated useful life or the term of the lease.  Major betterments andrenewals are capitalized, while routine repairs and maintenance are charged toexpense when incurred.  The Company leases certain of its computer equipmentand software under capitalized and operating lease arrangements.

 

The Company assesses therecoverability of property and equipment by determining whether such assets canbe recovered through projected undiscounted cash flows.  The amount ofimpairment, if any, is measured based on fair value and is charged tooperations in the period in which impairment is determined by management.  AtDecember 31, 2004, management has determined that there is no impairment ofproperty and equipment.  There can be no assurance, however, that marketconditions will not change, which could result in future property and equipmentimpairment.

 

e.      RevenueRecognition

 

The Company recognizesrevenue in accordance with Staff Accounting Bulletin ("SAB") No. 101, "*RevenueRecognition in Financial Statements,*" as revised by SAB No. 104.  Assuch, the Company recognizes revenue when persuasive evidence of an arrangementexists, title transfer has occurred, or services have been performed, the priceis fixed or readily determinable and collectibility is probable.  Sales arerecorded net of sales discounts.

 

The Company has adoptedStatement of Position ("SOP") 97-2, "*Software Revenue Recognition*",as well as SOP 98-9, "*Modification of SOP 97-2, Software RevenueRecognition with Respect to Certain Transactions*."  The SOPsgenerally require revenue earned on software arrangements involving multipleelements to be allocated to each element based on the relative fair marketvalues of each of the elements. The fair value of an element must be based onvendor-specific objective evidence ("VSOE") of fair value. Software licenserevenue allocated to a software product is recognized upon delivery of theproduct, or deferred and recognized in future periods to the extent that anarrangement includes one or more elements that are to be delivered at a futuredate and for which VSOE has not been established.  Maintenance and supportrevenue is recognized ratably over the maintenance term.  First-yearmaintenance typically is sold with the related software license and renewed onan annual basis thereafter. Estimated fair values of ongoing maintenance andsupport obligations are based on separate sales of renewals to other customersor upon renewal rates quoted in the contracts. For such arrangements withmultiple obligations, the Company allocates revenue to each component of thearrangement based on the estimated fair value of the undelivered elements. Fairvalue of services, such as consulting or training, is based upon separate salesof these services. The Company at times may enter into multiple-customercontracts in which the Company allocates revenue based on the number ofspecified users at each customer, and recognizes revenue upon customeracceptance and satisfying the other applicable conditions of the abovedescribed accounting policy. 

 

Services revenue isrecognized as the service is performed assuming that sufficient evidence existsto estimate the fair value of the services.  Consulting and trainingservices are billed based on contractual hourly rates and revenues arerecognized as the services are performed. Consulting services primarily consistof implementation services related to the installation of the Company'sproducts which do not require significant customization to or modification ofthe underlying software code. 

 

Significant managementjudgments and estimates must be made in connection with determination of therevenue to be recognized in any accounting period. If the Company madedifferent judgments or utilized different estimates for any period, materialdifferences in the amount and timing of revenue recognized could result.

 

f.      Product and TechnologyDevelopment

 

Product and technology development expenseincludes personnel costs relating to developing the features, content and functionalityof MVI's internet-enabled fax services and web site, as well as TBS'sgovernment accounting software.  Product and technology development costs areexpensed as incurred.

 

g.     Advertising

 

The Company expenses all advertising costs asincurred.  Advertising costs were $62,049 and $121,123 for the years endedDecember 31, 2004 and 2003, respectively. 

 

h.   Risks and Uncertainties

 

The Company operates in industries that aresubject to intense competition, government regulation and rapid technologicalchange.  The Company's operations are subject to significant risks anduncertainties including financial, operational, technological, regulatory andother risks associated with an operating business, including the potential riskof business failure.

 

i.    Fair Value of Financial Instruments

 

The carrying amount of certain of the Company'sfinancial instruments as of December 31, 2004 approximate their respective fairvalues because of the short-term nature of these instruments. Such instrumentsconsist of cash, accounts receivable, accounts payable, accrued expenses, andnote payable. The fair value of convertible notes payable to related parties isnot determinable as the borrowings are with related parties.

 

j.  Loss per Share

 

Basic loss per share is computed by dividingloss available to common stockholders by the weighted average number of commonshares assumed to be outstanding during the period of computation. Diluted lossper share is computed similar to basic loss per share except that thedenominator is increased to include the number of additional common shares thatwould have been outstanding if the potential shares had been issued and if theadditional common shares were dilutive.  All potentially dilutive shares,58,006,320 and 27,784,019 as of December 31, 2004 and 2003, respectively, havebeen excluded from dilutive loss per share, as their effect would beanti-dilutive for 2004 and 2003.

 

k.   ComprehensiveIncome

 

The Company has no itemsof comprehensive income.

 

l.       WebSite Development Costs

 

During the year ended December 31, 2004, theCompany did not capitalize any additional amounts related to its web site inaccordance with the Emerging Issues Task Force Issue ("EITF") No.00-2, "*Accounting for Web Site Development Costs".*  Web sitedevelopment costs are amortized using the straight-line method over theestimated useful life of three years.  During each of the years ended December31, 2004 and 2003, the Company recorded amortization of web site developmentcosts of $35,889.  At December 31, 2004, $7,319 of web site development costshave been included in other assets in the accompanying consolidated balancesheet.

 

m.   IncomeTaxes

 

The Company accounts for income taxes inaccordance with the liability method for financial accounting and reportingpurposes.  Under this method, deferred tax assets and liabilities aredetermined based on differences between the financial reporting and the taxbasis of assets and liabilities and are measured using the enacted tax ratesand laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided for certain deferred tax assets if it is morelikely than not that the Company will not realize tax assets through futureoperations.

 

n.     Stock-Based Compensation

 

The Company accounts for non-employeestock-based compensation under SFAS No. 123, "*Accounting ForStock-Based Compensation*."  SFAS No. 123 defines a fair value basedmethod of accounting for stock-based compensation.  SFAS No. 123 allows anentity to continue to measure compensation cost related to stock and stockoptions issued to employees using the intrinsic method of accounting prescribedby Accounting Principles Board ("APB") Opinion No. 25, as amended,"*Accounting for Stock Issued to Employees*." Under APB No. 25,compensation cost, if any, is recognized over the respective vesting periodbased on the difference, on the date of grant, between the fair value of theCompany's common stock and the grant price. Entities electing to remain withthe accounting method of APB No. 25 must make pro forma disclosures of netincome and earnings per share, as if the fair value method of accountingdefined in SFAS No. 123 had been applied.

 

At December 31, 2004, the Company has twostock-based employee compensation plans, which are described more fully in Note8.  The Company accounts for those plans under the recognition and measurementprinciples of APB No. 25, and related interpretations.  During the years endedDecember 31, 2004 and 2003, $0 and $15,000, respectively, of compensationexpense was recognized in the accompanying statements of operations for optionsissued to employees.    No other option-based employee compensation cost isreflected in the statements of operations, as all other options granted since1999 under those plans had exercise prices equal to or greater than the marketvalue of the underlying common stock on the date of grant.  The following tableillustrates the effect on net loss and loss per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123 to stock-basedemployee compensation:

**Year ended December  31,**

 

**2004**

**2003**

 

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

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

 

Net  loss as reported

 $

(391,213)

 $

(2,106,345)

 

 

Deduct:   Total stock-based employee

 

  compensation  expense under APB No. 25

-- 

15,000 

 

 

Add:   Total stock-based employee

 

  compensation  expense under fair value

 

  based  method for all awards, net of

 

  related  tax effects

(430,000)

(520,008)

 

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

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

 

Pro  forma net loss 

 $

(821,213)

 $

(2,611,353)

==========

==========

 

Basic  and diluted loss per share - as

 

  reported

 $

(0.01)

 $

(0.07)

==========

==========

 

Basic  and diluted loss per share - pro

 

  forma

 $

(0.02)

 $

(0.08)

==========

==========

 

 

 

All issuances of the Company's stock fornon-cash consideration have been assigned a dollar amount equaling either themarket value of the shares issued or the value of consideration receivedwhichever is more readily determinable. The majority of the non-cashconsideration received pertains to services rendered by consultants and othersand have been valued at the market value of the shares issued. In certainissuances, the Company may discount the value assigned to the issued shares forilliquidity and restrictions on resale.

 

o.      Inventory

Inventory consists primarily of supplies, forms and envelopes and is stated atthe lower of cost (using first-in, first-out method) or market.

 

p.       Goodwilland Other Intangible Assets

The Company has adopted SFAS No. 142, "*Goodwill and Other IntangibleAssets*."  Under SFAS No. 142, goodwill and other intangibleassets with indefinite lives are no longer subject to periodic amortization butare instead reviewed annually for impairment, or more frequently if impairmentindicators arise.  The Company performed an impairment test on goodwill asof December 31, 2004.  Based on its analysis as of December 31, 2004, the Company's management believes there is no impairment of its goodwill.  There can be noassurance, however, that market conditions will not change or demand for theCompany's products or services will continue, which could result in impairmentof goodwill in the future.

Identifiable assets and liabilities acquired in connection with businessacquisitions accounted for under the purchase method are recorded at theirrespective fair values.  The Company is amortizing the trade name andcustomer list over estimated useful lives of 5 and 10 years, respectively.  Deferredincome taxes have been recorded to the extent of differences between the fairvalue and the tax basis of the assets acquired and liabilities assumed.

 

q.         BeneficialConversion Feature

 

The convertible feature of certain convertiblenotes provides for a rate of conversion that is below market value (see Note 7).Such feature is normally characterized as a "beneficial conversionfeature" ("BCF"). Pursuant to EITF No. 98-5, "*AccountingFor Convertible Securities with Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratio*" and Emerging Issues Task Force Issue No.00-27,"*Application of EITF Issue No. 98-5 To Certain ConvertibleInstruments*," the relative fair values of the BCFs have been recordedas a discount from the face amount of the respective debt instrument. TheCompany is amortizing the discount using the effective interest method throughmaturity of such instruments. The Company will record the correspondingunamortized debt discount related to the BCF and the warrants as interestexpense when the related instrument is converted into the Company's commonstock.

 

r.          Long-LivedAssets

 

The Company's management assesses therecoverability of its long-lived assets by determining whether the depreciationand amortization of long-lived assets over their remaining lives can berecovered through projected undiscounted future cash flows.  The amount oflong-lived asset impairment, if any, is measured based on fair value and ischarged to operations in the period in which long-lived asset impairment isdetermined by management.  At December 31, 2004, the Company's managementbelieves there is no impairment of its long-lived assets.  There can be noassurance, however, that market conditions will not change or demand for theCompany's products and services will continue, which could result in impairmentof long-lived assets in the future. 

 

s.      WarrantyCosts

 

The Company offers a one year and a 90-daywarranty period for customers after installation for certain services offeredby TBS.  Management has determined that warranty claims are not material to thefinancial statements as of December 31, 2004.

 

t.       New AccountingPronouncements

 

In December 2004, the Financial AccountingStandards Board ("FASB") issued SFAS No. 123 (revised 2004) ("SFAS123(R)"), "*Share-Based Payment,*" to provide investors andother users of financial statements with more complete and neutral financialinformation by requiring that the compensation cost relating to share-basedpayment transactions be recognized in financial statements. That cost will bemeasured based on the fair value of the equity or liability instruments issued.SFAS 123(R) covers a wide range of share-based compensation arrangementsincluding share options, restricted share plans, performance-based awards, shareappreciation rights, and employee share purchase plans. SFAS 123(R) replacesSFAS No. 123, and supersedes APB No. 25. SFAS No. 123, as originally issued in1995, established as preferable a fair-value-based method of accounting forshare-based payment transactions with employees. However, that Statementpermitted entities the option of continuing to apply the guidance in APB No. 25,as long as the footnotes to financial statements disclosed what net incomewould have been had the preferable fair-value-based method been used. Smallbusiness issuers will be required to apply SFAS 123(R) as of the first interimor annual reporting period that begins after December 15, 2005. The Company isin the process of evaluating whether the adoption of SFAS 123(R) will have asignificant impact on the Company's overall results of operations or financialposition. 

In December 2004, the FASB issued SFAS No. 153,"*Exchanges of Nonmonetary Assets,*" an amendment of APB No. 29,"*Accounting for Nonmonetary Transactions.*" APB No. 29 is basedon the principle that exchanges of nonmonetary assets should be measured basedon the fair value of the assets exchanged. The guidance in APB No. 29, however,included certain exceptions to that principle. SFAS No. 153 amends APB No. 29 toeliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance, that is, if the future cash flows of theentity are not expected to change significantly as a result of the exchange.The provisions of this statement are effective for nonmonetary asset exchangesoccurring in fiscal periods beginning after June 15, 2005. The Companyanticipates that SFASNo. 153 will nothave an impact on its financial statements.

 

 

**4.         Propertyand Equipment**

 

            Propertyand equipment consist of the following as of December 31, 2004:

                                                                                                                        

Equipment  and software under capital leases

$

32,590 

Computer  equipment

280,091 

Furniture  and equipment

349,617 

Automobiles

22,665 

Software

 

35,205 

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

720,168 

Less--  accumulated depreciation

(369,701)

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

$

350,467 

=======

                                                                                                      

Depreciationexpense for the property and equipment for 2004 and 2003 was $145,938 and$113,086, respectively.

**5.               Acquisitionsand Intangible Assets**

*TBS*

On February 17, 2004, the Company purchased 100% of the issued and outstandingcapital stock of TBS from Stephen A. Garner and James L. Campbell.

The Company purchased TBS with $1.5 million in cash, convertible securedpromissory notes totaling $600,000, and 11 million restricted shares of theCompany's common stock.   Payment of 4,400,000 (or 40%) of the shares were madeat the closing, and payment of 6,600,000 (or 60%) of the shares is contingentupon TBS meeting certain net revenue goals in each of the first three fiscalyears following the closing and, therefore, will take place over a three-yearperiod.   As of February 17, 2005, the Company has determined that TBS met thecontractual net revenue goal for 2004.  Accordingly, the Company will issue anadditional 1,100,000 shares of restricted common stock to each of Messrs.Campbell and Garner during 2005 pursuant to the acquisition agreement.  The 4,400,000shares of the Company's common stock issued at closing was valued at $0.10 pershare, the average closing bid price of the Company's common stock for thethirty-day period ended February 16, 2004.   The additional 2,200,000 shares ofthe Company's common stock earned by Messrs. Campbell and Garner in February2005 will be valued at $0.145 per share (and added to goodwill), the closingbid price of the Company's common stock at February 17, 2005.

The acquisition has been accounted for using the purchase method of accounting.The Company funded the cash portion of the purchase price of TBS with theproceeds of a $1.7 million convertible secured promissory note offeringsubscribed to by Mr. and Mrs. Williams (see Note 7).

The terms of the purchase were the result of arms-length negotiations.  Neitherof the TBS shareholders was previously affiliated with VillageEDOCS.

The Company, in connection with the acquisition of TBS, has incurredapproximately $60,000 in consulting expenses to an unrelated third party (paidduring February 2004 in a combination of cash and 220,000 shares of commonstock issued in March 2004 valued at $0.10 per share), $76,000 in compensationto an employee (paid, pursuant to his employment agreement and incremental tohis base salary, during February 2004 in a combination of cash and 132,000shares of common stock issued in March 2004 valued at $0.10 per share) and $79,416in other acquisition-related costs including, but not limited to, expensesincurred for legal, accounting, and travel.

The purchase price was determined as follows:

 

Cash

 $

1,500,000 

Convertible  secured promissory notes

600,000 

Common  stock (4,400,000 shares)

440,000 

Acquisition  costs (including 352,000 shares)

215,416 

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

 $

2,755,416 

============

Thefollowing represents an allocation of the purchase price over the historicalnet book value of the acquired assets and liabilities of TBS as of February 17,2004, the acquisition date:

Cash

 $

110,556 

Accounts  receivable

278,136 

Inventories

18,546 

Property  and equipment

257,803 

Other  assets

11,109 

Accounts  payable and accrued expenses

(445,505)

Notes  payable

(152,535)

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

Net  tangible assets

78,110 

Customer  list

500,000 

Trade  name

50,000 

Goodwill

2,127,306 

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

 $

2,755,416 

==========

Thegoodwill from the acquisition of TBS was allocated one hundred percent to thegovernment accounting products and services segment.

 

Theunaudited pro forma combined historical results, as if TBS had been acquiredJanuary 1, 2004 and 2003, are estimated as follows:

For the Years Ended

December 31, 2004

December 31, 2003

Net sales

 $

6,575,555 

 $

5,206,086 

Net loss

 $

(313,524)

 $

(2,459,364)

Weighted  average common

shares  outstanding:

Basic and  diluted

35,840,116 

35,228,738 

Loss per  share:

Basic and  diluted

 $

(0.01)

 $

(0.07)

 

Priorto being acquired by the Company, TBS's fiscal year ended on October 31.  Accordingly,the unaudited pro forma information for the 2003 period has been prepared bycombining the results of VillageEDOCS for the fiscal year ended December 31,2003 and the results of TBS for the fiscal year ended October 31, 2003.

 

Theunaudited pro forma information has been prepared for comparative purposes onlyand does not purport to be indicative of what would have occurred had theacquisition actually been made at such a date, nor is it necessarily indicativeof future operating results.

* *

*PotentialFuture Acquisition*

* *

In November 2004,the Company signed a letter of intent to acquire a Document Management SolutionsProvider.  The acquisition is contingent on financing and other customaryclosing conditions.  There can be no assurances that the Company willsuccessfully complete 

this transaction.

 

*OtherIntangible Assets*

 

Otherintangible assets consist of the following as of December 31, 2004: 

 

Customer  list   

$ 

500,000 

Trade name

50,000 

Less:  accumulated amortization

(52,500)

$ 

497,500 

 

During2004, amortization expense totaled $52,500.  The estimated amortizationexpense for the next five years is as follows: 

 

 
Years  Ending 

December  31,

2005

$

60,000 

 

2006

60,000 

 

2007

60,000 

 

2008

60,000 

 

2009

51,250 

 
 

 

**6.              NotePayable**

 

Inconnection with the acquisition of TBS, the Company assumed a promissory notein connection with a vehicle purchase.  This note is payable in monthlyinstallments of approximately $500, including interest, bears interest at 5.4%,is collateralized by a vehicle, and is due in November 2005.  Theoutstanding principal balance of this note as of December 31, 2004 was $3,455.

 

 

**7.              ConvertibleNotes Payable to Related Parties**

 

Duringthe year ended December 31, 2004, the Company borrowed $345,000 from C. Alanand Joan P. Williams and issued convertible promissory notes bearing interestat 10 percent per annum (the "Notes").   The Notes were secured by asecurity interest in all of the Company's assets.  The notes and accruedinterest were due at the earlier of one of three events: 1) October 31, 2005;2) acquisition of controlling interest in the Company by a third party; or 3)the Company achieves equity financing of a minimum of $3,000,000.  In addition,the principal and accrued interest on the Notes were convertibleinto shares of the Company's common stock at a conversion price equal to thelower of $0.07 per share or the average of the Company's common stock closingbid price on the OTCBB, NASDAQ or other established securities exchange ormarket for the ten (10) consecutive trading days prior to the date Mr. or Mrs.Williams delivered written notice of his or her conversion election to theCompany.  The Company recorded a BCF of $241,180 in connection with theconversion feature of the notes payable during 2004, amortizing $101,725 tointerest expense in the accompanying statement of operations during 2004.  Subsequent to year end, all of these notes were converted to common stock (seeNote 14).

 

OnFebruary 17, 2004, the Company borrowed $1,700,000 from C. Alan and Joan P.Williams and issued a convertible promissory note, bearing interest at 10percent per annum.  The note and accrued interest are due at the earlier of oneof three events: 1) October 31, 2007; 2) acquisition of controlling interest inthe Company by a third party; or 3) the Company achieves equity financing of aminimum of $3,000,000.  If the Company is acquired, the principal and accruedinterest on the note are convertible into shares of the Company's common stockat the lower of $2.50 per share or the price paid per share by the acquirer. In addition, the principal and accrued interest on the note are convertibleinto shares of the Company's common stock at a conversion price equal to eightyfive percent (85%) of average of the Company's common stock closing bid priceon the OTCBB, NASDAQ or other established securities exchange or market for theten (10) consecutive trading days prior to the date Mr. and Mrs. Williamsdeliver written notice of their conversion election to the Company.  As anincentive for Mr. and Mrs. Williams to provide the loan, the Company agreed toissue them a warrant to purchase 5,000,000 shares of the Company's restrictedcommon stock at $0.10 per share exercisable until February 17, 2009.  Inconnection with the issuance of the note, the Company recorded a debt discountof $477,619, consisting of a BCF of $153,810 and the relative fair value of thewarrant of $323,810.  The Company is amortizing the discount using theeffective interest method through October 31, 2007.  In the event that therelated debenture is converted to shares of the Company's common stock, theCompany will immediately expense the corresponding unamortized debt discount asadditional interest expense.  During 2004, approximately $112,337 of interestexpense was recognized in the accompanying consolidated statement of operationsin connection with amortization of the debt discount. Subsequent to year end,$700,000 of this note was converted to common stock (see Note 14).

 

Inaddition, at December 31, 2004, the Company had additional convertiblepromissory notes payable to C. Alan and Joan P. Williams totaling $1,882,000bearing interest at 10 percent per annum.  The notes were secured by a securityinterest in all of the Company's assets.  Subsequent to year end, all of thesenotes were converted to common stock (see Note 14).

 

OnJuly 15, 2002, the Company entered into a Promissory Note ModificationAgreement with James Townsend with respect to $507,747 in convertible promissorynotes (the "Townsend Notes"), bearing interest at 10 percent per annum. Pursuant to this agreement, the Townsend Notes were modified and now includethe following terms:  the principal and accrued interest on the Townsend Notes,as modified, are due at the earlier of one of three events: 1) October 31,2005; 2) acquisition of controlling interest in the Company by a third party;or 3) the Company achieves equity financing of a minimum of $3,000,000.  If theCompany is acquired, the principal and accrued interest on the Townsend Notes,as modified, are convertible into shares of the Company's common stock at thelower of $2.50 per share or the price paid per share by the acquirer.  Inaddition, the principal and accrued interest on the Townsend Notes, asmodified, are convertible at any time into shares of the Company's common stockat a conversion price equal to the lower of $0.10 per share or the average ofthe Company's common stock closing bid price on the OTCBB, NASDAQ or otherestablished securities exchange or market for the ten (10) consecutive tradingdays prior to the date Mr. Townsend delivers written notice of his conversionelection to the Company.  In addition, the agreement grants to Mr. Townsendpiggyback registration rights with respect to all previously unregisteredshares of the Company's common stock held by him, whether issued for cash orfor conversion of the Notes, as modified.  At December 31, 2004, theoutstanding principal balance of the Townsend Notes was $507,747.

 

OnJuly 30, 2002, the Company granted Mr. and Mrs. Williams a full ratchetanti-dilution right to receive additional shares of the Company's common stockin the event that Mr. Townsend converts some or all of his outstandingpromissory notes to the Company's common stock at any price lower than $0.13per share such that Mr. and Mrs. William's conversion price shall be equivalentto Mr. Townsend's conversion price with respect to the same number of shares.

 

Inconnection with the acquisition of TBS, the Company issued a $300,000convertible promissory note to Stephen A. Garner and a $300,000 convertiblepromissory note to James L. Campbell (the "TBS Notes").  Each of theTBS Notes bears interest at 5 percent per annum and is due and payable in threeequal annual installments of  $100,000, with the first installment paid in fullduring February 2005 and subsequent installments due on February 17, 2006 andFebruary 17, 2007.  The TBS Notes are secured by a Stock Pledge Agreement and aSecurity Agreement, which secure the TBS Notes with substantially all of theassets of TBS.  In addition, Messrs. Garner and Campbell have the right toconvert the balance of unpaid principal and interest of the TBS Notes intoshares of the Company's common stock at the rate of 9.8 shares of common stockfor each $1.00 of principal and interest to be converted.  

 

Inconnection with the acquisition of TBS, the Company assumed promissory notes inthe aggregate amount of $140,000 to Stephen A. Garner and James L. Campbell. The notes bore interest at 8 percent per annum and were paid in full beforeDecember 31, 2004.

Interestexpense recognized on all the convertible notes payable to related parties was$663,623 and $661,659 during the years ended December 31, 2004 and 2003,respectively.  Total interest accrued and not paid on the convertible notespayable to related parties as of December 31, 2004 totaled $1,006,019 and isincluded in the accompanying balance sheet.  $755,609 of the accrued interestwas converted to common stock subsequent to year end (see Note 14).

 

Convertiblenotes payable and accrued interest payable to related parties consists of thefollowing at December 31, 2004:

 

Convertible  note payable to Williams, net of debt discount of $214,872

$

785,128 

Convertible  notes and accrued interest payable to Townsend

758,157 

Convertible  notes payable to former TBS shareholders

600,000 

2,143,285 

Less:  current portion

(958,157)

$

1,185,128

 

Futureminimum principal payments pursuant to the above long term debt agreements areas follows:

 

Years  ending December 31, 

2005

$

958,157

2006

200,000

2007

1,200,000

2,358,157

Less:  debt discount

(214,872)

$

2,143,285

**8.         Stockholders'Equity (Deficit)**

a.      Common Stock

OnJune 16, 2004, the holders of a majority of the voting capital stock of theCompany acted by written consent in lieu of a special meeting of stockholdersto increase the number of authorized no par value shares of the common stock ofthe Company from 90,000,000 to 175,000,000.

On February 17, 2004, the Company issued 2,200,000 shares of restricted commonstock to each of Stephen A. Garner and James L. Campbell in partial payment ofthe total purchase price for 100% of the common stock of TBS.  All4,400,000 shares were valued at $0.10 per share, the fair value on date ofacquisition.

On February 17, 2004, in connection with the acquisition of TBS, the Companyagreed to issue 132,000 shares of its restricted common stock to H. Jay Hill,who is an officer and director of the Company, pursuant to Mr. Hill's employmentagreement.  The shares were valued at $0.10 per share, the fair value ondate of acquisition.  The shares were issued on March 11, 2004.  

On February 17, 2004 and in connection with the acquisition of TBS, the Companyagreed to issue 220,000 shares of its restricted common stock to a non-affiliatepursuant to a finder's fee agreement.  The shares were valued at $0.10 pershare, the fair value on the date of the acquisition.  The shares wereissued on March 11, 2004.  

On March 11, 2004, the Company issued 24,019 shares of restricted common stockfor $240 in cash in connection with the exercise of a warrant.

On December 29, 2004, the Company issued 125,000 shares of restricted commonstock at $0.13 per share (fair value on date of issuance) in connection with anemployment agreement.

On January 28, 2003, the Company entered into an agreement with a non-relatedparty pursuant to which the party agreed to accept 109,091 shares of theCompany's common stock as payment in full for $24,000 in consulting fees owed tothe party by the Company for product and service marketing consulting services. The shares were issued on February 11, 2003.

On February 11, 2003, the Company issued 510,124 shares of restricted commonstock to consultants and employees in consideration for services valued at$71,417, and 320,000 shares to the Company's former founder, who is a less thanten percent shareholder, in consideration for marketing communications servicesvalued at $44,800, or $0.14 per share (fair value on date of issuance).

On December 9, 2003, the Company issued 214,823 shares of restricted commonstock to a consultant in consideration for services valued at $26,916 (fairvalue on date of issuance).

b.     Stock Options

The Company has adopted an equity incentive plan (the "2002 Plan") thatauthorizes the issuance of options to acquire up to 28,000,000 shares of commonstock, as amended, to employees and certain outside consultants.   The2002 Plan allows for the issuance of either non-qualified or, subject tostockholder approval, incentive stock options pursuant to Section 422 of theInternal Revenue Code. Options vest at the discretion of the Board of Directorsas determined at the grant date, but not longer than a ten-year term. Under the 2002 Plan, the exercise price of each option shall not be less thanfair market value on the date the option is granted.  The number of optionsunder the 2002 Plan available for grant at December 31, 2004 was 10,816,532.

During 2004, the Company granted to its employees options to purchase shares ofits common stock under the 2002 Plan as follows:  5,150,000 shares at $0.15per share, 150,000 shares at $0.17 per share, 2,990,000 shares at $0.18 pershare, 10,000 shares at $0.1875 per share, 25,000 shares at $0.19 per share,35,000 shares at $0.20 per share.   All options were issued above orat the fair market value on the dates of grant and vest on various dates fromthe date of grant through October 2009.

EffectiveFebruary 10, 2005, the exercise price of options to purchase 1,860,000 sharesof the Company's common stock under the 2002 Plan at $0.15 per share that wereissued in 2004 was reduced to $0.07 per share, in accordance with the relatedemployment agreements, in connection with the conversion of debt to common stocksubsequent to year end (see Note 14).  As a result, the Company will accountfor such options under variable accounting.    As none of the options werevested at February 10, 2005, no compensation expense will be recordedimmediately for the repricing.  Had the options been fully vested at that date,the additional compensation would have been approximately $130,000.

Optionsto purchase 50,000 shares at $0.10 (the fair market value on the date of grant)were granted to a non-employee consultant during 2003.  These options vested onFebruary 28, 2004 and $5,310 of consulting expense was recognized in theaccompanying consolidated statements of operations in connection with thevesting of these options.

Optionsto purchase 3,710,000 shares of the Company's common stock under the 2002 Planat per share prices ranging from $0.10 to $0.1875 (above or at the fair marketvalue on the dates of grant) were issued to employees during the year endedDecember 31, 2003, vesting on various dates from the date of grant through December2008.    

Optionsto purchase 833,030 shares of the Company's common stock under the 2002 Plan at$0.1875 per share (above or at the fair market value on the dates of grant)that were issued in 2002 were modified as to vesting and expiration date during2003 in connection with the retirement of employees.  As a result,  $65,028of compensation expense was recognized in the accompanying consolidatedstatement of operations during the year ended December 31,  2003 in connection with the modifications, under SFAS No. 123.

During 1997, the Board of Directors of theCompany adopted a stock option plan (the "1997 Plan") that authorizes theissuance of options to acquire up to 5,000,000 shares of common stock to employeesand certain outside consultants.  The 1997 Plan allows for the issuance ofeither non-qualified or incentive stock options pursuant to Section 422 of theInternal Revenue Code. Options vest at the discretion of the Board of Directorsas determined at the grant date, but not longer than a ten-year term.  Underthe 1997 Plan, the exercise price of each option shall not be less than 85percent of fair market value on the date the option is granted.  The number ofoptions under the 1997 Plan available for grant at December 31, 2004 was2,089,798.

During the year ended December 31, 2003, $15,000of compensation expense was recognized in the accompanying statements ofoperations for options issued to employees in 1999 under the 1997 Plan for thevesting period from the date of grant through December 2003, pursuant to APBNo. 25.

During 2004, 1,362,286 options under the 2002Plan and 154,635 other options were cancelled due to their expiration or thetermination of employment. 

Stock option activity for the years endedDecember 31, 2004 and 2003 is as follows:

 

Weighted Average

Number

Exercise Price

of Options

Per Share

Outstanding  at January 1, 2003

10,865,200 

 $

0.43 

Granted

3,760,000 

0.16 

Exercised

- 

- 

Canceled

(1,374,609)

(0.35)

Outstanding  at December 31, 2003

13,250,591 

0.37 

Granted

8,360,000 

0.16 

Exercised

- 

- 

Canceled

(1,516,921)

0.30 

Outstanding  at December 31, 2004

20,093,670 

 $

0.33 

Exercisable at December 31, 2004

7,771,867 

 $

0.41 

Weighted  average fair value of options granted

2003

 $

0.08 

2004

 $

0.07 

The following summarizes information about stockoptions outstanding at December 31, 2004:

 
   

Options Outstanding |
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