FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

|X|   ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE
      ACT OF 1934. For the fiscal year ended 12/31/2004

                                       OR

|_|   TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OF 15(D)  OF THE  SECURITIES
      EXCHANGE ACT OF 1934. For the transition period from___ to___ .

                              1mage Software, Inc.
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

                                     0-12535
                            ------------------------
                            (Commission File Number)

<TABLE>
<CAPTION>
<S>                                                                            <C>
                Colorado                                                       84-0866294
       (State of Incorporation)                                   (IRS Employer Identification Number)
6025 S. Quebec St. #300 - Englewood CO 80111                                   (303) 773-1424
--------------------------------------------                ---------------------------------------------------
  (Address of principal executive offices)                  (Registrant's telephone number, including area code)
</TABLE>

Securities Registered Pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
<S>                                                                        <C>
                         NONE                                              NONE
                   (Title of Class)                                 (Name of Exchange)
Securities Registered Pursuant to Section 12(g) of the Act:
</TABLE>

                         Common Stock - $.004 par value
                         ------------------------------
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy statements or any amendment
of this Form10-K.

Indicate  by check mark  whether  the  Registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act). Yes|_| No |X|

State the aggregate market value of the voting and nonvoting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
March 11, 2005: $362,467.

As of March 31, 2005, there were 3,302,597 shares of the Registrant's Common
Stock outstanding.

                         Exhibit Index begins on Page 40

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                                                                                                    <C>
PART I

1.      Business..........................................................................................3

2.      Properties........................................................................................9

3.      Legal Proceedings.................................................................................9

4.      Submission of Matters to a Vote of Security Holders ..............................................10

PART II

5.      Market for Registrant's Common Equity and Related Stockholders Matters............................11

6.      Selected Financial Data...........................................................................12

7.      Management's Discussion and Analysis of Financial Condition and Results of Operations.............13

8.      Financial Statements and Supplementary Data.......................................................16

9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  ............39

9A.     Controls and Procedures...........................................................................39

9B.     Other Information.................................................................................39

PART III

10.     Directors and Executive Officers of the Registrant............................................... 40

11.     Executive Compensation............................................................................40

12.     Security Ownership of Certain Beneficial Owners and Management....................................40

13.     Certain Relationships and Related Transactions....................................................40

14.     Principal Accounting Fees and Services............................................................40

PART IV

15.     Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................40
</TABLE>


                                       2
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

Introduction

1mage  Software,  Inc.,  (the  "Company")  develops  and markets  computer-based
document management systems that capture, store and display electronic files and
paper documents as graphical images.  Document  management systems like 1MAGE(R)
(pronounced  "one  image")  offer  organizations  of every  size the  ability to
deliver the information embedded in their documents to employees, customers, and
authorized persons across their existing computing infrastructure.  In addition,
the  Company  provides  the tools to  efficiently  manage the  proliferation  of
digital  documents for eBusiness  deployment.  The modular 1MAGE system captures
entire documents from a variety of sources.  Memos,  letters,  source documents,
contracts,  purchase orders,  word processing files,  e-mail,  computer reports,
faxes, industry and market studies,  spreadsheets,  databases,  multimedia, maps
and regulatory forms are examples of documents that are  automatically  captured
into  secure,  permanent  digital  images  that are  indexed  for  instantaneous
retrieval.  Using an open,  client/server  architecture design, 1MAGE provides a
comprehensive solution for scanning,  indexing,  storing and retrieving document
images so that they may be viewed,  printed,  faxed,  e-mailed or made available
for  eBusiness  or  eCommerce  applications.  The 1MAGE  system is  designed  to
integrate easily with existing IT infrastructure,  using an extensive library of
multi-platform APIs (Application  Programming  Interfaces),  rather than forcing
expensive investments in re-engineered or new computing hardware and software.

Today's  workplace  is  dramatically  changing  with the  advent  of  eBusiness,
eCommerce,  and  affordable  electronic  document  management.  During 2004, the
Company  concentrated  its efforts on selling  document  imaging software to its
niche markets. These markets include users that prefer a choice of (1) operating
platforms,  such as RedHat Linux, Windows, and UNIX, or (2) application software
developers  that  wish to offer a  document  imaging  solution  as part of their
portfolio.  The  Company  also  changed its sales  strategy in 2004.  Instead of
selling its products primarily through a direct sales organization,  the Company
made a concerted effort to establish a broad-based independent sales network for
its  imaging  software.  In addition  to Value  Added  Resellers  ("VARs") , the
Company  seeks to partner  with Value  Added  Dealers  ("VAD")  such as software
developers,  consultants,  and other  businesses which provide software to their
targeted  markets  in  specific  geographical  territories.  While  the  Company
recognizes that its increased  efforts to utilize an outside sales network had a
detrimental  effect on its sales during  2004,  the Company  believes  this is a
short term issue and that the  Company's  best  long-term  strategy  is to fully
develop that independent sales network.

Imaging Software Market

      Historically,  the Company  marketed its products through its direct sales
force but, as noted  above,  has  recently  changed  that  strategy,  to place a
greater emphasis on its distribution  channel partners.  The Company now focuses
its sales and marketing efforts on VARs, VADs, systems integrators,  developers,
consultants,  and other companies that market complementary software,  services,
or other  products.  The Company's  decision to build this outside sales network
was based,  in part, on its  recognition  that 1MAGE software has an established
presence  in  a  multitude  of  industries,   including  retail,   distribution,
education,  state  and  local  government,  healthcare,  manufacturing,  energy,
automotive,  public safety,  transportation  and utilities,  that should support
such a "partnering' approach.

      The  Company  offers  a  comprehensive  channel  partner  program,   which
provides,  in the context of a cooperative  marketing  effort,  a broad range of
sales, marketing, and technical support. The program includes technical training
and  assistance,  marketing  communications,   sales  training  and  assistance,
excellent  support and training,  lead  referral  services,  customized  product
literature, and a discounted demonstration/development system.

                                       3
<PAGE>

Products

      As  noted  above,  the  Company's   flagship  product  is  1MAGE(R),   its
proprietary  document  management  software package.  The Company is continually
enhancing this product  portfolio in order to improve its performance and expand
its possible uses.

      1MAGE(R)  Document  Management - 1MAGE is a powerful  electronic  document
management  system  created  to  operate  the  same on  Linux,  Windows(TM)  and
Unix-based  computer  systems.  It  provides a  comprehensive  solution  for the
scanning,  indexing,  storage and  retrieval  of images and is designed to file,
route,  track,  archive,  and manage an  organization's  incoming  and  outgoing
documents and electronic files.

Additional products include the following:

      o     1API for image-enabling an application using a toolkit
      o     1SCAN for scanning, pre-indexing, and bar code reading
      o     1FAX  for  inbound  and  outbound  fax or  e-mail  and  cover  sheet
            management
      o     1COLD/ERM for storing computer-generated formatted data
      o     1FORM for business form template administration
      o     1RENDITION  for  merging  spooled  data with  supporting  images for
            billing or other needs
      o     1WORKFLOW  for  electronically  moving a  document  from one task to
            another
      o     1OCR/OMR  for  automatic  indexing  and data capture via optical and
            mark character recognition
      o     1SUITE for bringing images to Windows-based PC clients
      o     1SERVER for accessing documents via the Internet
      o     1VIEW for using standard browsers to access images over the Intranet
            and Internet
      o     1ACCESS for bringing  images to desktop  computers that support JAVA
            programming languages
      o     1SEARCH for full text/keyword retrieval of documents
      o     1PUBLISH for selecting and recording  images on output media such as
            CD or DVD
      o     1BRIDGE - JAVA API tools for  accessing  foreign  databases for data
            verification and retrieval
      o     1GATEWAY - JAVA API tools for  managing  workflows  associated  with
            business process management requirements
      o     1MAGEwf - for managing  business process  workflows  utilizing "open
            source" technologies

A key element of the  Company's  product  line is its open  systems  technology,
namely:

      o     Open  Systems  compliant  with Linux,  Unix,  and Windows  Operating
            Systems
      o     Supports  file formats in most common  formats such as; TIFF,  JPEG,
            PCX, PCL, WAV, PDF, HTML or HPGL
      o     The server software  (1MAGE)  operates the same on Linux,  Unix, and
            Windows servers
      o     Supporting  clients include  Microsoft  Windows,  Linux,  X-Windows,
            ASCII, JAVA and browser clients
      o     Device connectivity via Ethernet or token ring networks using TCP/IP
            communication protocol
      o     Compatibility  with IBM AIX,  HP-UX,  Sun Solaris,  RedHat Linux and
            Windows
      o     Recognition technology and scanning tasks run on Microsoft Windows
      o     UniVerse and UniData ("U2") Relational Database software from IBM
      o     Support for J2EE technologies including JBoss(R),  MaxDB(R) (MySQL),
            WfmOpen(R),   Combined  to  form   1mage's   open  source   workflow
            applications: 1MAGEwf

                                       4
<PAGE>

      1MAGE includes several  distinguishing  features:  the ability to use many
different  types of  workstations,  the ability to quickly and easily  integrate
with the existing business  application  software using application  programming
interfaces ("APIs"), and the scalability to handle the needs of companies of all
sizes  economically.  Through the use of the Linux,  UNIX, and Windows operating
systems and open systems technology, the Company seeks to offer its customers an
imaging solution at a reasonable cost. Because 1MAGE is a server-based  product,
the Linux operating system ("O/S") has become very popular with end users of the
Company's software.

      1MAGE utilizes the Linux, UNIX, and Windows operating systems and IBM's U2
database  software.  The Company's  open systems  technology  makes its software
transportable to numerous hardware products from varying manufacturers.  Because
of the number of  hardware  manufacturers  using the Linux,  UNIX,  and  Windows
operating  systems,  the Company's  software  customers are rarely restricted in
their choice of hardware manufacturers.

      During 2004, sales of 1MAGE software  licenses  (excluding  annual license
fees) accounted for $412,000 (30% of total revenue); in 2003, revenue from sales
of software licenses accounted for $815,000 (39% of total revenue).

Services and Annual Fees

      The Company  licenses its 1MAGE  software to its  customers and charges an
annual license and  maintenance  fee,  which must be paid to continue  receiving
support,  updates and add-on  products for the  software.  During 2004 and 2003,
annual  license  fees   accounted  for  $703,000   (50%)  and  $786,000   (37%),
respectively,  of the Company's net sales. The Company believes recurring annual
license fees from new and existing  customers  are important to the stability of
the Company.  The Company also provides  professional  services to its customers
and business  partners.  These services include  preparation of image management
plans ("IMP"),  installation,  training,  image enabling existing software,  and
consulting  services for customers.  The Company  believes that its new workflow
product  1MAGEwf  will  increase  the  need  by  its  customers  for  additional
professional  services  as they  automate  business  processes  associated  with
document  management.  For the years  ended  December  31,  2004 and  2003,  the
revenues from these services  accounted for $244,000 (17%),  and $299,000 (14%),
of the Company's net sales.

Hardware Sales

      The Company also recommends  hardware and related products,  but typically
only sells specialized  peripheral products,  such as high-end scanners,  at the
customer's request. Computer hardware and peripheral products are purchased only
upon request to fill  specific  customer  orders,  no  inventory is  maintained.
Hardware is generally  shipped  directly from the  manufacturer to the customer.
During 2004,  hardware  sales  accounted for $37,000 (3% of total  revenue);  in
2003,  revenue  from sales of  hardware  accounted  for  $205,000  (10% of total
revenue).

Marketing and Distribution

      In 2004,  the  Company  radically  changed  its  sales  strategy  from one
primarily  focused on direct  sales to  end-users  through  its  employee  sales
organization to a distribution  channels approach,  where sales of the Company's
products will be primarily through business  partners.  By that change, the cost
associated with maintaining a dedicated  employee based end-user sales force was
eliminated. To date, the Company has signed partnering agreements for 1MAGE with
a variety of resellers (VARs),  dealers (VADs),  and marketing alliance partners
(MAPs)  specializing  in a number of  different  industries,  including  retail,
healthcare,  construction,  human resources, and distribution/manufacturing.  In
addition,  the Company  licenses  its software  and certain  other  products and
services  through  agreements with  Application  Service  Providers (ASP) in the
healthcare industry.  In 2004, the Company also began to license its products to

                                       5
<PAGE>

end-users  through  twelve  independent  sales  representatives.  The  Company's
overall  marketing  and sales  objective  is to  support  the  current  business
partners and to continue to enroll new software  integrators,  independent sales
representatives,  and consultants in the program.  The Company provides training
aids,  an  Internet  demonstration  site,  user  instruction  manuals  and other
documentation,  and a newsletter  to keep its partners,  as well as  prospective
resellers and customers,  informed of new product applications and developments.
In 2004 the Company established a consulting  certification program to train and
educate  outside  consultants  on the support of the  Company's  products.  As a
result of this program the Company  expects to outsource  some of its  technical
service and support projects when needed.

      The  general  strategy  is to assist its  partners  to (1) help  customers
define the goals for their  system,  (2)  provide the means of  achieving  those
goals  through   document   management   software,   workflow   processes,   and
appropriately  configured  computer  systems,  and (3) help  assure the  ongoing
success of this collaborative process by providing continuing support, including
on-site training and educational programs, and ongoing maintenance.  The Company
also  markets its  products  and  services  over the  Internet on its website at
www.1mage.com.

Customers

      The Company sells its 1MAGE software  primarily  through its  distribution
channels to businesses in a wide variety of industries and markets.

Sources of Supply

      The Company has a Value Add Reseller  (VAR)  Software  Agreement  with IBM
Corp. to sublicense their UniVerse and UniData database programs.  The agreement
authorizes the Company to include certain IBM database programs as part of their
imaging solution.  This agreement currently runs until September 28, 2005 and it
may be automatically  renewed for additional one (1) year terms. The Company has
designed  its  product  such that,  through the use of its  Application  Program
Interfaces ("API"s), third party software can be easily integrated into the core
products with minimal difficulty and effort.

Possible Fluctuations in Operating Results

      The  Company's  sales  cycle,  which  generally  commences  at the  time a
prospective  distribution partner or customer demonstrates a serious interest in
purchasing  a system or software  license,  and ends upon  execution  of a sales
contract,  is lengthy and not  predictable  with any degree of certainty.  Prior
sales and  implementation  cycles are not  necessarily  an  indication of future
cycles.  Operating  results  could vary from period to period as a result of the
length of the sales  cycle,  the timing of  individual  system  sales,  business
partners'  performance  and  conditions in the target markets and the economy in
general.

      Despite the negative  short-term  results during the transition  period in
2004,  it is the  Company's  expectation  that its recent  decision  to focus on
offering  its  proprietary  imaging  software  to a  broader  range of  business
partners  and  customers,  through its  distribution  channel  could  lessen the
historical  quarterly  fluctuations in the Company's  operating results.  In any
event,  however,  large volume sales,  special product  packaging,  or groups of
sales of software  licenses may still cause  significant  variances in quarterly
results that may be difficult to predict.

Trade Secret and Copyright Laws

      The Company  regards its software as proprietary and relies for protection
upon trade secret and  copyright  laws and  non-disclosure  agreements  with its
employees as well as restrictions on disclosure and transferability contained in
its software license agreements with its customers.  Despite these restrictions,
it may be possible for  competitors  or customers to copy,  or reverse  compile,
aspects of the Company's products or obtain information that the Company regards
as  proprietary.  Furthermore,  there can be no  assurance  that others will not
independently develop software products similar to those developed or planned by
the Company.

                                       6
<PAGE>

      Although  the  Company  believes  its  software  does not  infringe on the
proprietary  rights  of  others  and has not  received  any  notice  of  claimed
infringement,  it is  possible  that  portions of the  software  marketed by the
Company  could be claimed to  infringe on existing  proprietary  rights.  In the
unlikely event that any such  infringements are found to exist,  there can be no
assurance that any necessary  licenses or rights could be obtained,  or could be
obtained on terms  satisfactory  to the  Company.  Further,  in such event,  the
Company  could be required to modify the  infringing  software.  There can be no
assurance  that the  Company  would be able to do so in a  timely  manner,  upon
acceptable  terms and  conditions,  or at all;  even though the failure to do so
could have a material adverse effect on the Company.

Backlog

      As a practical  matter,  the  Company's  business has evolved to the point
where the Company has minimal  backlog at any given point in time.  With respect
to software  license sales,  because there is no significant  time delay between
receipt of an order and shipment of the software,  electronically  or otherwise,
there is effectively no backlog. For hardware, because of direct delivery of the
hardware  by the  manufacturer,  hardware  sales have such short lead times that
unfilled firm orders seldom, if ever, build up to significant levels.

      The  Company  normally  receives a deposit  of between  25% and 50% of the
hardware and software price when an order is placed. This deposit may or may not
be  returned  upon   cancellation,   depending  on  the   circumstances  of  the
cancellation.

Competition

      The  Company   experiences   intense  competition  in  its  business  from
competitors who target one or more of the same markets or market segments as the
Company.  Software and systems  that  perform many of the same  functions as the
Company's  systems and software are also  available from a number of competitors
of the Company.  Some of these  competitors are larger and have longer operating
histories,  significantly  greater  financial,  technical,  marketing  and other
resources,  significantly  greater name  recognition and a larger installed base
than we do. As a result,  these  competitors may be able to respond more quickly
to emerging  technologies  and changes in  customer  requirements,  or to devote
greater resources to the development,  promotion and sale of their products than
we can.

      The Company believes that usage of the Linux and Windows operating systems
and the IBM U2 databases has strengthened the Company's  competitive position by
making the Company's  software  compatible  with more types of hardware and with
the IBM U2 application  software offered by other software developers and system
integrators.  The Company further believes that its principal advantage over its
competitors is the Company's ability to give its customers and partners a choice
in selecting a Linux, UNIX, or Windows-based  open systems  architecture and the
IBM U2 database that can be offered at lower prices.

Limited Markets

      The Company's  channels program targets  complementary  markets and allows
the  Company to draw from a variety of  industries  with  respect to its imaging
software  products.  As noted  above,  the  Company's  strategy is to expand the
domestic  and  international  markets for its imaging  software by placing  more
emphasis on its distribution channel network of partners.

                                       7
<PAGE>

      The Company's  experience  has been that  economic  downturns or increased
competitive  pressures  in its niche  markets  sometimes  result in reduction or
deferral of capital expenditures or large purchases,  like software licenses, by
potential customers. On the other hand, certain adverse conditions can sometimes
lead  to  opportunities  as  potential  customers  downsize  to  smaller,   more
cost-efficient  computer systems or replace custom designed systems that require
higher levels of support and maintenance.

Product Development

      The  software  and  services  market  in which  the  Company  competes  is
characterized by (1) rapid  technological  change, (2) frequent  introduction of
new products and enhancements, and (3) changing customer needs. Accordingly, the
Company's future success depends on its ability to support existing products and
develop new products.

      During 2004, the Company developed a new release of 1MAGE(C) which employs
new technologies,  including workflow and business process management  (1MAGEwf)
requirements  and significant  development on creating JAVA and J2EE integration
and application  integration  tools. In addition,  improvements were made to the
hardware/software compatibility offerings available for Linux and Windows users.
During 2004 and 2003, the Company spent $267,000 and $261,000, respectively, for
computer software development.  The Company capitalizes its software development
costs once technological feasibility is established.

Employees

      As of March 11, 2005, the Company employed  sixteen  persons,  thirteen of
whom serve on a full-time basis and three on a part-time basis. Responsibilities
are divided as follows:  four persons in channel sales and  marketing,  eight in
technical  support  and  programming  functions,   and  four  in  administrative
positions.  In addition, the Company established a certification program in 2004
for outside technical  contractors and independent sales  representatives.  This
program is expected to facilitate outsourcing of some of the Company's technical
service and support  requirements  when necessary and to decrease the dependency
on employing additional personnel to do such work.

      The  Company  provides  incentive  compensation  packages  to  many of its
employees,  including its executive  officers.  The  Company's  chief  executive
officer,  David  R.  DeYoung,  receives  a  quarterly  bonus  equal to 5% of the
Company's pretax profits.  Sales and Consulting  personnel  receive a commission
based upon sales. The Company has a policy of encouraging the effort and loyalty
of all of its employees by making all employees  eligible for the grant of stock
options  under its Equity  Incentive  Plan,  subject to vesting  schedules.  The
Company  believes that these incentive  programs are important in attracting and
retaining  skilled  personnel.  The future success of the Company will depend in
large part upon the  quality of its  employees  and the  efforts  they expend on
behalf of the Company.

      None of the Company's  employees are represented by a labor union, and the
Company has experienced no work stoppage. The Company believes that its employee
relations are good.

ITEM 2. PROPERTIES

      The Company's executive offices consist of approximately 5,464 square feet
at Plaza Quebec, 6025 South Quebec Street, Suite 300, Englewood, Colorado, 80111
and are occupied  pursuant to a lease agreement  between the Company and Trammel
Crow,  Inc. with monthly rental  payments of $7,058,  currently,  and scaling to
$7,741 by the end of the lease term. The term of the lease commenced May 1, 2003
and will terminate on August 31, 2008. The landlord is responsible  for property
taxes,  utilities,  janitorial services,  repairs, and maintenance.  The Company
believes  that  its  facilities  and  equipment  are in good  condition  and are
satisfactory  for their present uses. As a condition of renewing the lease,  the
Company  requested and received two months free rent in 2004 at $6,830 per month
and two months free rent in 2005 at $7,058 per month. Rent is expensed under the
straight-line  method  over the term of the lease at $6,822 per month.  Deferred
rent at 12/31/04 is $12,636.

                                       8
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

      In May 1994,  the Company signed a software  license  agreement (the "1994
Agreement") with Reynolds and Reynolds, Inc. ("Reynolds")for the exclusive right
to sublicense  certain modules of 1MAGE (without payment of further license fees
to the Company) to businesses  primarily  engaged in retail sales of new or used
automobiles, trucks, or tractors (the "Licensed Software"). In 1996, the Company
signed a  subscription  and  maintenance  agreement  with  Reynolds  (the  "1996
Agreement") under which annual subscription fees are to be paid to the Company.

      On  January  18,  2002,  Reynolds  notified  the  Company of its intent to
terminate the 1996 Agreement  effective  April 22, 2002.  Reynolds had installed
the 1MAGE document  management  software in approximately  1,000 of its customer
sites in the United States and Canada.  As a result of various  disputes arising
out of the termination of the 1996 agreement,  including  Reynolds'  decision to
continue  sublicensing the Company's software  notwithstanding such termination,
the Company and Reynolds became involved in litigation.

      On June 21, 2002,  the Company filed a civil action seeking monies owed by
Reynolds under its 1996 Agreement with the Company in the District Court for the
City and County of Denver,  Colorado,  1mage Software,  Inc. v. The Reynolds and
Reynolds Co. Case No.: 02-CV-4701 ("the "Collection  Action").  In its complaint
in the Collection  Action,  the Company demanded  immediate  payment of $193,611
currently due under that contract  plus interest and costs.  Reynolds  deposited
the  $193,611  with  the  court  clerk,  pending  order  of the  court as to its
disposition  and has filed an answer  denying  liability.  The  Company  filed a
Motion for Summary Judgment to which Reynolds  responded,  denying liability and
stating  that in all events,  the amount due was only  $166,741.  The Court then
referred the matter to arbitration before the American Arbitration Association.

      A lawsuit was filed by the Company in the United States District Court for
the District of Colorado, 1mage Software, Inc. v. The Reynolds and Reynolds Co.,
et al., No. 02-K-1688 (OES), (the "Infringement  Action"),  in which the Company
sought damages for copyright  infringement  resulting from continuing use of the
Company's   software   without  any  license  or   authority   by  Reynolds  and
approximately  1,000  automobile  dealers  throughout  the  United  States.  The
Infringement Action was also referred to arbitration.

      In the  Arbitration,  besides  the  claims  raised by the  Company  in the
Collection Action and the Infringement Action,  Reynolds asserted a counterclaim
for $580,000,  alleging that the Company,  without  justification  or privilege,
advised  customers  and/or  prospects of Reynolds  that Reynolds no longer had a
license  to  distribute  the  Company  software.  The  Company  denied  that  it
improperly informed Reynolds' dealers.

      On June 17,  2004,  the Company  received  notification  from the American
Arbitration  Association  that all of the Company's  claims against Reynolds had
been dismissed and a second hearing would be held, as previously  scheduled,  on
October 11,  2004,  for  consideration  of Reynolds'  counterclaims  against the
Company. In this first phase of the arbitration,  the Arbitrator determined that
Reynolds has a perpetual license under the 1994 Agreement to all software listed
therein  and to all  software  related to  updates,  upgrades  and  enhancements

                                       9
<PAGE>

provided under the 1996 Agreement,  with one exception,  the Flex LM software in
use at Reynolds'  facilities.  The Flex LM software  provides the Company with a
means by which it could  control the  software's  features,  user count and time
periods  within which its licensees  would be enabled to operate their copies of
the Company's  Licensed  Software and shut down that software unless  additional
fees for  future  periods  were  paid.  The  Arbitrator  found  that the Flex LM
software  provides no benefit to Reynolds and was either  surplusage or provided
an actual impediment,  inconsistent with the 1994 Agreement, to Reynolds' use of
the Licensed  Software.  He also found that there was no basis for the Company's
claim that  Reynolds  either  breached any  agreement  or  infringed  any of its
copyright  rights.  Since  the 1994  Agreement  prohibits  the  Arbitrator  from
awarding costs or attorneys'  fees, he did not address those issues and no award
was made.  The  Arbitrator  also noted that the 1994 Agreement did not appear to
speak to the  allocation  or  award of  arbitration  fees  paid to the  American
Arbitration  Association  but  whether  any such  award  would be made  would be
reserved for the second phase of the arbitration.

      A second hearing was held on October 11 and 12, 2004, for consideration of
Reynolds'  counterclaims seeking $836,643 in damages from the Company. Among the
counterclaims  considered  by the  arbitrator  were those  based upon  Reynolds'
claimed  damages  from having to replace 39 copies of the  Company's  DocVantage
software  product that expired  after only a 1 year license with  Reynolds'  new
choice  of  software,  EDM.  It  was  the  Company's  contention  that  all  but
approximately  $40,000 of Reynolds' damage claims were barred by a limitation of
remedies clause contained in the 1996 agreement.  Reynolds claimed that the 1996
agreement  did not apply to the  counterclaims  but admitted that the Company is
entitled to the $193,611 in accounts receivable previously deposited by Reynolds
with the court in a related  case.  The Company  also  argued  that  $597,000 in
hardware costs claimed by Reynolds was unproven because the hardware in question
was returned to Reynolds and reused for other purposes by Reynolds. The November
12, 2004  decision of the  arbitrator  concerning  Reynolds'  counterclaims  was
issued on  November  17,  2004.  The  arbitrator  ruled in favor of  Reynolds on
substantially all of its  counterclaims,  finding that the Company breached both
the 1994 and 1996  agreements with Reynolds by delivering only 1 year DocVantage
licenses to 39 Reynolds  customers after Reynolds  terminated its agreement with
the Company.  The arbitrator refused to uphold the limitation of remedies clause
in the 1996  agreement on the grounds that it was  unconscionable  as applied to
the Company's decision to provide Reynolds with only 1 year DocVantage licenses.
While  admitting  that it was "not  simple" to devise a fair method of assessing
damages for the breach  beyond the  undisputed  $40,131  attributable  to the 39
software licenses, the arbitrator nevertheless allowed $36,205 for installation,
$40,725 for training,  and $275,000 of the total $577,273  Reynolds was found to
have spent for new  equipment,  for a total of $392,061 in damages to be paid by
the Company.

      Reynolds  subsequently  obtained  a  judgment  on the  arbitrator's  award
against the Company on the  counterclaims  and denial of the Company's claims in
the  United  States  District  Court for the  District  of  Colorado,  which had
retained  jurisdiction  of the dispute  pending  resolution of the  arbitration.
Since the parties no longer  disputed the Company's  entitlement to the $193,611
deposited with the court,  the net result of the judgment was that Reynolds took
the $193,611  deposited with the court and applied that deposit to the judgment,
so that the Company still owed the balance of $198,450 to Reynolds.



      Instead of satisfying  the balance of the  judgment,  the Company filed an
appeal from the court's  judgment to the United  States Court of Appeals for the
Tenth  Circuit  and in  April,  2005  filed  a cash  bond in the  amount  of the
remaining judgment pending appeal. The Company obtained the money needed to post
that bond by  borrowing  approximately  $180,000  in  additional  funds from the
private line of credit  extended to the Company by DEMALE,  LLC. DEMALE is owned
and  controlled  by members of the Company's  Board of Directors.  In connection
with DEMALE's loan of the additional  $180,000 to the Company,  which  increased
the total  amount  loaned  under that  private  line of credit to $468,000  plus
interest,  the  Company  and  DEMALE  agreed  to change  the price for  DEMALE's
conversion  right for the principal  amount of, and unpaid interest on, the line
of credit.  The conversion  price was previously equal to 80% of the fair market
value on the  date  that  DEMALE's  written  notice  of such  conversion  to the
Company's  Common Stock is received by the Company.  The  amendment  changed the
conversion price to $0.14 per share, or 80% of the fair market value on the date
of the written  notice,  whichever is lower.  As a result of the increase in the
amount owed to DEMALE under the line of credit to $500,000 and the fixing of the
maximum conversion price at $0.14 per share,  DEMALE is now the beneficial owner
of at least 3,571,429  shares, or 52.0% of the Company's  outstanding  shares of
common stock,  as calculated  under  Securities  Exchange Act Rule 13d-3(a).  In
connection  with the  amendment  of the line of credit  agreement,  DEMALE  also
agreed to extend the expiration date of the line of credit from June 30, 2005 to
June 30, 2007


                                       10
<PAGE>

      The  Company  intends  to  vigorously  pursue  its  appeal of the  adverse
judgment of the district court confirming (a) the arbitrator's award against the
Company and (b) the  arbitrator's  denial of all of the Company's claims against
Reynolds.  There can be no assurance that the Company will succeed in all or any
portion of its appeal.

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

      The  Company  did not submit any  matters  to a vote of  security  holders
through the  solicitation  of proxies or otherwise  during the fourth quarter of
the Company's calendar year ended December 31, 2004.

                                     PART II

ITEM  5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

      The Company's  Common Stock is quoted in the OTC Bulletin  Board under the
symbol ISOL. The following table sets forth, for the fiscal quarters  indicated,
the high and low bid prices per share for the Common  Stock as  reported  on the
OTC Bulletin Board.

                  2004
              ----------------------- --- ---------- ------- --- ----------
                                          High                   Low
              ----------------------- --- ---------- ------- --- ----------
              First Quarter           $        0.97          $       0. 31
              ----------------------- --- ---------- ------- --- ----------
              Second Quarter                   0.90                   0.51
              ----------------------- --- ---------- ------- --- ----------
              Third Quarter                    0.52                   0.15
              ----------------------- --- ---------- ------- --- ----------
              Fourth Quarter                   0.23                   0.15
              ----------------------- --- ---------- ------- --- ----------


                  2003
              ----------------------- --- ---------- ------- --- ----------
                                          High                   Low
              ----------------------- --- ---------- ------- --- ----------
              First Quarter           $        0.51          $        0.23
              ----------------------- --- ---------- ------- --- ----------
              Second Quarter                   0.56                   0.21
              ----------------------- --- ---------- ------- --- ----------
              Third Quarter                    0.40                   0.21
              ----------------------- --- ---------- ------- --- ----------
              Fourth Quarter                   0.55                   0.25
              ----------------------- --- ---------- ------- --- ----------

      These quotations reflect interdealer prices,  without retail mark-up, mark
down or commission and may not necessarily represent actual transactions.

                                       11
<PAGE>

      On March 25,  2005,  the closing bid price per share for the Common  Stock
was $0.17 as reported on the OTC Bulleting  Board. On that same date, there were
approximately 131 holders of record of the Common Stock.

Dividends

      The Company has never  declared or paid cash dividends on its Common Stock
and has no present intention to do so. For the foreseeable  futurethe  Company's
earnings,  if any,  will be utilized  to pay down its bank and private  lines of
credit and, if additional  funds are available,  will be retained to finance the
development and expansion of the Company's business. The declaration and payment
of future  dividends  will be determined by the Company's  Board of Directors in
light of conditions then existing,  including the Company's earnings,  financial
condition and capital requirements.

Issuer Repurchases of Registered Equity Securities

      There were no shares repurchased during the fourth quarter of 2004.

ITEM 6. SELECTED FINANCIAL DATA

      The  following  table sets  forth,  for the  periods  indicated,  selected
financial data of the Company. This table should be read in conjunction with the
financial  statements  and  notes  included  in Item 8 of this Form 10-K and the
section entitled "Management's  Discussion and Analysis of Results of Operations
and Financial Condition" following this section.

<TABLE>
<CAPTION>
Statements of Operations                                               Years Ended December 31,
---------------------------------------------------------------- ----------- ------------ ----------- ----------- ------------
In thousands, except for per share data:                            2004        2003         2002        2001        2000

---------------------------------------------------------------- ----------- ------------ ----------- ----------- ------------
<S>                                                                  <C>          <C>         <C>         <C>          <C>
Net Sales                                                            $1,396       $2,104      $2,242      $2,776       $2,163
Cost of Sales                                                           770          915       1,153       1,109          934
Gross Profit                                                            626        1,189       1,089       1,667        1,229
Gross Profit (as a % of Net Sales)                                      45%           57%         49%         60%          57%
Selling, General & Administrative expenses                            1,605        1,215       1,365       1,500        1,211
Income (Loss) before Income Taxes                                    (1,064)          86        (282)        161           11
Net Income (Loss)                                                    (1,124)          96        (282)        211            8
Net Income (Loss) Per Share                                            (.34)         .03        (.09)        .07          .00
Weighted Average Number of Outstanding Shares                         3,298        3,237       3,146       3,146        3,056
---------------------------------------------------------------- ----------- ------------ ----------- ----------- ------------

<CAPTION>

Balance Sheets                                                                  Years Ended December 31,
---------------------------------------------------------------- ----------- ------------ ----------- ----------- ------------
In thousands:                                                       2004        2003         2002        2001        2000

---------------------------------------------------------------- ----------- ------------ ----------- ----------- ------------
<S>                                                                  <C>       <C>            <C>        <C>          <C>
Working Capital/ (Deficit)                                           $(776)    $   175        $ 28       $ 140        $(93)
Total Assets                                                           871       1,674       1,562       1,496       1,428
Long Term Obligations                                                  216         201         207           1           3
Total Stockholders Equity(Deficit)                                    (261)        789         643         925         714
---------------------------------------------------------------- ----------- ------------ ----------- ----------- ------------
</TABLE>


                                       12
<PAGE>

ITEM  7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

                                    OVERVIEW

      Management believes that operating  performance of the Company during 2004
was  negatively  affected by the  short-term  impact of the Company's  change in
sales strategy from internal direct sales by Company employees,  to a partnering
or  indirect  sales  strategy  through  a  network  of  VARs,  VADs,  and  other
independent sales  representatives.  In addition,  a significant  portion of the
losses in 2004 are the result of the $392,000  award  against the Company on the
counterclaims  brought  against it by  Reynolds &  Reynolds  in the  arbitration
brought by the Company against  Reynolds.  Besides the general economic slowdown
in the technology  sector,  the extent to which the Company's  limited resources
were dedicated to the Reynolds litigation probably contributed to the poor sales
performance.   Thus,   identifying   specific  trends  based  on  the  Company's
performance in 2004 is particularly difficult.

      While interest in the Company's products remains positive, there can be no
assurance that the Company's revenue for 2005 will expand beyond current levels.
As such, the Company has implemented  stringent cost cutting measures.  There is
no certainty that the Company will in fact be profitable in 2005 but the Company
believes that its recurring annual license fee revenue,  tight expense controls,
and the  maturation  of its  re-directed  sales  strategy  will help  return the
Company to profitability by the end of the year.

                              Results of Operations
      Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

      The Company's  total revenue was $1.4 million for the year ended  December
31,  2004,  compared  to $2.1  million  for the year ended  December  31,  2003,
representing a decrease of $709,000  (34%).  Mid-year 2004, the Company  changed
its sales strategy from selling  through a direct sales force to selling through
business  partnerships in various  markets.  Unfortunately,  establishing  these
relationships  takes  time both in  signing up new  partners  and then  securing
business through those  relationships.  As a result,  the Company's revenue from
new business dropped 56% in 2004 as compared to 2003, primarily due to a decline
in new software licenses caused by the transition to an outside sales network.

      The  Company's  2004 and 2003  revenue  was  derived  from  four  sources:
software licenses,  annual  maintenance/license  fees, consulting services,  and
hardware sales.

      In 2004,  software  license  revenue  decreased 49%, or $403,000 from 2003
levels, primarily due to the drop in new business. Annual license fees decreased
11%, or $83,000 due to a few customers  going out of business or electing not to
renew maintenance. The professional service group's revenue decreased by $55,000
(18%) for the year primarily due to decreased services typically  generated from
new installations.  Hardware sales decreased 82%, or $168,000, from 2003 levels,
as the Company has changed its  distribution  strategy from a direct sales force
to that of a  business  partner  network,  where  most  partners  sell their own
hardware solutions.

      Gross  profit on revenue  for the year ended 2004 was 45%,  as compared to
57% for 2003,  primarily  due to the  decrease  in high profit  margin  software
sales. In 2004, selling,  general and administrative expenses increased $390,000
(32%) due to a $112,000  increase  in legal fees plus a  litigation  judgment of
$392,000  offset  by tight  expense  controls  across  all  departments  and the
elimination of its direct sales force. For the year ended December 31, 2004, the
Company reported a net loss of $1.1 million,  or $(.34) per share, a decrease of
$1.21  million  over net income of  $96,000  or $.03 per share for the  previous
year.

                                       13
<PAGE>

      The more pressing challenge faced by the Company today,  however,  is that
of  liquidity.  Because the Company has  limited  capital  resources,  namely an
undrawn balance of around $32,000 on its private convertible line of credit from
DEMALE,  LLC, it cannot  sustain  future losses without an adverse effect on its
liquidity and  operations.  In addition,  the Company's  potential  inability to
satisfy the bank's  request for a gradual pay down on its credit line could have
severe consequences for the Company.

     Year Ended December 31, 2003 Compared to Year Ended December 31, 2002.

      The Company's  total revenue was $2.1 million for the year ended  December
31,  2003,  compared  to $2.2  million  for the year ended  December  31,  2002,
representing  a decrease of  $138,000  (6%).  The  Company's  revenue  decreased
$428,000 as a result of the loss of the Company's largest customer, Reynolds and
Reynolds,  during the year as total revenue from Reynolds declined from $441,000
to  $13,000.  The Company  does not  anticipate  any  significant  revenue  from
Reynolds in 2004.

      The  Company's  revenue for 2003 and 2002 was derived  from four  sources:
software licenses,  annual  maintenance/license  fees, consulting services,  and
hardware sales.

      In 2003,  software  license  revenue  increased  6%, or $49,000  from 2002
levels,  of which a decrease of $121,000  was  attributable  to the loss of this
single  customer.  Without  the loss of this large  customer,  software  license
revenue would have  increased  $170,000.  Annual  license fees decreased 20%, or
$192,000  of  which a  decrease  of  $307,000  was  attributable  to the loss of
business  from this large  customer.  Without  the loss of this large  customer,
annual  license fees would have increased  $115,000.  The  professional  service
group's  revenue  decreased  by  $20,000  (6%)  for the  year  primarily  due to
decreased  consulting services provided due to the timing of year-end contracts.
Hardware sales of $205,000 increased $24,000 (13%) over $181,000 for 2002.

      Gross  profit on revenue  for the year ended 2003 was 57%,  as compared to
49% for 2002, primarily due to the increase in software sales. In 2003, selling,
general  and  administrative  expenses  decreased  $151,000  (11%)  due to tight
expense  controls  across all  departments of the Company.  In addition,  during
2003,  the  Company  settled a payable of  $138,000  that was due to a vendor in
connection with a software  purchase for an earlier  period.  For the year ended
December 31, 2003, the Company reported net income of $96,000 or $.03 per share,
an  improvement  of $378,000 over a net loss of $282,000 or $(.09) per share for
the previous year.

<TABLE>
<CAPTION>
---------------------------------------- --- ----------------- -- ----------------- --- -------------- -------------
                                                Year Ended           Year Ended           Increase/      Increase/
                                                 12/31/03             12/31/02           (Decrease)      (Decrease)
                                                                                              $              %
---------------------------------------- --- ----------------- -- ----------------- --- -------------- -------------
<S>                                      <C>                   <C>                  <C>                     <C>
Revenue, as reported                     $   2,104,367         $  2,242,089         $   (137,722)           (6%)
---------------------------------------- --- ----------------- -- ----------------- --- -------------- -------------
Less:  Reynolds Revenue                         13,318              441,152             (427,834)          (97%)
---------------------------------------- --- ----------------- -- ----------------- --- -------------- -------------
Revenue excluding Reynolds               $   2,091,049         $  1,800,937         $    290,112            16%
---------------------------------------- --- ----------------- -- ----------------- --- -------------- -------------
</TABLE>


                                       14
<PAGE>

                         Liquidity and Capital Resources

      The Company's cash and cash equivalents  decreased  approximately  $93,000
during the twelve  months  ended  December  31, 2004 as compared to December 31,
2003.  During 2004,  the Company used cash of $267,000 for deferred  development
expenses. The Company had deficit working capital of $776,000 as of December 31,
2004.  Included in current  liabilities is $310,000 for Deferred Revenue,  which
will  be  earned  throughout  2005  from  its  annual  license  and  maintenance
contracts. The Company had drawn $172,000 on its bank line of credit at December
31,  2004,  as compared to $139,000  drawn at  December  31,  2003.  The line is
collateralized by all accounts  receivable,  assets, and general  intangibles of
the  Company.  The  Company's  line of credit  agreement  with its bank  expired
February  24, 2005 and will not be renewed.  On March 31, 2005 the bank line was
advanced  $162,000.  The Company is currently in  negotiations  with the bank to
implement a payment  plan that will  amortize  the debt over a 48-month  period,
with a new maturity date of April 15, 2006.  The bank has granted the Company an
extension of time to repay the  promissory  note  underlying the line of credit,
which was due in full on March 31, 2005,  until April 15, 2005.  There can be no
assurance that the bank will agree to any additional extension or to any plan to
retire the debt over time or to any other  resolution  that is acceptable to the
Company.

      In April, 2003, the Company  established an additional line of credit with
DEMALE,  LLC,  a  limited  liability  corporation  owned and  controlled  by the
principal shareholders and members of the Board of Directors of the Company. The
initial  line  provided  for  borrowings  of up to  $300,000  and is  secured by
substantially  all of the Company's assets and is expressly  subordinated to the
bank's  line of  credit.  Under  the terms of the  agreement  with  DEMALE,  the
outstanding balance,  including unpaid principal and accrued but unpaid interest
can be converted by DEMAL:E to equity at any time. The  conversion  price is the
lower of $.14 or 80% of the fair market  value,  of the  Company's  stock at the
time of  conversion.  At December 31, 2004,  DEMALE had  advanced  $223,600,  as
compared to $54,600 at December 31, 2003.  On March 31, 2005,  DEMALE  agreed to
increase the line to $500,000 in order to fund the Company's  appeal bond in the
litigation  challenging  the  results of the  Reynolds  &  Reynolds  arbitration
proceeding.  As of March 31, 2005, the Company had advanced $468,000 on the line
of  credit.  DEMALE  also  agreed to extend the  expiration  date of the line of
credit from June 30, 2005 to June 30, 2007.

      As noted above in "Results of Operations", the termination by Reynolds and
Reynolds  ("Reynolds")  of its 1996 Agreement and the resulting  judgement had a
significantly adverse impact on the Company's 2004 financial results.

      The Company has developed a new, lower cost, strategy for the distribution
of its  products and  services.  The  downturn in revenue  associated  with this
change  in  strategy,  however,  has  required  the  Company  to bring  its cost
structure  in  line  with  its  available  revenue.  As a  result,  the  Company
implemented  new stringent cost cutting  measures  throughout 2004 and into 2005
that are expected to help improve its results of operations in 2005.

      The Company receives its revenues from software licenses, recurring annual
maintenance/license  fees,  consulting  services  and  minimal  hardware  sales.
Notwithstanding  the burdens  imposed by the  Reynolds'  judgement,  the Company
believes  that its  continued  relationship  with  DEMALE,  and the  cash  flows
generated from current operations, may be sufficient to meet its immediate needs
for working capital.

      The Company has no material commitments for capital expenditures for 2005.

      Contractual obligations at December 31, 2004 are as follows:

                                       15
<PAGE>

<TABLE>
<CAPTION>
--------------------- -------------------- ---------------------- --------------------- -------------------

                      Lines of Credit (1)    Capital Lease (2)      Operating Lease           Total
--------------------- -------------------- ---------------------- --------------------- -------------------
Year
--------------------- -------------------- ---------------------- --------------------- -------------------
<S>                               <C>                      <C>                  <C>                <C>
2005                              172,300                  5,668                71,487             249,455
--------------------- -------------------- ---------------------- --------------------- -------------------
2006                                    -                  5,250                88,335              93,585
--------------------- -------------------- ---------------------- --------------------- -------------------
2007                              223,600                    658                91,067             315,325
--------------------- -------------------- ---------------------- --------------------- -------------------
2008                                    -                     55                61,925              61,980
--------------------- -------------------- ---------------------- --------------------- -------------------
2009                                    -                      -                     -                   -
--------------------- -------------------- ---------------------- --------------------- -------------------
Thereafter                              -                      -                     -                   -
                                  -------                -------             ---------            --------
--------------------- -------------------- ---------------------- --------------------- -------------------
                                 $395,900                $11,631             $,312,814            $720,345
                                  =======                =======             =========            ========
--------------------- -------------------- ---------------------- --------------------- -------------------
</TABLE>

(1)   Lines of credit,  consist of two revolving line of credit agreements,  one
      with the bank that  expired  on  February  24,  2005 and one with  related
      parties that will expire on June 30, 2007. The Company is negotiating with
      the bank to pursue the option of making monthly  payments over the next 48
      months.   DEMALE  is  entitled  to  monthly  interest   payments  and  the
      outstanding principal balance is due at maturity. DEMALE, at their option,
      can elect to convert the debt to equity.

(2)   Amounts shown under capital lease arise under leases for office  equipment
      expiring in 2006 and 2008 with  monthly  lease  payments of  approximately
      $418 and $55.

Risks to Future Financial Performance

Severely  Limited  Capital  Resources.  As a result of the  Company's  operating
losses in 2004 and the $392,000  award  against it in the Reynolds  arbitration,
the Company's  capital  resources have been stretched to unprecedented  lengths.
The Company cannot bear any significant  operating or other losses in 2005 if it
is to  survive.  While  preliminary  indications  are that the  Company  has not
incurred such a significant loss in the first quarter of 2005, the Company still
requires the continuing  forbearance of its bank,  which has already declined to
renew the  $162,000  owed on its line of credit,  and the  continued  support of
DEMALE,  LLC, which the Company owes $468,000 as of March 31, 2005.  There is no
assurance  that such  forbearance  or support will  continue or that the Company
will not incur additional operating losses. Accordingly,  unless the Company can
obtain  additional  capital  to  cover  future  losses,  if the  Company  incurs
additional  losses or  otherwise  experiences  negative  cash  flow,  there is a
substantial  risk  that  the  Company  will not be able to  continue  as a going
concern.

Variable operating results. Our future operating results may vary significantly
and are difficult to predict due to a number of factors, of which many are
beyond our control. These factors include:

      o     Demand for our products;
      o     Productivity of our business partners;
      o     The level of product and price competition;
      o     The length of our sales cycle;
      o     The size and timing of individual license transactions;
      o     The delay or deferral of customer implementations;
      o     Our success in expanding our customer support  organization,  direct
            sales force and indirect distribution channels;
      o     The timing of new product introductions and product enhancements;
      o     Changes in our pricing policy;
      o     The mix of products and services sold;
      o     Our ability to develop and market new  products  and control  costs;
            and
      o     Current economic and political conditions

                                       16
<PAGE>

Current  Economic  and  Political  Conditions  May  Affect  Results.  Due to the
discretionary  nature of our  customers'  budget  and  purchase  cycles  and the
absence of long-term  customer  purchase  commitments,  it is expected to remain
difficult  for the  Company  to  avoid  significant  fluctuations  in  quarterly
operating  results.  On the other hand,  if the  overall  economy  continues  to
improve,  of which there can be no  certainty,  the Company  believes  that such
improvement will assist it in its return to profitability.

                          CRITICAL ACCOUNTING POLICIES

      In preparing  financial  statements,  management  must make  estimates and
judgments  that  affect  the  carrying  values  of  the  Company's   assets  and
liabilities  as  well as  recognition  of  revenue  and  expenses.  Management's
estimates and judgments are based on the  Company's  historical  experience  and
management's knowledge and understanding of current facts and circumstances. The
policy  discussed  below  is  considered  by  management  to be  critical  to an
understanding  of the Company's  financial  statements.  The application of this
policy places  significant  demands on  management's  judgment,  with  financial
reporting  results relying on estimations about the effect of the matter that is
inherently  uncertain.  For this policy,  management cautions that future events
rarely develop as a forecast, and estimates routinely require adjustment and may
require material adjustment.  There have been no significant changes in critical
accounting policies in the past year.

      Software Development Costs are capitalized when technological  feasibility
is  established.  Such costs are stated at the lower of unamortized  cost or net
realizable value. Amortization is computed using either the straight-line method
based on estimated economic lives of the products (five years) or the ratio that
current  product  revenues bear to the total of current and  anticipated  future
product  revenues,  whichever is greater.  It is reasonably  possible that those
estimates of anticipated future gross revenues, the remaining estimated economic
life of the products, or both will be reduced significantly in the near term due
to competitive  pressure.  As a result,  the carrying  amount of the capitalized
software  costs may be reduced  materially in the near term.  The net realizable
value of such  capitalized  costs is reviewed by management on a periodic basis,
and costs in excess of net realizable value, if any, are charged to operations.

      Revenue Recognition - Revenue from the sale of software licenses, computer
equipment,  and existing  application  software  packages is recognized when the
software and computer  equipment are shipped to the customer,  remaining  vendor
obligations  are  insignificant,  there are no significant  uncertainties  about
customer  acceptance  and  collectibility  is  probable.  Revenue  from  related
services, including installation and software modifications,  is recognized upon
performance  of services.  Maintenance  revenue is  recognized  ratably over the
maintenance period.

Forward Looking Statements

Some of the statements  made in this Form 10-K are not historical  facts and may
be considered "forward looking statements." All forward-looking  statements are,
of course, subject to varying levels of uncertainty.  In particular,  statements
which suggest or predict  future events or state the Company's  expectations  or
assumptions  as  to  future  events  may  prove  to  be  partially  or  entirely
inaccurate,  depending on any of a variety of factors,  such as the availability
of additional capital, the actions of the Company's creditor,  including but not
limited to the  Company's  bank and DEMALE,  LLC,  the  success of its  recently
implemented  cost  cutting,  the  results  of  the  Reynolds  appeal,   economic
conditions generally, new technological developments,  competitive developments,
results of pending litigation, competitive pressures, changes in the management,
personnel,  financial  condition  or business  objectives  of one or more of the
Company's  customers,   increased  governmental   regulation  or  other  actions
affecting the Company or its customers as well as other factors.


                                       17
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

1mage Software, Inc.
--------------------
INDEX TO FINANCIAL STATEMENTS                                             PAGE
--------------------------------------------------------------------------------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM....................19

BALANCE SHEETS - December 31, 2004 and 2003................................20

STATEMENTS OF OPERATIONS - For the Years Ended
   December 31, 2004, 2003, and 2002 ......................................21

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) - For the Years Ended
   December 31, 2004, 2003, and 2002.......................................22

STATEMENTS OF CASH FLOWS - For the Years Ended
   December 31, 2004, 2003, and 2002.......................................23

NOTES TO FINANCIAL STATEMENTS..............................................25

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE............................... ...............38

SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS..........................39


                                       18
<PAGE>

             Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders
1mage Software, Inc.
Englewood, Colorado

We have audited the  accompanying  balance sheets of 1mage Software,  Inc. as of
December  31,  2004  and  2003,  and  the  related   statements  of  operations,
shareholders'  equity  (deficit),  and cash flows for each of the three years in
the  period  ended  December  31,  2004.  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 the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  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 1mage  Software,  Inc. as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2004, in conformity
with accounting principles generally accepted in the United States of America.

The accompanying  financial  statements have been prepared  assuming the Company
will  continue  as a going  concern.  As  discussed  in Note 11, the Company has
suffered  recurring losses from operations and has a net capital deficiency that
raises  substantial  doubt about its  ability to  continue  as a going  concern.
Management's plans in regard to these matters are also described in Note 11. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.

                                                                       BKD, LLP

Denver, Colorado
February 25, 2005, except for Note 4 as to which the date is April 6, 2005


                                       19
<PAGE>

1mage Software, Inc.
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------

                                                                       2004           2003
----------------------------------------------------------------------------------------------
<S>                                                                <C>            <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                       $    50,503    $   143,505
   Receivables:
       Trade(less allowance: 2004, $3,750; 2003, $20,000)               81,851        609,216
   Inventory                                                             5,756         11,517
   Prepaid expenses and other current assets                             2,033         55,457
   Employee advances                                                       393         19,631
   Deferred tax asset                                                       --         20,000
                                                                   -----------    -----------
       Total current assets                                            140,536        859,326

PROPERTY AND EQUIPMENT, at cost, net                                    33,816         43,465

OTHER ASSETS:
   Software development costs, net                                     680,613        694,262
   Loan costs, net                                                       8,649         25,929
   Deferred tax asset                                                       --         40,000
   Rent/Security deposit                                                 7,841          7,841
   Inventory                                                                --          2,958
                                                                   -----------    -----------
TOTAL ASSETS                                                       $   871,455    $ 1,673,781
                                                                   ===========    ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
   Current portion of capital lease obligations                    $     4,124    $     3,663
   Deferred revenue                                                    310,403        287,000
   Line of credit - Bank                                               172,300             --
   Accounts payable                                                     60,002        162,255
   Accrued liabilities                                                 370,040        230,958
                                                                   -----------    -----------
       Total current liabilities                                       916,869        683,876
                                                                   -----------    -----------
LONG-TERM OBLIGATIONS:
   Capital lease obligations                                             5,311          7,105
   Deferred rent                                                        12,636             --
   Line of credit - Bank                                                    --        139,314
   Line of credit - Related Parties, net of discount                   197,772         54,600
                                                                   -----------    -----------
                                                                       215,719        201,019
                                                                   -----------    -----------
SHAREHOLDERS' EQUITY(DEFICIT):
   Common Stock, $.004 par value - 10,000,000 shares authorized;
      shares outstanding: 2004 and 2003- 3,302,597 and 3,287,597        13,210         13,150
   Additional paid-in capital                                        7,361,988      7,288,455
   Accumulated deficit                                              (7,636,331)    (6,512,719)
                                                                   -----------    -----------
      Total shareholders' equity(deficit)                             (261,133)       788,886
                                                                   -----------    -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY(DEFICIT)                  $   871,455    $ 1,673,781
                                                                   ===========    ===========
</TABLE>

See notes to financial statements.

                                       20
<PAGE>

1mage Software, Inc.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                           2004            2003            2002
--------------------------------------------------------------------------------
<S>                                     <C>              <C>          <C>
REVENUE:
   System sales and software licenses   $   448,994      1,019,708    $   946,071
   Services and annual fees                 946,595      1,084,659      1,296,018
                                        -----------    -----------    -----------
      Total revenue                       1,395,589      2,104,367      2,242,089
                                        -----------    -----------    -----------
COST OF REVENUE:
   System sales and software licenses       366,001        537,623        623,242
   Services and annual fees                 403,571        377,380        529,791
                                        -----------    -----------    -----------
      Total cost of revenue                 769,572        915,003      1,153,033
                                        -----------    -----------    -----------
GROSS PROFIT                                626,017      1,189,364      1,089,056

OPERATING EXPENSES:
   Selling, general & administrative      1,605,201      1,214,577      1,365,214
                                        -----------    -----------    -----------
LOSS FROM OPERATIONS                       (979,184)       (25,213)      (276,158)
                                        -----------    -----------    -----------
OTHER INCOME/(EXPENSE):
   Interest income                              395          1,701          3,396
   Interest expense                         (85,016)       (29,467)        (9,595)
   Other Income                                 193        138,519             --
                                        -----------    -----------    -----------
      Total other income (expense)          (84,428)       110,753         (6,199)
                                        -----------    -----------    -----------
INCOME/(LOSS) BEFORE INCOME TAXES        (1,063,612)        85,540       (282,357)

PROVISION/(CREDIT) FOR INCOME TAXES          60,000        (10,000)            --
                                        -----------    -----------    -----------
NET INCOME/(LOSS)                       $(1,123,612)        95,540    $  (282,357)
                                        ===========    ===========    ===========

BASIC AND DILUTED INCOME
(LOSS) PER COMMON SHARE                 $     (0.34)           .03    $      (.09)
                                        ===========    ===========    ===========

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING                 3,298,241      3,236,610      3,146,554
                                        ===========    ===========    ===========
</TABLE>

See notes to financial statements.


                                       21
<PAGE>

1mage Software, Inc.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                               Common Stock          Additional
                                                        ------------------------      Paid-In     Accumulated
                                                           Shares      Amount         Capital       Deficit         Total
                                                        ---------------------------------------------------------------------
<S>               <C>                                   <C>          <C>            <C>           <C>            <C>
Balances, January 1, 2002                               3,146,554    $    12,586    $ 7,238,658   $(6,325,902)   $   925,342

    Net loss                                                   --             --             --      (282,357)      (282,357)

Balances, December 31, 2002                             3,146,554    $    12,586    $ 7,238,658   $(6,608,259)   $   642,985

    Issuance of stock for services                         38,043            152          6,848                        7,000

    Issuance of stock for loan origination fee             90,000            360         20,340                       20,700

    Issuance of warrants for loan origination fee               0              0         18,189                       18,189

    Issuance of stock for exercise of stock options        13,000             52          4,420                        4,472

    Net income                                             95,540         95,540

Balances, December 31, 2003                             3,287,597         13,150      7,288,455    (6,512,719)       788,886

    Issuance of stock for exercise of stock options        15,000             60          6,383                        6,443

    Discount recorded on DEMALE line of credit                 --             --         67,150

    Net loss                                                                                       (1,123,612)    (1,123,612)
                                                        ---------------------------------------------------------------------
Balances, December 31, 2004                             3,302,597    $    13,210    $ 7,361,988   $(7,636,331)   $  (261,133)
                                                        =====================================================================
</TABLE>

See notes to financial statements.


                                       22
<PAGE>

1mage Software, Inc.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------

                                                                               2004            2003           2002
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings/(loss)                                                          $(1,123,612)   $    95,540    $  (282,357)
Adjustments to reconcile earnings/(loss) to net cash provided by operating
activities:
   Depreciation and amortization                                                 297,226        306,292        323,096
   Amortization of deferred loan costs                                            17,280         12,960             --
   Amortization of debt discount                                                  41,322             --             --
   Deferred rent                                                                  12,636             --             --
   Settlement of payable                                                              --       (138,375)            --
   Deferred revenue                                                               23,403          6,000         48,000
   Deferred tax asset                                                             60,000        (10,000)            --
   Issuance of stock options for services                                             --          7,000             --
   Changes in assets and liabilities:
     Receivables                                                                 527,365        (59,761)      (127,478)
     Inventory                                                                     8,719          4,983         (7,430)
     Prepaid expenses and other assets                                            72,662        (59,426)        (7,806)
     Accounts payable                                                           (102,253)        22,456         90,296
     Accrued liabilities                                                         139,082         82,698          1,750
                                                                             -----------    -----------    -----------
           Net cash provided by (used for) operating activities                  (26,170)       270,367         38,071
                                                                             -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment                                                (4,584)       (13,180)        (6,103)
Additions to capitalized software                                               (267,351)      (261,346)      (292,015)
                                                                             -----------    -----------    -----------
           Net cash used for investing activities                               (271,935)      (274,526)      (298,118)
                                                                             -----------    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:

Net borrowings on line of credit - related parties                               169,000         54,600             --
Net borrowings (repayments) on line of credit - bank                              32,986        (60,686)       200,000
Repayment of long-term obligations                                                (3,326)          (460)        (2,636)
Proceeds from exercise of Common Stock options                                     6,443          4,472             --
                                                                             -----------    -----------    -----------
           Net cash provided by (used for) financing activities                  205,103         (2,074)       197,364
                                                                             -----------    -----------    -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                                                                 (93,002)        (6,233)       (62,683)
CASH AND CASH EQUIVALENTS, beginning of year                                     143,505        149,738        212,421
                                                                             -----------    -----------    -----------

CASH AND CASH EQUIVALENTS, end of year                                       $    50,503    $   143,505    $   149,738
                                                                             -----------    -----------    -----------
SUPPLEMENTAL CASH FLOWS INFORMATION
     Issuance of stock and stock purchase warrants
        for deferred loan origination fees related to the

        DEMALE, LLC line of credit                                           $        --    $    38,889    $        --

    Beneficial conversion option associated with DEMALE
        line of credit                                                       $    67,150    $        --    $        --
</TABLE>

See notes to financial statements


                                       23
<PAGE>

1mage Software, Inc.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

<TABLE>
<CAPTION>
|---------------------------------------------------------------------------------------------------------------------------------

                                                                                       2004             2003           2002
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>             <C>             <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

                                                           Cash paid for interest   $      15,160   $      14,774   $       9,595
                                                                                    =============   =============   =============

                                                                Income taxes paid   $       2,500   $       2,500   $       2,500
                                                                                    =============   =============   =============

SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:

                        Acquisition of property and equipment by assuming capital

                                                                lease obligations   $       1,993   $          --   $      10,987
                                                                                    =============   =============   =============
</TABLE>


                                       24
<PAGE>

1mage Software, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, AND 2002

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION

      Organization and Nature of Business - 1mage Software, Inc. (the "Company")
      was incorporated in Colorado in December 1981.

      The  Company  develops  and  markets  a  Linux,  UNIX,  and  Windows-based
      electronic  document image  management and retrieval  system.  The Company
      earns the majority of its revenues in the United States.

      Cash   Equivalents  -  The  Company   considers  all  highly  liquid  debt
      instruments purchased with an original maturity of three months or less to
      be cash equivalents.

      Inventories consist of third party software and are stated at the lower of
      cost (specific  identification  method) or market (net realizable  value).
      This software is ultimately integrated into the Company's products.

      Property and Equipment is stated at cost.  Depreciation  and  amortization
      are computed  using the  straight-line  method over the  estimated  useful
      lives  (generally five years) of the assets or the lease term, if shorter.
      The Company  capitalizes  all  expenditures  for property and equipment in
      excess of $500.  For the years ended  December 31, 2004,  2003,  and 2002,
      depreciation expense totaled $16,226, $18,292, and $21,896, respectively.

      Advertising Costs are expensed as incurred.  Advertising  expenses totaled
      $40,522, $63,552, and $118,373, in 2004, 2003 and 2002, respectively.

      Software Development Costs are capitalized when technological  feasibility
      is established.  Such costs are stated at the lower of unamortized cost or
      net  realizable   value.   Amortization   is  computed  using  either  the
      straight-line  method  based on estimated  economic  lives of the products
      (five years) or the ratio that current product  revenues bear to the total
      of current and anticipated future product revenues, whichever is greater.

      It is reasonably possible that those estimates of anticipated future gross
      revenues,  the remaining estimated economic life of the products,  or both
      will  be  reduced  significantly  in the  near  term  due  to  competitive
      pressure.  As a result,  the carrying amount of the  capitalized  software
      costs may be reduced materially in the near term. The amounts  capitalized
      for the years ended  December  31,  2004,  2003,  and 2002 were  $267,351,
      $261,346, and $296,510, respectively.  Amortization of these costs totaled
      $281,000, $288,000, and $301,200,  respectively.  The net realizable value
      of such  capitalized  costs is reviewed by management on a periodic basis,
      and  costs in excess of net  realizable  value,  if any,  are  charged  to
      operations.

      Loan Costs are amortized using the effective interest method over the term
      of the debt agreement.

      Revenue Recognition - Revenue from the sale of software licenses, computer
      equipment,  and existing  application software packages is recognized when
      the software and computer equipment are shipped to the customer, remaining
      vendor   obligations   are   insignificant,   there  are  no   significant
      uncertainties  about customer  acceptance and  collectibility is probable.
      Revenue  from  related  services,   including  installation  and  software
      modifications,  is recognized  upon  performance of services.  Maintenance
      revenue is recognized ratably over the maintenance period.


                                       25
<PAGE>

      A single customer, Reynolds and Reynolds,  accounted for 0%, 0.1%, and 20%
      of revenues  in 2004,  2003,  and 2002,  respectively.  No other  customer
      accounted for more than 10% of revenue for 2004, 2003, or 2002.

      Debt Discount - is amortized using the effective  interest method over the
      term of the debt agreement.

      Accounts  Receivable - Accounts receivable are stated at the amount billed
      to customers.  The Company  provides an allowance  for doubtful  accounts,
      which  is  based  upon  a  review  of  outstanding   accounts  receivable,
      historical  collection  information and existing economic conditions.  The
      Company performs credit evaluations of its customers'  financial condition
      and generally does not require collateral.  The Company retains a security
      interest in the  equipment  and software sold until they are paid in full.
      Accounts  receivable  are ordinarily due 30 days after the issuance of the
      invoice, with those customers not meeting those requirements being subject
      to stricter credit policies.  Delinquent receivables are written off based
      on  individual  credit  evaluation  and  specific   circumstances  of  the
      customer.

      Three customers  accounted for 41%, 13% and 11% of accounts  receivable at
      December 31, 2004. One customer  accounted for 31% of accounts  receivable
      at December 31, 2003. Three different customers accounted for 32%, 12% and
      11% of accounts receivable at December 31, 2002.

      Earnings (Loss) per Share is computed by dividing net income (loss) by the
      weighted average number of common and equivalent shares outstanding during
      the year. Fully diluted earnings per share are either anti-dilutive or not
      materially different from basic earnings per share.

      Income Taxes The Company  follows the liability  method of accounting  for
      income  taxes  in  accordance  with  Statement  of  Financial   Accounting
      Standards  (SFAS) No. 109.  Under this method,  deferred  income taxes are
      recorded based upon  differences  between the financial  reporting and tax
      bases of assets and  liabilities  and are measured using enacted tax rates
      and laws that will be in effect when the underlying  assets or liabilities
      are received or settled.

      The Company has  recorded a valuation  allowance  against the deferred tax
      assets due to the uncertainty of ultimate realizability.

      Stock-based  Compensation  At  December  31,  2004,  the Company has three
      stock-based employee compensation plans, which are described more fully in
      Note 5. The Company  accounts  for these plans under the  recognition  and
      measurement  principles of APB Opinion No. 25, Accounting for Stock Issued
      to  Employees,  and  related  Interpretations.   No  stock-based  employee
      compensation cost is reflected in net income, as all options granted under
      those  plans  had an  exercise  price  equal  to the  market  value of the
      underlying common stock on the grant date. The following table illustrates
      the effect on net income and earnings per share if the company had applied
      the fair value  provisions  of FASB  Statement  No.  123,  Accounting  for
      Stock-Based Compensation, to stock-based employee compensation.


                                       26
<PAGE>

<TABLE>
<CAPTION>
                                                                 Year Ended December 31
                                                      -----------------------------------------
                                                          2004          2003            2002
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Net income (loss), as reported                        $(1,123,612)   $    95,540    $  (282,357)
Less:  Total stock-based employee compensation cost
   determined under the fair value based method,
   net of income taxes                                    (28,415)      (105,885)       (97,166)
                                                      -----------    -----------    -----------
Pro forma net income (loss)                           $(1,152,027)   $    10,345    $  (379,523)
                                                      ===========    ===========    ===========
Earnings per share:
Basic and Diluted - as reported                       $     (0.34)   $      0.03    $     (0.09)
                                                      ===========    ===========    ===========
Basic and Diluted - pro forma                         $     (0.35)   $        --    $     (0.12)
                                                      -----------    ===========    ===========
</TABLE>


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

2.    PROPERTY AND EQUIPMENT

      Property and equipment at December 31 consists of the following:

                                                            2004         2003
                                                         ---------    ---------
Equipment                                                $ 340,425    $ 666,277
Furniture                                                   57,035       57,088
Leasehold improvements                                      10,903       10,903
                                                         ---------    ---------
                                                           408,363      734,268
Less: accumulated depreciation                            (374,547)    (690,803)
                                                         ---------    ---------
                                                         $  33,816    $  43,465
                                                         =========    =========

3.    ACCRUED LIABILITIES

      Accrued liabilities at December 31 consist of the following:

                                                         2004             2003
                                                       --------         --------
Sales tax payable                                      $ 52,475         $ 73,770
Accounting and audit fees                                 6,500            9,521
Accrued compensation                                     16,140           80,873
Litigation                                              198,389                0
Deferred rent                                            12,636                0
Other                                                    96,536           66,794
                                                       --------         --------
                                                        382,676          230,958
Less: Deferred rent - long-term                          12,636                0
                                                       --------         --------
                                                       $370,040         $230,958
                                                       ========         ========

4.    LINES OF CREDIT

      Bank

      On February 24, 2004, the Company entered into a $200,000 annual revolving
      bank  line of credit  that  expired  on  February  24,  2005 and had borne
      interest at prime plus 1.75% (total rate of 7.0% at December 31, 2004) not
      to exceed 18%, and was collateralized by all accounts receivable,  assets,
      and general  intangibles of the Company.  The proceeds from this bank line
      of credit  were used to payoff  the bank line of credit  that  existed  at
      December 31, 2003. Total borrowings  outstanding  under the line of credit
      were $172,300 at December 31, 2004. The bank has informed the Company that
      the line will not be renewed.  On March 25, 2005,  the bank line of credit
      was  amended to extend the due date  until  April 15,  2005 and reduce the
      line to $162,300.  The Company is currently in negotiations  with the bank
      to  implement a payment  plan that will  amortize the debt over a 48-month
      period, with a new maturity date of April 15, 2006.

      The  Company had a $200,000  annual  revolving  bank line of credit  which
      expired on February  24, 2004 and had borne  interest at the greater of 7%
      or prime plus  1.5%,  not to exceed  18%,  and was  collateralized  by all
      accounts  receivable  and  general  intangibles  of  the  Company.   Total
      borrowings  outstanding under the line of credit were $139,314 at December
      31, 2003.


      Related Parties

      On  April  1,  2003,  the  Company  entered  into a  $300,000  convertible
      revolving  line-of-credit  agreement (the Agreement) with DEMALE,  LLC, an
      entity owned by certain  stockholders of the Company. The lender may elect
      to convert all or any portion of the unpaid  principal  and interest  owed
      under the line at the  termination  of the  Agreement  into  shares of the
      Company's  common  stock at a  conversion  price  equal to 80% of the fair
      market  value on that date.  The  estimated  fair value of the  beneficial
      conversion  terms related to this  convertible  line of credit amounted to
      $67,150  and was  recorded  as a  discount  on the line of credit  with an
      offsetting  credit to additional  paid-in capital.  In connection with the
      Agreement, the Company issued 90,000 shares of restricted common stock and
      stock  purchase  warrants  to  purchase  an  additional  90,000  shares of
      restricted  common stock as payment for loan  origination  costs. The line
      expires on June 30, 2005 and requires the Company,  among other things, to
      maintain  certain  financial  conditions.  At December  31, 2004 and 2003,
      there was $223,600 and $54,600, respectively,  borrowed against this line.
      The line is secured by  substantially  all of the Company's  assets and is
      subordinated  to the bank line of credit.  Interest is accrued and payable
      quarterly at the greater of 7% or prime plus 1.5% (total  interest rate of
      7.0% at December 31,  2004).  At December  31, 2004 and 2003,  accrued and
      unpaid interest was $12,560 and $1,733,  respectively,  and is included in
      the balance under the heading "Accrued  liabilities." On February 7, 2005,
      the Board of Directors  voted to amend the line and,  effective  March 31,
      2005, the line was amended to increase the line to $500,000 and extend the
      due date until June 30, 2007 or such  earlier  date as is mutually  agreed
      upon by the Company  and  DEMALE.  Additionally,  in  connection  with the
      amendment,  DEMALE right to convert any or all of the unpaid principal and
      interest into shares of the  Company's  common stock was set at the lesser
      of $0.14 per share, that price being equal to 80% of the fair market value
      as of the date of the amendment, or 80% of the fair market value as of the
      date of the actual conversion.

5.    SHAREHOLDERS' EQUITY

      Stock Compensation Plans

      At December  31,  2004,  the Company  has three  stock-based  compensation
      plans,   which  are  described  below.  The  Company  applies   Accounting
      Principles  Board  (APB)  Opinion  25  and  related   interpretations   in
      accounting  for its  plans.  Accordingly,  no  compensation  cost has been
      recognized.  Had  compensation  cost for the Company's  three  stock-based
      compensation plans been determined based on the fair value at the dates of
      awards under those plans consistent with the method of FASB Statement 123,
      the Company's  net income (loss) and earnings  (loss) per share would have
      been as indicated below:


                                       28
<PAGE>

<TABLE>
<CAPTION>
                                                                 2004              2003              2002
                                                             ------------      -----------       -------------
<S>                                                          <C>               <C>               <C>
      Net Income (Loss):
                                         As Reported         $ (1,123,612)     $    95,540       $    (282,357)
                                         Pro Forma           $ (1,152,027)     $   (10,345)      $    (379,523)

      Earnings (Loss) Per Common Share:
                                         As Reported         $      (0.34)     $      0.03       $       (0.09)
                                         Pro Forma           $      (0.35)     $        --       $       (0.12)
</TABLE>

      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 for grants in 2004, 2003, and 2002:

                                        2004           2003            2002
                                    ------------    -----------    -------------

      Dividend Yield                      0%             0%             0%
      Expected Volatility               134%          1328%           128%
      Risk-Free Interest Rate          5.00%          4.25%          4.25%
      Expected Lives                    5.0 years      9.0 years      8.8 years


      The Black-Scholes option-pricing model was developed for use in estimating
      the fair value of traded options,  which have no vesting  restrictions and
      are freely transferable.  In addition, option valuation models require the
      input of highly subjective assumptions, including the expected stock price
      volatility.   Because  the   Company's   employee   stock   options   have
      characteristics  significantly different from those of traded options, and
      because changes in the subjective input  assumptions can materially affect
      the fair value estimate,  in management's  opinion, the existing models do
      not necessarily provide a reliable single measure of the fair value of its
      employee stock options.

      1996 Equity Incentive Plan

      In September 1996, the Board of Directors  authorized  1,000,000 shares of
      Common  Stock for  issuance  under its 1996 Equity  Incentive  Plan ("1996
      Plan") as incentive stock options ("ISOs") or non-qualified  stock options
      ("NQSOs"). On June 7, 2004, the Board of Directors voted to amend the 1996
      Plan to increase the number of authorized shares of Common Stock available
      for issuance from 1,000,000 shares to 1,200,000 shares. The Company grants
      ISOs only to employees.  The Company grants NQSOs and restricted  stock to
      persons who are  employees  of the Company and to  non-employee  directors
      under the 1996 Plan.

      The options are granted to purchase  Common Stock at the fair market value
      on the  grant  date or at  other  prices  as  determined  by the  Board of
      Directors.  The  option-vesting  period is  determined at the time of each
      grant, and all options expire five to ten years from the grant date.


                                       29
<PAGE>

      A summary of the 1996 Plan stock option activity follows:

<TABLE>
<CAPTION>
      -----------------------------------------------------------------------------------------------------

                                                      Outstanding           Exercise          Weighted Avg.
                                                        Shares               Price           Exercise Price
      -----------------------------------------------------------------------------------------------------
<S>                                               <C>                     <C>                     <C>
         Balances, January 1, 2002                          770,000                                .59
         Granted                                              8,000           $.51                 .51
         Canceled                                           (13,500)      $.56 - $.70             (.66)
                                                  -----------------

         Balances, December 31, 2002                        764,500                                .59
         Granted                                            112,000       $.31 - $.39              .34
         Canceled                                           (74,500)      $.51 - $1.43            (.67)
                                                  -----------------

         Balances, December 31, 2003                        802,000                                .55
         Granted                                             63,151       $.15 - $.59              .32
         Exercised                                           (9,000)      $.31 - $.63             (.48)
         Canceled                                           (65,000)      $.31 - $1.29            (.60)
                                                  -----------------

         Balances, December 31, 2004                        791,151                               .53
                                                  =================
</TABLE>

      The following table summarizes  information  about stock options under the
      plan at December 31, 2004:

<TABLE>
<CAPTION>
                                             Outstanding                              Exercisable
                        --------------------------------------------------    ---------------------------
                                            Weighted
                                             Average          Weighted                         Weighted
        Range of                            Remaining         Average                          Average
        Exercise             Number        Contractual        Exercise          Number         Exercise
         Prices           Outstanding         Life             Price          Exercisable        Price
      ------------      --------------   --------------    ---------------    -----------     -----------
<S>                         <C>             <C>                 <C>             <C>               <C>
      0.15 to 0.44          387,151         4.5 years           0.39            342,041           0.41
      0.51 to 0.84          396,000         5.5 years           0.64            383,665           0.64
      1.29 to 1.44            8,000         5.0 years           1.36              8,000           1.36
</TABLE>

      At December 31, 2004,  options for 733,706 shares were  exercisable  under
      the 1996 Plan. There were 201,849 shares available for future grant.

      The weighted-average grant-date fair value of options granted during 2004,
      2003, and 2002 were $0.32, $0.34, and $0.51, respectively.

      1994 Stock Option and Grant Plan

      In April 1994, the Company  authorized  700,000 shares of Common Stock for
      issuance  under its 1994  Stock  Option and Grant  Plan  ("1994  Plan") to
      employees,  consultants  and  contractors  of the  Company.  The  Plan was
      amended in 2002 to permit grants to employees who were also members of the
      board of directors.

      The options are granted to purchase  Common Stock at the fair market value
      on the date of grant or at other  prices  as  determined  by the  Board of
      Directors  ("the  Board").  Options  issued  under  the 1994  Plan  become
      exercisable in one or more  installments  during its term and the right to
      exercise may be cumulative,  as determined by the Board. Options expire as
      determined  by the  Board,  but not more  than 10 years  after the date of
      grant.


                                       30
<PAGE>

      Details of activity under the 1994 Plan are as follows:

<TABLE>
<CAPTION>
      -----------------------------------------------------------------------------------------------------------

                                                                                                Weighted Average
              Stock Options                            Outstanding           Exercise Price      Exercise Price
      -----------------------------------------------------------------------------------------------------------
<S>                                               <C>                         <C>                    <C>
         Balances, January 1, 2002                             320,750                                .52
            Granted                                             34,000           $.35                 .35
            Canceled                                           (96,500)          $.63                (.63)
                                                  --------------------

         Balances, December 31, 2002                           258,250                                .46
            Granted                                             78,849        $.31 - $.35             .34
            Exercised                                          (13,000)          $.34                (.34)
            Canceled                                           (34,250)       $.34 - $.66            (.51)
                                                  --------------------

         Balances, December 31, 2003                           289,849                                .43
            Granted                                             14,849           $.15                 .15
            Exercised                                           (6,000)       $.34 - $.35             .35
            Canceled                                           (14,849)       $.31 - $.63             .37
                                                  --------------------

         Balances, December 31, 2004                           283,849                                .42
                                                  ====================
</TABLE>

<TABLE>
<CAPTION>
      -----------------------------------------------------------------------------------------------------------

                                                                                                Weighted Average
                Stock Grants                                                   Grant Price       Exercise Price
      -----------------------------------------------------------------------------------------------------------
<S>                                               <C>                         <C>                   <C>
         Balances, January 1, 2002                              83,166        $.84 - $1.13          $1.66
            Granted/Canceled                                        --             --                  --
                                                  --------------------

         Balances, December 31, 2002                            83,166                               1.66
            Granted/Canceled                                        --             --                  --
                                                  --------------------

         Balances, December 31, 2003                            83,166                               1.66
            Granted/Canceled                                        --             --                  --
                                                  --------------------

         Balances, December 31, 2004                            83,166                               1.66
                                                  ====================
</TABLE>

      The following table summarizes  information  about stock options under the
      1994 Plan at December 31, 2004:

<TABLE>
<CAPTION>
                                             Outstanding                              Exercisable
                        --------------------------------------------------    ---------------------------
                                            Weighted
                                             Average          Weighted                         Weighted
        Range of                            Remaining         Average                          Average
        Exercise             Number        Contractual        Exercise          Number         Exercise
         Prices           Outstanding         Life             Price          Exercisable        Price
      ------------      --------------   --------------    ---------------    -----------     -----------
<S>                         <C>             <C>                 <C>             <C>               <C>
      0.15 to 0.35          207,349         4.6 years           0.33            178,783           0.35
      0.56 to 0.66           76,500         3.3 years           0.65             75,875           0.65
</TABLE>

      The weighted-average grant-date fair value of options granted during 2004,
      2003, and 2002 were $.15, $.34, and $.35, respectively.

      At December 31, 2004,  options to purchase  254,658 shares of Common Stock
      were  exercisable  and no shares were available for future grant under the
      1994 Plan.

      1993 Stock Option Plan

      In May 1994,  the Company  authorized  235,000  shares of Common Stock for
      issuance  under its 1993 Stock  Option Plan ("1993  Plan") as incentive or
      non-qualified stock options. The Company grants nonqualified stock options
      to officers,  directors and  employees and incentive  stock options may be
      granted to employees under the 1993 Plan.


                                       31
<PAGE>

      The options are granted to purchase  Common Stock at the fair market value
      on the  grant  date or at  other  prices  as  determined  by the  Board of
      Directors.  The  option-vesting  period is  determined at the time of each
      grant, and all options expire two to ten years from the grant date.

      A summary of the 1993 Plan stock option activity follows:

<TABLE>
<CAPTION>
      -------------------------------------------------------------------------------------------------------

                                                       Outstanding                            Weighted Avg.
                                                         Shares             Exercise Price   Exercise Price
      -------------------------------------------------------------------------------------------------------
<S>                                                <C>                       <C>                 <C>
         Balances, January 1, 2002                            79,800                             .47
            Granted/Canceled/Exercised                             0             $ -              --
                                                   -----------------

         Balances, December 31, 2002                          79,800                             .47
            Granted                                           11,675             $.31            .31
            Canceled                                         (11,675)        $.44 - $2.06       (.52)
                                                   -----------------

         Balances, December 31, 2003                          79,800                             .44
            Canceled                                         (13,500)        $.31 - $.34         .32
                                                   -----------------

         Balances, December 31, 2004                          66,300                             .46
                                                   =================
</TABLE>


                                       32
<PAGE>

The following table summarizes information about stock options under the plan at
December 31, 2004.

<TABLE>
<CAPTION>
                                             Outstanding                              Exercisable
                        --------------------------------------------------    ---------------------------
                                            Weighted
                                             Average          Weighted                         Weighted
        Range of                            Remaining         Average                          Average
        Exercise             Number        Contractual        Exercise          Number         Exercise
         Prices           Outstanding         Life             Price          Exercisable        Price
      ------------      --------------   --------------    ---------------    -----------     -----------
<S>                         <C>             <C>                 <C>             <C>               <C>
      0.31 to 0.44          61,300          2.0 years           0.43            60,463            0.44
      0.56 to 0.75           4,500          2.6 years           0.73             4,500            0.73
      1.38 to 2.06             500          1.0 years           1.72               500            1.72
</TABLE>

      There were no options  granted during 2004. At December 31, 2004,  options
      for 64,683  shares  were  exercisable  under the 1993 Plan.  There were no
      shares available for future grant under the 1993 Plan.

      Common Stock Warrants

      On April 1,  2003,  in  connection  with  obtaining  the line of  credit -
      related  parties,  the Company issued warrants to the owners of the lender
      to purchase  90,000  shares of Common Stock at an exercise  price of $0.18
      per share,  that price being equal to 80% of the fair market  value of the
      Common Stock on March 31, 2003.

      Common Stock Reserved

      Common Stock reserved at December 31, 2004 was as follows:

            1996 Equity Incentive Plan                             993,000
            1994 Stock Option and Grant Plan                       283,849
            1993 Stock Option Plan                                  65,800
                                                                 ---------
                                                                 1,342,649
                                                                 =========

6.    INCOME TAXES

      The provisions  (credit) for income taxes for the years ended December 31,
      consists of:

                                        2004           2003            2002
                                   ------------    ------------    ------------

      Current:
                Federal            $         --    $         --    $         --
                State                        --              --              --
                                   ------------    ------------    ------------
                Total current                --              --              --
                                   ------------    ------------    ------------

      Deferred:
                Federal                  60,000         (10,000)             --
                State                        --              --              --
                                   ------------    ------------    ------------
                Total deferred           60,000         (10,000)             --
                                   ------------    ------------    ------------
                                         60,000    $    (10,000)   $         --
                                   ============    ============    ============


                                       33
<PAGE>

      The following is a reconciliation of statutory federal income taxes to the
      actual provision (credit) for income taxes:

<TABLE>
<CAPTION>
                                                     2004                  2003               2002
                                                   ---------            ---------          ---------
<S>                                                <C>                  <C>                <C>
      Federal income taxes at statutory rate       $(362,000)           $  29,000          $ (96,000)
      Non-deductible expenses                          7,000                7,000              7,000
      Increase (decrease) in taxes resulting
        from state income taxes                      (33,000)               3,000             (9,000)
      Increase (decrease) in deferred tax
        asset valuation allowance                    465,000              (52,000)           101,000
      Other, net                                     (17,000)               3,000             (3,000)
                                                   ---------            ---------          ---------
      Provision/(credit) for income taxes          $  60,000            $ (10,000)         $      --
                                                   =========            =========          =========
</TABLE>

      The components of the net deferred tax (liability) asset recognized in the
      accompanying balance sheets are as follows:

                                            2004                      2003
                                        -----------               -----------
                Deferred tax liability  $    (4,000)              $   (12,000)
                Deferred tax asset        2,554,000                 2,156,000
                Valuation allowance      (2,550,000)               (2,084,000)
                                        -----------               -----------
                                        $         0               $    60,000
                                        ===========               ===========

      The types of  temporary  differences  between  the tax bases of assets and
      liabilities  and their  financial  reporting  amounts  that give rise to a
      significant  portion of the deferred tax asset and their  approximate  tax
      effects are as follows:

                                            2004                      2003
                                        -----------               -----------
                Future income
                  (deductions):
                Net operating loss      $ 2,553,000               $ 2,147,000
                Allowance for
                  doubtful accounts           1,000                     8,000
                Depreciation                      0                     1,000
                Other, net                   (4,000)                  (12,000)
                                        -----------               -----------
                                        $ 2,550,000               $ 2,144,000
                                        ===========               ===========

      The Company has net operating  loss carry  forwards for federal income tax
      purposes  of  approximately  $6,584,000.  These carry  forwards  expire on
      varying dates through 2024.

7.    EMPLOYEE BENEFIT PLAN

      The  Company  has a Cash or  Deferred  Profit  Sharing  Plan ("the  401(k)
      Plan"). The 401(k) Plan is designed to qualify under Section 401(k) of the
      Internal  Revenue  Code  and  allows  the  Company  to make  discretionary
      contributions  as determined by the Company's Board of Directors.  For the
      years ended December 31, 2004,  2003,  and 2002,  the Company  contributed
      $2,954, $3,225, and $4,923 to the 401(k) Plan.


                                       34
<PAGE>

8.    COMMITMENTS AND CONTINGENCIES

      At December 31, 2004 and 2003,  equipment  with a net book value of $2,254
      and  $7,436,  net of  accumulated  amortization  of  $8,863  and  $19,827,
      respectively, has been leased under capital leases.

      The Company leases its executive  offices under a  noncancelable-operating
      lease,  which  expires in August  2008.  Total rent  expense for the years
      ended December 31, 2004, 2003 and 2002 was $81,847,  $76,352,  and $89,306
      respectively.

      Future minimum payments for lease obligations are as follows:

                                                       Capital        Operating
                                                      ---------       ---------
                2005                                      5,668          71,487
                2006                                      5,250          88,335
                2007                                        658          91,067
                2008                                         55          61,925
                                                      ---------       ---------
                Total minimum lease payments             11,631       $ 312,814
                                                                      =========
                Amount representing interest             (2,196)
                                                      ---------
                Present value of min. lease payments      9,435
                Current portion                          (4,124)
                                                      ---------
                Long-term portion                       $ 5,311
                                                      =========

      The  Company  has bonus  agreements  with two  officers  that  provide for
      quarterly  bonuses of 5% and 4%,  respectively,  of the Company's  pre-tax
      profits.  The Company expensed bonuses of $0, $9,449,  and $0, under these
      agreements  for the  years  ended  December  31,  2004,  2003,  and  2002,
      respectively.

9.    FINANCIAL INSTRUMENTS

      All financial  instruments  are held for purposes other than trading.  The
      following  methods and assumptions were used to estimate the fair value of
      each  financial  instrument  for which it is  practicable to estimate that
      value:

      Cash and Cash Equivalents

      The carrying amount  approximates fair value because of the short maturity
      of those instruments.

      Debt

      The fair value of the Company's debt is estimated based on borrowing rates
      currently  available to the Company for bank loans with similar  terms and
      maturities.


                                       35
<PAGE>

      The  estimated  fair  values of the  Company's  financial  instruments  at
      December 31, 2004 are as follows:

                                                      Carrying
                                                       Amount       Fair Value
                                                    -----------     -----------
                Assets:
                Cash and cash equivalents           $    50,503     $    50,503
                Receivables                         $    82,244     $    82,244

                Liabilities:
                Accounts Payable                    $    60,002     $    60,002
                Line of Credit-bank                 $   172,300     $   172,300
                Line of Credit-related parties      $   197,772     $   223,600

      The  estimated  fair  values of the  Company's  financial  instruments  at
      December 31, 2003 are as follows:

                                                      Carrying
                                                       Amount       Fair Value
                                                    -----------     -----------
                Assets:
                Cash and cash equivalents           $   143,505     $   143,505
                Receivables                         $   628,848     $   628,848

                Liabilities:
                Accounts Payable                    $   162,255     $   162,255
                Line of Credit-bank                 $   139,314     $   139,314
                Line of Credit-related parties      $    54,600     $    54,600

10.   SEGMENT INFORMATION

      The Company operates in one industry segment consisting of the development
      and  marketing of  electronic  document  image  management  and  retrieval
      systems. The Company's  technologies are managed as one segment because it
      offers  similar  products in similar  markets and the factors  determining
      strategic decisions are comparable for all products and markets.

      Sales to foreign markets  totaled  $35,471,  $35,556,  and $38,197 for the
      years ending December 31, 2004, 2003, and 2002, respectively.


                                       36
<PAGE>

11.   LIQUIDITY

      The Company's cash and cash equivalents  decreased $93,002 during the year
      ended  December  31, 2004 to  approximately  $51,000 at December 31, 2004.
      During  2004,  the  Company   incurred  cash   expenditures  for  deferred
      development costs of approximately  $267,000. As of December 31, 2004, the
      Company had deficit working capital of approximately $789,000. At December
      31, 2004, current  liabilities  included deferred revenue of approximately
      $310,000,  which will be earned throughout calendar year 2004 and does not
      require additional direct cash flow needs to be earned.

      At  December  31,  2004,  the  Company's  line of credit with a bank had a
      balance of $172,300 and the Company's  line of credit with a related party
      had a balance of  $223,600.  Subsequent  to December  31,  2004,  the bank
      notified  the Company  that it would not be renewing the line of credit in
      February,  2005.  The line is  collateralized  by accounts  receivable and
      general  intangibles of the Company and bears interest at prime plus 1.75%
      not to exceed 18%.  During March 2005, the bank line of credit was amended
      to  extend  the due date  until  April  15,  2005 and  reduce  the line to
      $162,300.  Currently,  the  Company  is in  negotiations  with the bank to
      implement  a  payment  plan that will  amortize  the debt over a  48-month
      period, with a new maturity date of April 15, 2006.

      Additionally,  during  March 2005,  the  related  party line of credit was
      amended to extend the due date until June 30, 2007,  or an earlier date as
      mutually  agreed upon by the Company and DEMALE,  and increase the line to
      $500,000.  The  line is  collateralized  by all  accounts  receivable  and
      general  intangibles of the Company.  As of December 31, 2004, the Company
      had no material  commitments  for capital  expenditures  to be made during
      calendar 2005.

      As a result of the  Company's  operating  losses in 2004 and the  $392,000
      award  against  it in the  Reynolds  arbitration,  the  Company's  capital
      resources have been stretched to unprecedented lengths. The Company cannot
      bear  any  significant  operating  or  other  losses  in  2005 if it is to
      survive.  While  preliminary  indications  are  that the  Company  has not
      incurred such a significant loss in the first quarter of 2005, the Company
      still requires the continuing  forbearance of its bank,  which has already
      declined  to  renew  the  $162,000  owed on its  line of  credit,  and the
      continued  support of DEMALE,  LLC,  which the Company owes $468,000 as of
      March 31, 2005.  There is no assurance  that such  forbearance  or support
      will  continue or that the  Company  will not incur  additional  operating
      losses.  Accordingly,  unless the Company can obtain additional capital to
      cover future losses,  if the Company incurs additional losses or otherwise
      experiences  negative  cash  flow,  there is a  substantial  risk that the
      Company will not be able to continue as a going concern.


                                       37
<PAGE>

           Report of Independent Registered Public Accounting Firm on
                          Financial Statement Schedule

Audit Committee, Board of Directors and Shareholders
1mage Software, Inc.
Englewood, Colorado

In connection with our audit of the financial statements of 1mage Software, Inc.
for each of the three years in the period ended  December 31, 2004, we have also
audited the following  financial  statement  schedule.  This financial statement
schedule is the responsibility of the Company's  management.  Our responsibility
is to  express  an opinion on this  financial  statement  schedule  based on our
audits of the basic financial statements. The schedule is presented for purposes
of complying with the Securities and Exchange Commission's rules and regulations
and is not a required part of the financial statements.

In our  opinion,  the  financial  statement  schedule  referred  to above,  when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents  fairly,  in all  material  respects,  the  information  required to be
included herein.


                                                                        BKD, LLP

Denver, Colorado
February 25, 2005


                                       38
<PAGE>

1mage Software, Inc.

SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                             Deductions
                                                                          Additions           Accounts
                                                       Balance at        charged to:         charged to:
                                                      beginning of        Costs and                            Balance at end
                                                         period            expenses           Allowance           of period
                                                     --------------     --------------    ----------------     --------------
<S>                                                  <C>                <C>               <C>                  <C>
For the Year Ended December 31, 2004:
      Allowance for Doubtful Accounts                $     20,000       $     45,956      $        62,206      $      3,750

For the Year Ended December 31, 2003:
      Allowance for Doubtful Accounts                $     10,000       $     43,450      $        33,450      $     20,000

For the Year Ended December 31, 2002:
      Allowance for Doubtful Accounts                $     10,000       $     34,850      $        34,850      $     10,000
</TABLE>

ITEM 9. CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
        FINANCIAL DISCLOSURE

            There were no  disagreements  with  accountants  on  accounting  and
      financial disclosure.

ITEM 9A. CONTROLS AND PROCEDURES

            As of the end of the period reported on in this report,  the Company
      has  undertaken  an  evaluation   under  the   supervision  and  with  the
      participation  of  management,  including  the Company's  Chief  Executive
      Officer and Chief Financial  Officer,  of the  effectiveness of the design
      and operation of the Company's disclosure controls and procedures pursuant
      to Rule 13a-15 of the  Securities  Exchange  Act of 1934.  Based upon that
      evaluation,  the  Chief  Executive  Officer  and Chief  Financial  Officer
      concluded  that the  Company's  disclosure  controls and  procedures  were
      effective,  in all  material  respects,  with  respect  to the  recording,
      processing,  summarizing and reporting,  within the time periods specified
      in the SEC's rules and forms,  of information  required to be disclosed by
      the Company in the  reports  that it files or submits  under the  Exchange
      Act.

            There have been no  significant  changes in the  Company's  internal
      controls  during the quarter ended  December 31, 2004, or in other factors
      that could  significantly  affect internal controls subsequent to the date
      of the evaluation described above.


                                       39
<PAGE>

ITEM 9B. OTHER INFORMATION

      None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The  following  table  sets  forth  information  concerning  the  Company,
Executive Officers and Directors:

                                 Period Served as         All Positions and
                                 Director of the           Offices Held
Name                    Age          Company              With the Company
--------------------------------------------------------------------------------

David R. DeYoung         60        Since 1981         President, Chief Executive
                                                      Officer and Director

Mary Anne DeYoung        51        Since 1994         Treasurer, Chief Financial
                                                      Officer, Asst. Secretary
                                                      and Director

Robert Wiegand II        58        Since 1992         Secretary and Director

John G. Mazza            59        Since 2003         Director

Spencer D. Lehman        69        Since 2004         Director


David R. DeYoung - Chairman, President, Chief Executive Officer and Director

      Mr. DeYoung has been President,  Chief Executive Officer and a Director of
the Company since its formation in 1981.  He served in similar  capacities  with
the Company's predecessor  corporation from 1979 to 1981. He holds a Bachelor of
Science Degree in Business  Administration  and Computer Science from California
State  Polytechnic  University.  Mr. DeYoung is the spouse of Mary Anne DeYoung.
Mr.  DeYoung owns a one fourth  membership  interest in DEMALE,  LLC,  which has
extended a $500,000  convertible line of credit to the Company,  under which the
Company owed DEMALE $468,000 plus interest as of March 31, 2005.

Mary Anne DeYoung - Treasurer,  Chief Financial Officer, Assistant Secretary and
Director

      Ms.  DeYoung was  elected to the Board of  Directors  in April  1996.  Ms.
DeYoung was appointed Treasurer, Chief Financial Officer and Assistant Secretary
of the Company on December 15, 1994. Ms.  DeYoung has served as Vice  President,
Finance and  Administration  since July 1986.  Ms. DeYoung joined the Company as
Controller in April 1981.  From 1975 to 1981, Ms. DeYoung was a systems  analyst
with Arthur  Andersen LLP, a financial  analyst,  and an  independent  financial
consultant.  Ms. DeYoung holds a Bachelor of Science  Degree in Accounting  from
the University of Santa Clara. Ms. DeYoung is the spouse of David R. DeYoung.

Robert Wiegand II - Secretary and Director

      Mr.  Wiegand  was  elected to the Board of  Directors  in July  1992.  Mr.
Wiegand  was  appointed  to the office of  Secretary  of the Company on March 1,
1994.  Mr. Wiegand is presently a lawyer in private  practice.  From January 15,
1992 to December 26, 1992,  he was  Vice-President  of  Administration  for Rose
Manufacturing  Co., a privately held  manufacturer of safety  equipment based in
Englewood,  Colorado.  Mr. Wiegand has practiced law for 23 years,  and prior to
joining Rose Manufacturing, was special counsel with Pendleton & Sabian, P.C., a
law firm in  Denver.  Mr.  Wiegand  graduated  Phi Beta  Kappa  from the  Tulane
University  of  Louisiana  in 1970 and went on to  receive a law  degree and was
admitted to practice in Louisiana in 1972 and Colorado in 1977.  Since 1976, Mr.
Wiegand's  practice has been limited to securities  offerings,  estate planning,
business  organizations  and tax  law.  In  addition  to  membership  in six bar
Associations,  Mr. Wiegand has been admitted to practice before the U.S. Supreme
Court, the U.S.  District Court (Colorado and  ED-Louisiana) and before the U.S.
Court of Appeals (5th  Circuit).  Mr. Wiegand is a minority  interest  holder in
Gold King Investments LLC, who owns a one fourth membership  interest in DEMALE,
LLC.


                                       40
<PAGE>

John G. Mazza - Director

      Mr. Mazza was elected to the Board of  Directors in March 2003.  Mr. Mazza
is currently the President of Drake Holding Corp.  and Drake Energy Corp.,  both
Nevada corporations and brokerage firms, located in Malibu,  California, and has
served in that capacity  since 1984 and 1990,  respectively.  From 1999 to 2001,
Mr. Mazza was a founder,  Secretary and director of Aoptix  Technologies Inc., a
manufacturer of free space optical laser data and telecommunication transmission
systems.  From 1969 to 1984 Mr. Mazza held various senior  management  positions
with William O'Neil and Co. Incorporated,  a New York Stock Exchange member firm
and O'Neil Data Systems, Inc., a brokerage company. In total, Mr. Mazza has been
associated  with the  securities  industry for over 30 years.  Mr. Mazza holds a
Bachelor  of Science  degree  from  Claremont  McKenna  College and a Masters of
Business  Administration from the University of Southern  California.  Mr. Mazza
owns a one fourth membership interest in DEMALE, LLC.

Spencer D. Lehman - Director

      Mr.  Lehman was elected to the Board of  Directors in February  2004.  Mr.
Lehman has been a  securities  broker  with the  Shemano  Group in Los  Angeles,
California  since 2002. From 1987 until 2002, Mr. Lehman held various  positions
with Drake Capital,  another  brokerage firm. From 1962 to 1987, Mr. Lehman held
positions  at  PaineWebber,  Dean Witter and  Shearson.  From 1958 to 1960,  Mr.
Lehman served as an officer in the United States Navy. Mr. Lehman holds a degree
in Geology from the University of California- Los Angeles (U.C.L.A.). Mr. Lehman
owns a one fourth membership interest in DEMALE, LLC.

      There is no  arrangement  or  understanding  between any of the  executive
officers  and any  other  persons  pursuant  to  which he or she was or is to be
selected as an executive officer.

      Audit Committee Expert

      The Company  does not have a "financial  expert",  as defined by the SEC's
rules  under  Sarbanes-Oxley,  serving  on the  Committee  because  the Board of
Directors  believes  that all of the  members  of the Board,  including  but not
limited  to those  serving on the Audit  Committee,  have  sufficient  financial
knowledge,  experience and  sophistication to comprehend and critically  analyze
the Company's financial statements and the audit thereof. Accordingly, the Board
has  determined  that  adding a  "financial  expert"  to the Board and the Audit
Committee  at this time is not a  necessary  or  productive  expenditure  of the
Company's limited resources.

      Codes of Ethics

      The  Company  has  not yet  adopted  a code of  ethics  for its  principal
executive  officer and principal  financial officer since they are the Company's
only two executive  officers.  The Board of Directors will continue to evaluate,
from time to time, whether a code of ethics should be developed and adopted.  If
the Company does adopt a code of ethics in the future, in light of the Company's
modest size, it is likely to apply to all employees  rather than only  executive
officers.

      Section 16(a) Beneficial Ownership Reporting Compliance

      Section  16(a)  of the  Exchange  Act  requires  the  Company's  executive
officers and directors,  and persons who own more than ten percent of the Common
Stock of the Company, to file reports of ownership and changes in ownership with
the  Securities  and  Exchange  Commission  and the exchange on which the Common
Stock  is  listed  for  trading.  Those  persons  are  required  by  regulations
promulgated  under the  Exchange  Act to furnish the Company  with copies of all
reports filed pursuant to Section 16(a).  The Company  believes that all Section
16(a) Securities and Exchange Commission filing  requirements  applicable to the
Company's executive officers and directors for calendar 2004 were timely met.


                                       41
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

                           Summary Compensation Table

      The following sets forth in summary form the compensation  received during
each of the Company's last three  completed  fiscal years by the Chief Executive
Officer of the Company.  There were no other Executive  Officers  serving at the
end of the last fiscal year whose compensation was greater than $100,000.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                                             Long Term         All Other
                                                Annual Compensation *      Compensation     Compensation**
                                              -----------------------      -------------    --------------
                                               Salary           Bonus          Awards
                                              -------         -------      -------------
                                                                             Securities
                                                                             Underlying
Name and Principal Position    Year             ($)              ($)         Options (#)         ($)
----------------------------------------------------------------------------------------------------------
<S>                            <C>            <C>               <C>              <C>           <C>
David R. DeYoung               2004           132,687               0            0             3,792
President, CEO                 2003           132,408           5,250            0             1,767
                               2002           145,578               0            0             3,068
----------------------------------------------------------------------------------------------------------
</TABLE>

* Mr. DeYoung did not receive  additional  compensation  other than noted above,
the  aggregate  amount of which was the  lesser of either  $50,000 or 10% of his
annual salary and bonus.

** Includes  insurance premiums paid by the Company for term life and disability
insurance,  as well as premiums paid for a key-man life  insurance  policy which
has the death  benefit  assigned to the Company and the cash value of the policy
intended to accrue for the benefit of Mr. DeYoung.

              Option Grants for Fiscal Year Ended December 31, 2004

      The  following  table sets  forth the  information  concerning  individual
grants of stock  options  during  the last  fiscal  year to the named  Executive
Officers:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                        Individual Grants
----------------------------------------------------------------------------------------------------------------------------
                             Number of
                            Securities
                            Underlying     Percent of Total       Exercise
                              Options      Options Granted          or Base
                              Granted      to Employees in          Price                                     Grant Date
          Name                (#)(1)         Fiscal Year          ($/Share)         Expiration Date         Present Value(2)
----------------------------------------------------------------------------------------------------------------------------
<S>                            <C>               <C>                <C>                  <C>                     <C>
David R. DeYoung                 0                 0%               $.00                 N/A                     N/A
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   There were no option grants to Messr. DeYoung during the fiscal year ended
      December 31, 2004.


                                       42
<PAGE>

       Aggregated Option Exercises For Fiscal Year Ended December 31, 2004
                           and Year-End Option Values

      The following  table sets forth  information  concerning  each exercise of
stock options during the last fiscal year by the named Executive Officer and the
fiscal year-end value of unexercised options:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                       Number of securities underlying           Value of unexercised
                   Shares acquired         Value       unexercised options at fiscal           in-the-money options at
Name               on exercise (#)       Realized ($)           year-end (#)                     fiscal year-end ($)*
----------------------------------------------------------------------------------------------------------------------------
                                                         Exercisable/unexercisable           Exercisable/unexercisable
----------------------------------------------------------------------------------------------------------------------------
<S>                     <C>                 <C>                  <C>                                    <C>
D.R. DeYoung            0                   $ 0                  393,000/0                              $ 0/$ 0
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

*For all the  unexercised  options held as of December 31, 2004,  the  aggregate
dollar  value is the excess of the market  value of the stock  underlying  those
options over the exercise price of those unexercised  options. The price used to
calculate these figures is the closing price as of December 31, 2004 as reported
on the OTCBB, which was $.15 per share.

      Equity Compensation Plan Information as of Year End December 31, 2004

<TABLE>
<CAPTION>
                                                  Equity Compensation Plan Information
------------------------------------------------------------------------------------------------------------------------------------
                                             (a)                             (b)                                (c)
------------------------------------------------------------------------------------------------------------------------------------
      Plan Category                                                                                     Number of securities
                                 Number of securities to be     Weighted average exercise          remaining available for future
                                  issued upon exercise of          price of outstanding         issuance under equity compensation
                               outstanding options, warrants      options, warrants and            plans (excluding securities
                                         and rights                       rights                     reflected in column (a) )
------------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                              <C>                                 <C>
  Equity compensation plans
approved by security holders             1,059,300                        $ .63                               201,849
------------------------------------------------------------------------------------------------------------------------------------
  Equity compensation plans
  not approved by security
         holders (1)                       283,849                        $ .37                                  0
------------------------------------------------------------------------------------------------------------------------------------
           Total                         1,343,149                        $ .51                                  0
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) The 1994 Stock  Option and Grant Plan,  which was adopted by the Company but
not  approved  by the  Company's  securities  holders,  was  intended to provide
incentives for selected persons to promote the financial success and progress of
the Company by granting such persons  options to purchase shares of Common Stock
of the Company,  or through the award of shares of the  Company's  Common Stock.
The maximum  aggregate  number of shares of Common Stock  subject to the Plan is
700,000.  The Plan is administered by the Board of Directors of the Company. The
Plan was amended in 2002 to permit  grants to employees who were also members of
the Board.  In addition,  options for 20,000 shares were granted  outside of the
1996 Equity Incentive Plan (which was approved by the shareholders) by the Board
of Directors on December 31, 2003.  Those options are treated in all respects as
to terms and conditions as if they were granted under the 1996 Plan.


                                       43
<PAGE>

Employment Contracts

      Mr.  DeYoung,  the Company's  President and Chief  Executive  Officer,  is
employed  pursuant to a three-year  employment  contract between the Company and
Mr. DeYoung,  which has been extended and will expire on October 31, 2005. Since
November 1, 1999, the compensation of Mr. DeYoung has been established under the
terms of this employment contract. The contract calls for an annual base salary,
in  an  amount   determined   annually  by  the  Board  of  Directors,   payable
semi-monthly,  plus expenses and normal  fringe  benefits.  Mr.  DeYoung earns a
bonus of 5% of the Company's pretax  earnings,  calculated on a quarterly basis.
An  annual  bonus may be paid to Mr.  DeYoung  based on the  performance  of the
Company  and  at the  discretion  of  the  Board  of  Directors.  Mr.  DeYoung's
employment  contract  provides that should his  employment be terminated for any
reason other than for cause, he is entitled to a cash severance package equal to
one year's cash compensation.  In addition, Mr. DeYoung is entitled to receive a
grant of a sufficient  number of ten-year options as are necessary to permit him
to retain the same percentage of beneficial ownership interest in the Company as
he held on December  16, 1996.  These  grants  would be made from the  Company's
Equity  Incentive  Plan at the fair market value of the Common Stock on the date
of grant.

      Ms.  DeYoung,  the Company's Vice President of Finance and Chief Financial
Officer,  is employed  pursuant to three-year  employment  contract  between the
Company and Ms.  DeYoung  which has been extended and will expire on October 31,
2005.  Her  compensation  is  established  under  the  terms of this  employment
contract. The contract calls for an annual base salary, expenses,  normal fringe
benefits,  as well as a bonus  equal  to 4% of the  Company's  pretax  earnings,
calculated on a quarterly basis. In addition,  Ms. DeYoung's employment contract
provides that should her  employment be terminated for any reason other than for
cause,  she is entitled  to a cash  severance  package  equal to one year's cash
compensation.

                             DIRECTORS' REMUNERATION

      The Company currently pays non-employee  Directors $1,500 per quarter plus
specific  hourly fees for  special  meetings or  additional  participation  as a
director.  Any director who serves on the Compensation  Committee  automatically
receives 4,000 options on the last trading day in June pursuant to the Company's
1996 Equity  Incentive  Option  Plan.  Accordingly,  on June 30,  2004,  Messrs.
Wiegand & Lehman,  as  members of the  Compensation  Committee,  received  fully
vested ten year options to purchase  4,000 shares of Common Stock at an exercise
price of $0.59 per share, the closing price on the date of grant.


                                       44
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         .STOCK OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT

      The  following  table  sets  forth,  as far as is  known  to the  Board of
Directors or the management of the Company,  the only persons owning on April 1,
2005 more than five percent of the  outstanding  shares of the Company's  Common
Stock. For purposes of this disclosure, the amount of the Company's Common Stock
beneficially owned by each person or entity is the aggregate number of shares of
the Common Stock  outstanding on such date plus an amount equal to the aggregate
amount of Common Stock which could be issued upon the exercise of stock  options
and warrants within 60 days of such date.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                                           Beneficial
Name and Address of Beneficial Owner                                      Ownership(1)          Percent of Class
------------------------------------                                      ------------          ----------------
<S>                                                                     <C>                          <C>
David R. DeYoung                                                        1,882,283  (2),(3)           40.3%
6025 So. Quebec Street #300,  Englewood, Colorado  80111

Mary Anne DeYoung                                                         402,501  (4)               11.1%
6025 So. Quebec Street #300,  Englewood, Colorado  80111

Robert Wiegand II                                                         260,214  (5)               7.3%
5261 So. Quebec Street,  Greenwood Village, Colorado  80111

John G. Mazza                                                           1,315,004  (6)               30.7%
6613 Zumirez Drive, Malibu, California  90265

Spencer D. Lehman                                                       1,313,705  (7)               30.7%
26671 Latigo Shores Drive, Malibu, California  90265

DEMALE, LLC                                                             3,740,057                    53.1%
26671 Latigo Shores Drive, Malibu, California  90265

Gold King Investments LLC                                                 732,143  (8)               18.1%
5261 So. Quebec Street,  Greenwood Village, Colorado  80111

All Executive Officers and Directors as a Group - 5 persons             5,905,849  (9)               74.4%
----------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   Beneficial  owners are believed to have sole voting and  investment  power
      with respect to the shares shown unless otherwise indicated.

(2)   Includes:  387,625  options and 30,000  warrants to purchase Common Stock.
      Also includes 25.4% membership  interest in DEMALE, LLC or 949,067 shares.
      See EXECUTIVE COMPENSATION - Employment Contract

(3)   Excludes:  any  shares  attributable  to Mr.  DeYoung's  right  under  his
      employment contract to maintain his proportional  ownership of the Company
      under  certain  circumstances.  See  EXECUTIVE  COMPENSATION  - Employment
      Contract.

(4)   Includes 332,000 options to purchase Common Stock

(5)   Includes  79,500  options to purchase  Common  Stock.  Also  includes 4.3%
      membership interest in DEMALE, LLC or 160,713 shares.

(6)   Includes 3,000 options and 30,000 warrants to purchase Common Stock.  Also
      includes 25.4% membership interest in DEMALE, LLC or 949,067 shares.

(7)   Includes 4,000 options and 30,000 warrants to purchase Common Stock.  Also
      includes 25.4% membership interest in DEMALE, LLC or 949,067 shares.


                                       45
<PAGE>

(8)   Includes 19.5% membership interest in DEMALE, LLC or 732,143 shares.

(9)   Includes  806,125  options and 90,000  warrants to purchase  Common Stock.
      Also includes 100% membership of DEMALE, LLC or 3,740,057 shares.

      Change of Control

      As a result of  transaction  described in the following  Item 13.  Certain
Relationships and Related  Transactions,  and in the Company's Form 8-K filed on
April 7, 2005,  describing  the  Amendment  to the  Company's  Revolving  Credit
Agreement with DEMALE,  LLC, the private lender  controlled by affiliates of the
Company,  to increase  the line of credit by $200,000 to $500,000 and the fixing
of the maximum conversion price at $0.14 per share, DEMALE is now the beneficial
owner of at least  3,571,429  shares,  or 52.0%  of the  outstanding  shares  as
calculated under Rule 13d-3(a).


                                       46
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      On April 30, 2003, the Company closed on a Revolving Credit Loan Agreement
dated effective  April 1, 2003 (the  "Agreement")  with DEMALE,  LLC, a Colorado
limited liability company  ("DEMALE"),  under which DEMALE agreed to provide the
Company  with a line of credit up to  $300,000.  At that time,  DEMALE had three
members,  David R. DeYoung, the Company's President and Chief Executive Officer,
and John G.  Mazza and  Spencer  D.  Lehman,  both  Directors  and more than 10%
shareholders.  At closing,  each of Messrs.  DeYoung,  Mazza and Lehman received
30,000  shares of Common  Stock based on the closing bid price of $0.23 on April
1, 2003,  and a warrant to purchase up to an additional  30,000 shares of Common
Stock at $0.18 per share, which price was set by reference to 80% of the closing
bid price on April 1,  2003.  In  addition,  the amount of any  outstanding  and
unpaid  principal  and  interest on the line of credit  could be  converted,  at
DEMALE's option, into shares of the Company's common stock at a conversion price
equal to 80% of the fair  market  value  of the  Company's  stock on the date of
conversion.  At December 31, 2004, the Company had been advanced  $223,600 under
the DEMALE line of credit. On March 31, 2005 Gold King Investments LLC became an
equal member of DEMALE.  Mr. Robert Wiegand II, a member of the Company's  Board
of Directors,  holds a minority  interest in Gold King Investments LLC. On March
31, 2005, DEMALE agreed to raise the line to $500,000 and extend the due date to
June 30, 2007. In addition, the conversion price of the debt has been changed to
the lesser of $.14 or 80% of the fair market value.  Conversion of the debt into
equity is at the option of DEMALE.

      As a result of the  amendment of the DEMALE line of credit  agreement  and
the  increase of the amount  drawn by the  Company  under that line of credit to
$468,000 plus interest as of March 31, 2005,  DEMALE is now the beneficial owner
of at least 3,571,429 shares,  or 52.0% of the outstanding  shares as calculated
under Rule 13d-3(a).

      Management of the Company is of the opinion that the terms and  conditions
of the foregoing  transactions were no less favorable for the Company than could
be obtained from unaffiliated third parties.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Fees paid to BKD, LLP

      For the calendar years ended December 31, 2004 and December 31, 2003, BKD,
LLP provided services in the following categories and amounts:

                                                Calendar Year     Calendar Year
                                                    Ended             Ended
                                                  12/31/04           12/31/03
                                                  --------           --------
      Audit Fees(1)                               $28,050            $24,300
      All Other Fees                              $     0            $     0

(1)   Represents the aggregate fees billed for  professional  services  rendered
      for the audit and/or reviews of the Company's financial  statements and in
      connection  with  the  Company's   statutory  and  regulatory  filings  or
      engagements.

      There were not any non-audit  services rendered to the Company by BKD, LLP
in calendar 2004 and 2003. While the Audit Committee has not established  formal
policies and procedures concerning  pre-approval of audit or non-audit services,
the Company's  officers have been informed that all audit and non-audit services
must be approved in advance by the Audit  Committee.  The  establishment  of any
such formal  policies or  procedures in the future is subject to the approval of
the Audit Committee.


                                       47
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

      (a)   1. Financial Statements

               See Financial Statement Index on Page 13

            2. Financial Statement Schedules

               See Financial Statement Index on Page 13

            3. List of Exhibits

Exhibit Number             Description and Incorporation by Reference
--------------             ------------------------------------------

3.1*                - Restated  Articles of  Incorporation  of the  Company,  as
                    amended.
3.2*                - Bylaws of the Company, as amended.
3.3*                - Articles of Amendment to the Articles of  Incorporation of
                    the Company dated April 18, 1991
3.4**               - Articles of  Amendment  to the  Articles of  Incorporation
                    dated May 21, 1993.
3.4**               - Articles of  Amendment  to the  Articles of  Incorporation
                    dated June 28, 1994.
10.5*               -  UniVerse(TM)   Distributor   Agreement  between  INFORMIX
                    SOFTWARE, INC. and the Company dated May 15, 1991
10.14*******        - President  Employment  Agreement  between David R. DeYoung
                    and the Company dated November 1, 1999.
10.15*******        - Chief Financial Officer Employment  Agreement between Mary
                    Anne DeYoung and the Company dated September 1, 1999.
10.21****           - Software License Agreement between  Reynolds+Reynolds  and
                    the Company.  The grant of  confidential  treatment for this
                    exhibit filed  separately  with the  Securities and Exchange
                    Commission has been agreed to.
10.22***            - 1994 Stock Option and Grant Plan.
10.23**             - 1993 Stock Option Plan.
10.24******         - Equity Incentive Plan
10.25********       -  Revolving  Credit Loan  Agreement  and  Revolving  Credit
                    Master Note dated April 1, 2003 with DEMALE, LLC
10.26*********      -  Revolving  Credit  Agreement,  Revolving  Credit Note and
                    Business  Security and  Corporate  Resolution  for Borrowing
                    with U.S. Bank, N.A. dated February 24, 2003
23                  - Consent of BKD, LLP
31.1                - Certificate of Chief Executive Officer pursuant to Section
                    302 of the Sarbanes-Oxley Act of 2002
31.2                - Certificate of Chief Financial Officer pursuant to Section
                    302 of the Sarbanes-Oxley Act of 2002
32                  - Certificate  of CEO and CFO pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002

      See Index to Financial Statements on Page 13


                                       48
<PAGE>

*                   Filed as an Exhibit to Form S-1  Registration  Statement No.
                    33-44717, on December 23, 1991.

**                  Filed as an Exhibit to Form S-8  Registration  Statement No.
                    33-86760, on November 29, 1994

***                 Filed as an Exhibit to Form S-8  Registration  Statement No.
                    33-78096, on April 22, 1994.

****                Filed  as an  Exhibit  to Form  10-K  for the  period  ended
                    December 31, 1994.

******              Filed as an Exhibit to Form S-3  Registration  Statement No.
                    333-35265, on September 10, 1997.

*******             Filed  as an  Exhibit  to Form  10-K  for the  period  ended
                    December 31, 2001

********            Filed as an Exhibit to Form 8-K dated April 30, 2003

*********           Filed  as an  Exhibit  to Form  10-K  for the  period  ended
                    December 31, 2003.


                                       49
<PAGE>

                                   SIGNATURES

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

1MAGE SOFTWARE, INC.


By:   /s/ David R. DeYoung                                 Date:  April 15, 2005
      --------------------                                        --------------
      David R. DeYoung
      President

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


By:   /s/ David R. DeYoung                                 Date:  April 15, 2005
      --------------------                                        --------------
      David R. DeYoung, President
      and Principal Chief Executive Officer


By:   /s/ Mary Anne DeYoung                                Date:  April 15, 2005
      ---------------------                                       --------------
      Mary Anne DeYoung
      Vice President, Finance
      Principal and Accounting Officer


By:   /s/ Robert Wiegand, II                               Date:  April 15, 2005
      ----------------------                                      --------------
      Robert Wiegand, II
      Director and Secretary


By:   /s/ John G. Mazza                                    Date:  April 15, 2005
      -----------------                                           --------------
      John G. Mazza
      Director


By:   /s/ Spencer D. Lehman                                Date:  April 15, 2005
      ---------------------                                       --------------
      Spencer D. Lehman
      Director


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