**UNITEDSTATES**

**S****ECURITIESAND****E****XCHANGE****C****OMMISSION**

**Washington,D.C.  20549**

 

**F****ORM****10-KSB****/A**

**(AmendmentNo. 3)**

 

 

 

**ý****                                ****Annual report under Section 13 or 15(d) of the Securities Exchange Act of1934**

**for the fiscal year ended March 31,2004**

**or**

** **

**o****                                ****Transition report under Section 13 or 15(d) of the Securities ExchangeAct of 1934.**

 

**SentoCorporation**

(Nameof small business issuer in its charter)

 
| **Utah**                                                                       | ** ** | **000-06425**          | ** ** | **87-0284979**                    |
|--------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------------|
| (State  or otherjurisdictionof incorporation)                                  |       | (Commission  File No.) |       | (IRS  EmployerIdentification No.) |
|                                                                           |       |                   |       |                              |
| **808  East Utah Valley Drive**   **American Fork, Utah 84003**           |
| (Address  of principal executive offices, including zip code)                  |
|                                                                           |       |                   |       |                              |
| Issuer’s telephone  number, including area code:  **(801) 772-1100** |
|                                                                           |       |                   |       |                              |
| Securities registered  under Section 12(b) of the Exchange Act:                |
| **None**                                                                       |
|                                                                           |       |                   |       |                              |
| Securities registered  under Section 12(g) of the Exchange Act:                |
| **Common  Stock, $.25 par value**                                              |

 

Check whether theIssuer (1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the past 12 months (or for suchshorter period that the Issuer was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes ýNo o

 

Check if there isno disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained herein, and nodisclosure will be contained, to the best of the Issuer’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSBor any amendment to this Form 10-KSB. o

 

State Issuer’srevenues for its most recent fiscal year: $21,396,118

 

The aggregatemarket value of the Common Stock held by non-affiliates of the issuer, basedupon the closing sale price of the Common Stock reported by the NASDAQ SmallCapMarket on July 1, 2004, was approximately $31,818,000.

 

The number ofshares of Common Stock outstanding as of July 1, 2004 was 3,726,986.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

None

 

Transitional SmallBusiness Disclosure Format (check one): Yes oNo ý

 

 

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**TABLE OF CONTENTS**

 
| INTRODUCTION |      |
|--------------|-----------|
|         |      |   |   |
| PART I       |      |   |   |
|         | Item 1.   | Description of Business. |   |
|         |      | General Overview |   |
|         |      | Background |   |
|         |      | Industry Overview |   |
|         |      | Business Strategy |   |
|         |      | Services |   |
|         |      | Significant  Clients |   |
|         |      | Competition |   |
|         |      | Patents and  Proprietary Technology |   |
|         |      | Research and Development |   |
|         |      | Employees |   |
|         |      | Proprietary Marks |   |
|         |      | Factors that May  Affect Future Results |   |
|         | Item 2.   | Description of Property |   |
|         |      | Location |   |
|         | Item 3.   | Legal Proceedings |   |
|         | Item 4.   | Submission of Matters to a Vote of Security  Holders. |   |
|         |      |   |   |
| PART II      |      |   |   |
|         | Item 5.   | Market for Common Equity and Related  Stockholder Matters |   |
|         |      | Recent Sales of  Unregistered Securities |   |
|         |      | Description of Capital  Stock |   |
|         | Item 6.   | Management’s Discussion and Analysis or Plan of  Operations |   |
|         |      | Overview |   |
|         |      | Critical Accounting Policies |   |
|         |      | Results of Operations |   |
|         |      | Liquidity and Capital  Resources |   |
|         |      | Seasonality |   |
|         |      | Recently  Issued Accounting Pronouncements |   |
|         | Item 7.   | Financial Statements. |   |
|         | Item 8.   | Changes in and Disagreements with Accountants  on Accounting and Financial Disclosure. |   |
|         | Item 8A.  | Controls and Procedures |   |
|         |      |   |   |
| PART III     |      |
|         | Item 9.   | Directors and Executive Officers of the  Registrant. |   |
|         | Item 10.  | Executive Compensation. |   |
|         | Item 11.  | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters. |   |
|         | Item  12  | Certain  Relationships and Related Transactions. |   |
|         | Item 13.  | Exhibits and  Reports on Form 8-K. |   |
|         | Item  14. | Principal  Accountant Fees and Services |   |
|         |      |   |   |
| SIGNATURES   |      |

 

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# **INTRODUCTION**

# ** **

Sento Corporation(“we,” “us,” Sento or the “Company”) is filing this Amendment No. 3 on Form10-KSB for the year ended March 31, 2004 for the purpose of amending andrestating the information set forth in our Annual Report on Form 10-KSB for theyear ended March 31, 2004, filed May 20, 2004, our Amendment No. 1 to AnnualReport on Form 10-KSB/A, filed July 13, 2004, and our Amendment No. 2 to AnnualReport on Form 10-KSB/A, filed August 2, 2004. All subsequent references to “Form 10-KSB” or this “Report” shall referto our initial Form 10-KSB, as amended by this Amendment No. 3.

 

**SpecialNote Regarding Forward-Looking Statements**

 

*ThisAnnual Report on Form 10-KSB (this **“Report”**)contains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended (the **“SecuritiesAct”**), and Section 21E of the Securities Exchange Act of 1934, asamended (the **“Exchange Act”**).  Such statements can be identified by the useof forward-looking words such as “anticipate,” “estimate,” “project,” “likely,”“believe,” “intend,”  “expect” or similarwords.  These statements relate to our,and, in some cases, our clients’ or business partners’, future plans,objectives, expectations, intentions and financial performance and theassumptions that underlie these statements. Such forward-looking statements are included under Item 1. “Business,”Item 2. “Properties” and Item 6. “Management’s Discussion and Analysis or Planof Operations.”  All forward-lookingstatements included in this Report are made as of the date hereof, based oninformation available to us as of such date, and we assume no obligation toupdate any forward-looking statement.  Itis important to note that such statements may not prove to be accurate and thatour actual results and future events will differ, and could differ materially,from those anticipated in such statements. Among the factors that could cause actual results to differ materiallyfrom our Company’s expectations are those described under Item 1. “Descriptionof Business—Factors that May Affect Future Results.”  Readers are also encouraged to review ourother filings with the Securities and Exchange Commission (the **“Commission”)** describing other factors thatmay affect our future results.  Allsubsequent written and oral forward-looking statements attributable to us orpersons acting on our behalf are expressly qualified in their entirety by thissection and other factors included elsewhere in this Report.*

 

# **PART I**

# ** **

## ***Item 1.***   Description of Business.

## *** ***

### General Overview

###  

Sento Corporation(**“Sento,”** the **“Company”** or **“we”**) designs, implements and manages high-tech solutions forcustomer acquisition, customer care, technical support and help-deskfunctions.  We use modern customercontact centers, coupled with our state-of-the-art proprietary software systems(the **“Customer Choice PlatformSM”**),to provide domestic and international support services for Fortune 1000companies, multinational companies, product manufacturers, and softwarecompanies.

 

Our proprietarycustomer relationship management (**“CRM”**)software, known as **“ReciteSM”**andother reporting and management tools, when integrated with communicationspoints such as telephone, internet, chat, email, call-back, and self-help,provide solutions designed to help our clients reduce costs and improvecustomer satisfaction.

 

By outsourcingcustomer care, customer acquisition, technical support or help-desk solutionsto us, our clients can focus on their core businesses.  The staffing, operation and management ofefficient and cost-effective customer contact centers and the relatedtechnology are becoming more and more specialized, a business unto itself, andvery different from the core business of most of our clients.  The engagement of an outsourced customercontact service offers our clients the opportunity to focus their limited humanand financial resources on lowering operating costs, reducing unnecessarycapital expenditures, and other core objectives.  We believe that the factors motivatingorganizations to outsource customer contact services are the desire to providebetter customer satisfaction, to reduce costs, to lower headcount and to focusthese human and financial resources on core business functions.  Organizations are finding it increasinglydifficult and expensive to service their non-core needs internally.  As a

 

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result, outsourcing continues to gain favor across thebusiness spectrum.  Many businessanalysts believe this trend will continue to grow as technology becomes morecomplex and expensive and client resources need to be allocated in the mostcost-effective manner possible.

 

### Background

###  

Sento was formedin 1986 as a value-added reseller, formerly known as Spire Technologies,Inc.  In 1996, we executed a shareexchange with an existing public company. Sento is incorporated under the laws of the State of Utah.  Our common stock is traded on the NASDAQSmall Cap Market under the symbol “SNTO.” Throughout this Report, the word **“client”**refers to entities we serve, and the word **“customer(s)”**refers to our clients’ customer(s).

 

In 1997 and 1998,we undertook a strategic transition to focus our efforts on customer contactsolutions.  We constructed a newgeneration customer contact facility (**“CustomerContact Solutions Center”** or **“CCSC”)**in American Fork, Utah. Subsequently, we have constructed four additional Customer ContactSolutions Centers, two of which are in Utah and two of which are inWyoming.  One of our Wyoming CCSCs is notcurrently in use and is available for subletting.  In addition, through business alliances, wehave contracted for the use of a CCSC in Delhi, India.

 

### Industry Overview

###  

The customercontact services industry encompasses a broad spectrum of services andtechnology used to build long-term relations between clients and theircustomers.  Effective outsourcers providecost-effective, high-quality customer support solutions that enable clients toreduce costs and increase focus on core competencies.

 

We believe manyorganizations face a rapidly changing, highly competitive environment in whichimproved customer contact center services and enhanced customer interactionscan be a significant factor in improving products and services, lowering costs,increasing customer satisfaction, and building competitive advantages.

 

Many seniorexecutives and managers recognize the importance of information technology intheir organizations and the potential benefits of improved customerservice.  At the same time, technologicalchanges and the costs and time associated with implementing and using currentsolutions create tremendous pressure on organizations and theirmanagement.  As the pace of advancementaccelerates, an organization’s ability to evaluate, design, integrate, deploy,and leverage new technology becomes a critical competitive issue.

 

Staying abreast ofrapid technological change, while maintaining the required operationalefficiency of customer contact centers, is also becoming increasingly moredifficult and expensive for companies. Running a contact center on a day-to-day basis requires a skill set anda level of expertise that differs from the core business of most clients.  Understanding the inter-relationship of thevarious technological requirements as they relate to the needs of the variousinternal divisions of a client company requires significant time, as well ascareful attention to the client’s business needs.  An outsourcer has the benefit of seeing manycompanies and how they operate, then applying that knowledge to the issues athand with other client businesses.

 

The challenge ofmaintaining an organization’s focus on core business areas while attempting torecognize and benefit from rapid changes has prompted more and moreorganizations to seek outsourced customer contact center solutions.  Organizations lacking this experience andknow-how are finding it increasingly difficult and expensive to service alltheir needs in-house.  As a result,“outsourcing” continues to gain favor across the business spectrum.

 

### Business Strategy

###  

Our businessstrategy is to design, develop, implement, and manage customer contactsolutions that enable our clients to effectively use leading-edge technologyand diversified workforce management.  Bydoing so, we position our clients to improve business operations, reduceoperating expenses and increase overall customer satisfaction.

 

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Our businessstrategy is based on the following strategic initiatives:

 

*CustomerChoice PlatformSM TechnologySuite.* Ourproprietary software suite is designed to enable our clients, partners, andother service providers serving the same client to work from a proven unifiedsoftware platform regardless of whether they are in the U.S. or in an offshorelocation.  This technology suite,developed and hosted by us, provides a single repository for data entered fromdisparate locations and systems.  Ourtechnology suite facilitates seamless tracking of customer interactionsthroughout all touch points.  Ourcustomer relationship management software gathers information from every phonecall, chat, email and self-help transaction connected to our technology suite,regardless of the service provider.

 

*Consulting.*  The first step for most of our clients towarddecreasing costs and improving efficiencies and customer satisfaction is theutilization of Sento’s consulting services. We focus on both macro and micro level processes and methodology. On themacro level, we work closely with clients to understand business needs andgoals.  We then develop appropriatestrategies and processes, often by implementing our Customer Choice PlatformSM,which incorporates self-help, chat, email, phone, and fee-based phoneservices.  On the micro level, weincorporate contact-blue printing that analyzes all aspects of customercontacts including system interactions, as well as developing appropriatecustomer satisfaction/feedback methods.

 

*Design,Develop, Implement, and Manage Leading Edge Customer Relationship Managementand Contact Center Solutions and Methodologies.* We develop strategies and methodologiesdesigned to help our clients significantly reduce service costs, whileincreasing customer choices and satisfaction. Our business strategy utilizes a suite of options to allow our clients’customers to access a variety of contact points depending upon the customer’sdesire and choice at the time.

 

We have assistedmany of our clients in deflecting expensive phone interactions to morecost-effective Web solutions while maintaining the same or higher levels ofservice and quality.  In all cases, we donot eliminate any single form of contact with the customer, but introduce morecost-effective forms and reallocate according to the needs and desires of ourclients and their customers.  Thisconsultative function is designed to assist our clients in determining the bestsolution for their customer base.  Insituations when our clients desire continuing or an increased level oftelephone contact with their customers, we provide highly skilled and very personablephone agents to enhance both fee-based and free-phone interactions.  In consultation with our clients, we striveto deliver the preferred solution and methodology using a combination oftelephone and Web solutions.

 

*IntensiveKnowledgebase Architecture, Management and Scoring.* We deliverinnovative Web solutions through our proprietary “Customer Choice PlatformSM.”  This platform provides customers access tohighly-effective self-help tools.  If aparticular issue is not resolved through self-help, customers can then proceedseamlessly to live chat, email, phone, and other live Web services chosen byour clients.  This transition to livehelp is simply an extension of the customer’s Customer Choice Platform*SM* experience.  Our unique CRM product records and deliversthe customer’s Web experience (i.e. the “click stream,” operating system,browser version, and other important information) to the live agent.  This information transfer allows the agent toknow immediately which features of the Customer Choice Platform*SM* the customer has accessed, andreduces the time to resolution.  Bymonitoring customer activity and analyzing positive behavior, our tools aredesigned to report and improve the overall customer experience.  Our skill and experience in knowledgebasearchitecture and management allows our clients to deliver information tocustomers in a timely and cost-efficient fashion.  These tools are available to companies for alicensing fee using an application software provider (**“ASP”**) model, even when we are notproviding domestic or offshore labor.  Wecurrently support 17 foreign languages.

 

*Capitalizeon Technology.* Our Customer Contact Solutions Centers, whichincorporate scientific workforce management, proven call center infrastructureand leading-edge solutions, are designed to enable clients to rapidly deployand quickly capitalize on trends within their customer base.  In addition, we use contact center resourcesin India.

 

Our systemsincorporate newer technologies such as Voice over IP (**“VoIP”**) and hosted portal services.  The integration of these systems provided bycompanies such as Nortel Networks, Cisco Systems, and AT&T

 

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promote highlevels of economy and efficiency.  Ourtechnology policy requires that infrastructure be fully scalable, meet orexceed customer needs, and provide adequate redundancy and security.

 

Our CustomerContact Solutions Centers go beyond a traditional telephone-centric customersupport facility.  We have acquired ordeveloped systems that increase customer contact points through focusing onInternet interactions such as email, Web text chat, Internet calls, Webcollaboration, Web callback interactions, and co-browsing, as well as usingvoice and fax communication.  Our systemsprovide better efficiency than conventional telephone interactions.  The increasing use of the Internet, as wellas the rising levels of comfort and confidence of consumers with the Internet,is changing the manner in which businesses communicate and interact with theircustomers.  We believe our CustomerChoice Platform*SM* andCustomer Contact Solutions Centers position us to take advantage of theseemerging opportunities.

 

*UtilizeGlobal Labor Pools.*  Wecurrently own and operate three Customer Contact Centers in Utah and one in nearbyWyoming.  In addition, we currently usecontact center resources in India on a contract basis.  In the past we have operated and/or utilizedcenters in Scotland, Ireland and South Africa. We have determined that we can, in some instances, gain significant costsavings and/or language capabilities by utilizing non-U.S. labor.  We currently contract services from India tohandle chat and email transactions.  Todate, we have generally found the Indian workforce to be highly-educated andpossessing above-average writing capabilities. In Europe, we have utilized offshore facilities when supporting Europeanlanguages.

 

### Services

###  

Our integratedCustomer Choice Platform*SM*and customer contact solutions are designed to enable our clients toeffectively use leading-edge technology to improve their business processes andoperating results.  Clients rely on ourCustomer Choice Platform*SM*,methodologies, and customer contact solutions to reduce costs associated withproduct/services support, while increasing customer satisfaction and brandloyalty.  We strive to achieve theseresults in several ways:

 

*CustomerChoice PlatformSM.* We provide clients, through web interfaces, arobust inventory of tools. Through our Customer Choice Platform*SM*, customer specific information ismade available to customers.  Thisinformation provides customers with the option of answering questions andresolving problems without ever going to a live person for assistance.  If live assistance is necessary, however, theCustomer Choice Platform*SM*presents customer information related to live contact options (voice, chat,email or forums).  The customer then canmake an informed choice as to the best possible live contact option for him orher.  For our clients, we track customerbehavior while on the Customer Choice Platform*SM*, which promotes quicker resolution to issues andincreases customer satisfaction.  Thedirect result is increased efficiency and overall cost reduction.

 

*Fee-BasedSolution.* We provideclients with a variety of fee-based options. By adopting fee-based solutions and methodologies, our clients chargecustomers for annual service contracts, multi-incident packets, singleincidents, or even single minutes of support assistance.  One option allows customers the added abilityto move to the front of the queue at those times when waiting for a freecontact is not acceptable.  Whilecurrently used in the telephone environment, fee-based services can apply toany type of contact, whether delivered by telephone, chat, email, self-help, ora combination of these.  Fee-basedservices can be used to route and prioritize interactions, enabling clients tooffer multi-tiered service plans (e.g. silver, gold, platinum, etc.).

 

We currentlyinvoice our clients’ customers directly using a credit card or 900-numberbilling system (customers receive an invoice on their telephone bills).  In the case of credit card billing, funds aredeposited directly into the clients’ merchant accounts.  In some cases the revenue generated fromthese fee-based calls pays for a significant portion of the total cost ofproviding support.  We believe that thisoption will achieve greater acceptance as client companies recognize thatsignificant revenues to offset support costs can be generated from a very smallnumber of transactions and that the customer has made an informed decision tochoose this option.

 

*CustomerContact Solutions.* We offer a broad range of customer contactoutsourcing services, consisting principally of customer acquisition, sales,customer care, helpdesk, technical support, and the development andimplementation of Web strategies to induce customers to use Web services.  We use advanced systems, includingweb-enabled databases and reporting systems, Internet, local area networks (**“LAN”**), multi-user systems,

 

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Computer-TelephonyIntegration (**“CTI”**), CRM, andIntegrated Voice Response (**“IVR”**)technologies, to provide prompt and accurate support, while reducing thetechnology, personnel, and management expenses incurred by our clients.

 

IVR is anautomated self-help telephony system that responds with a voice menu thatallows the user to make choices and enter information via the user’s telephonekeypad or by voice to receive information and accurately route the call to aservice representative.  IVR systems areused in our Customer Contact Solutions Centers to enhance the customerexperience by assisting in routing the caller to the appropriate resource asquickly as possible and by limiting the amount of time required by a live agentto complete the interaction.

 

Most importantly,our CRM tools allow our clients to view the activities and behavior of theircustomers in regard to the transactions we handle.  These tools are easier and less expensive todeploy than more cumbersome enterprise CRM systems.  They also can be integrated into enterpriseCRM systems for deeper analysis.  Theinformation gathered and reported using our CRM tools facilitates our clients’efforts to improve the overall customer experience and to offer productsdesigned to fulfill their customers’ needs and desires.

 

Customer Care.  Our representatives are able to provide avariety of client specific services. These services may include billing andpost-sale customer inquiries, tracking order status, credit-relatedtransactions, providing product information, and generating resources forproblem resolution, mining customer data, or compiling and creating reports ofcustomer records for client-specific use.

 

CustomerAcquisitions.  Ourtrained representatives are able to perform a variety of sales and customer-acquisition-related tasks.  Among theservices offered are cross-sell and up-sell, payment processing, billinginformation, pricing information, general inquiries, and customer assistancefor common product questions.  We arealso able to capture customer profile information and interaction history andprovide such information and history to the client for future sales andmarketing efforts.

 

Helpdesk.  We can provide client-certified professionalsacting on behalf of the client for helpdesk services to end-users and ITstaffs. This is a powerful resource to address questions and problems involvingapplications, integrated desktop products, network support or other specializedareas of need.  Utilizing our personnel,clients may develop programs to meet very specific requirements, and thenimplement those programs as a customer contact solution or as a supplement tothe customer’s in-house facility.

 

Technical Support.  Product support services are targeted towardsOEMs, software publishers, hardware system manufacturers, and other entitiesrequiring mid-level to high-end technical services.  These services, which are more technical in naturethan helpdesk or customer support services, are designed to provide customerswith immediate and efficient access to “best-of-class” product support.  We also deliver comprehensive first-levelsupport (support related to product installation, features and configuration)to end users and manufacturers, combining hardware and network support withapplication support for proprietary and off-the-shelf programs.  We have a history of delivering theseservices at significantly lower average handle times than industry norms.  Our cost-effective tools and methodologyenable us to deliver these services through self-service, free and fee-basedphone, chat, and email.

 

*InternationalOperations*.* *Our clients and Sento both benefitby distributing some or all customer contacts to offshore locations.  We have engaged a third-party serviceprovider in India to assist in delivery of some of our chat and e-mailservices, and have previously conducted operations through alliances in otheroffshore locations.  These offshorelocations can successfully handle a mix of voice, chat, and email transactions.Other locations are currently under consideration. These internationaloperations provide our clients with more choices and greater control of theircustomer relationships.  We believeoffshore contact sites will help us to achieve levels of profitability thatcould be more difficult to realize in a large domestic urban area.

 

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### Significant Clients

###  

Two clientsaccounted for approximately 47% of our revenues for the year ended March 31,2004.  These two clients accounted forapproximately 29%, and 18%, respectively, of our revenues for fiscal 2004.  For fiscal 2003, four clients accounted forapproximately 70% of our revenues.  Thesefour clients accounted for approximately 27%, 20%, 12%, and 11%, respectively,of revenues for fiscal 2003.

 

Consistent withindustry standards, our contracts are generally cancelable by the client onshort-term notice.  Our loss of asignificant amount of business with any of our key clients could have, and theloss of a substantial amount of business with any of our larger existingtechnical support clients would have, a material adverse effect on ourbusiness, financial condition, and results of operations.  In addition, our future revenue growth isdependent upon our ability to attract and retain new clients.

 

### Competition

###  

The contact centerindustry is highly competitive, global in scope, and comprised of myriadenterprises and individuals.  Methods ofcompetition within the industry include, but are not limited to, marketing,product performance, price, product differentiation, service, technology, andcompliance with industry standards.  Weanticipate that present and potential competition in the various markets weserve will come from enterprises and individuals of various types, many ofwhich will likely be larger and will have greater resources than we.  Firms not now in direct competition with usmay introduce competing products in the future. It is possible for companies to be at various times competitors,customers, and collaborators in different markets.  We believe that implementation of ourstrategy and methodology of delivering integrated contact center solutions,powered by the Web, constitutes a competitive advantage**.**

 

We facesignificant and diverse competition in the customer contact solutions industryfrom a broad spectrum of international, national, regional and localenterprises.  Our ability to compete willbe driven by our niche approach, our competencies in leading-edge technologies,our deployment of Web solutions, our strategic and business alliances, and ourefforts to aggressively establish a presence in other vertical markets such asthe health care and the financial sectors.

 

Given theextensive market opportunity in the customer contact center space, we believethat our strategy of providing the “best-of-breed” services, powered by theWeb, will provide us with a competitive advantage in achieving growth and incapturing market share while reaching profitability objectives. Additionally,banks and other companies in the financial sector are beginning to recognizethe value of outsourced customer contact solutions. We expect to directconsiderable time and effort to establish a solid presence in this vertical market.

 

### Patents andProprietary Technology

###  

We do not own anypatents nor have we submitted any patent applications relating to ourproducts.  We have a limited number ofcopyrights and have obtained licenses to create derivative works relative tocopyrights owned by third parties.  Theownership of such derivative works vests in the licensor.  We claim trade name and trademark protectionfor our proprietary names and marks, and are seeking formal registration ofcertain of our trademarks.  Accordingly,we do not believe that any particular patent or group of patents, copyrights,trademarks, or trade names is of material importance to the business as awhole.

 

### Research andDevelopment

###  

We compete in anindustry that is characterized by rapid technological change.  As our clients’ needs change and evolve, andas Internet and Web technologies proliferate, we expect to incur additionalexpense in the development and improvement of our Customer Choice Platform*SM*, customer contact solutions toolsand offerings, and in the integration of our technology with third partyplatforms and software.  To maintain ourcompetitive edge in technology, we also intend to selectively utilize theresearch and development efforts of third-party technology providers andpartners.

 

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### Employees

###  

We maintain astaff of trained personnel to provide support to our clients. We have atechnically-competent employee base, which we enjoy from being geographicallysituated close to two major universities. We enhance employees’ proficiency through our sophisticated performancemanagement system.  Employees receivepositive performance feedback on a daily basis and are given access to trainingprograms including Microsoft Certified Software Engineer, Novell Certification,and operating systems including Windows, Unix, and Linux.  We also maintain a highly-proficientperformance management team responsible for training and monitoring employees.  Our rapidly expanding Customer ChoicePlatform*SM* businesshas allowed us to reduce headcount from that of previous years.  Meanwhile, our software engineering and webdevelopment groups continue to be a major focus within the organization.

 

As of July 1,2004, we had approximately 542 total employees, of which approximately 494 werefull-time employees and approximately 48 were part-time employees.  Competition for qualified personnel in ourindustry is intense. Our future success and growth will depend in large measure,upon our ability to attract and retain qualified management and technicalpersonnel.  There can be no assurance wewill be able to attract and maintain all personnel necessary for thedevelopment and operation of our business, or that we will be able to train ourcurrent employees on new developments in technology.  If we fail to attract and retain keymanagement and technical personnel, our operations may be adverselyaffected.  None of our employees isrepresented by a labor organization with respect to his or her employment.  We have never had a work stoppage, and weconsider our employee relations to be satisfactory.

 

### Proprietary Marks

###  

We use manythird-party products represented by registered or common-law trademarks,including the following trademarks:  (1)Microsoft®, Windows® and MCSE®, which are trademarks of Microsoft; (2) CNE®,which is a trademark of Novell Inc; and (3) Linuxä,which is a trademark of Linus Torvalds. This Report also contains trademarks of other companies includingNortel, which is a registered trademark of Nortel Networks; Cisco, which is aregistered trademark of Cisco Systems Inc; and AT&T, which is a registeredtrademark of AT&T Corporation.

 

### Factors that May Affect Future Results

###  

*Thereare a number of factors that may affect our operating results, including therisks and uncertainties identified in the following paragraphs.  In addition to other information set forth inthis Report, readers should review and carefully consider the followingfactors.*

 

***Volatile economic conditions have affected and will likelycontinue to affect our operations and financial results.***

 

Volatile economicconditions have adversely affected our operations and financial results.  The slowing economy in recent years caused usto lose some clients and also resulted in increased pricing pressures and lowercall volumes from some existing clients. Slower economic conditions may limit our ability to attract new clientsor retain existing clients.  Thesefactors contributed to the decline in our revenues and the net losses weexperienced during most of 2002 and 2003. The slower economy also resulted in excess capacity to service callvolumes.  A substantial percentage of ourexpenses is attributable to labor costs associated with staffing CustomerContact Solutions Centers, which we may not be able to significantly reduce onshort notice in order to compensate for unexpected shortfalls in callvolumes.  We cannot forecast futurefluctuations in economic conditions, and our operations and financial resultsmay be materially and adversely affected by economic volatility.

 

***We repriced our employee stock options and may havesignificant volatility in our earnings if our stock price increases ordecreases.***

 

In April 2003, werepriced certain employee and director stock options in an effort to provide anadequate incentive to assist in the retention and motivation of our employeesand directors.  Current accounting rulesrequire us to adjust the amount of compensation expense we recognize in ourfinancial statements for changes in the stock price until the stock options areexercised, forfeited or expire.  Infiscal 2004 we recognized expense of $1,562,108

 

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related to ourrepriced stock options.  If our stockprice is volatile, our future stock compensation charges may affect ourprofitability, either positively or negatively.

 

***Several key clients represent a significant portion of ourrevenues, and the loss of a key client could affect our revenues andprofitability.***

 

Two clientsaccounted for approximately 47% of our revenues for the year ended March 31,2004.  These two clients accounted forapproximately 29% and 18%, respectively of our revenues for fiscal 2004.  A key client, who accounted for 28% ofrevenues in fiscal 2002, cancelled its contract with us early in fiscal2003.  The loss of this client had asignificant negative impact on our revenue and profitability in fiscal 2003 andfor the first nine months of fiscal 2004, until this business was replaced.

 

Our clients cangenerally cancel their contracts on short notice.  It can take a significant amount of time todevelop and obtain new clients and retrain employees to replace revenue from alost client.  Thus, the loss of any ofour key clients could have a significant effect on our revenues andprofitability.  In addition, our futurerevenue growth is dependent upon our ability to attract and retain new clients.

 

***We have a history of losses and may continue to experiencelosses****.*

 

We experienced netlosses in four of our last five fiscal years.  In the fiscal years ended March 31, 2004and 2003, we had net losses of $(1,465,230) and $(2,111,348), respectively, andwe had an accumulated deficit of $(10,479,878) as of March 31, 2004.  We may continue to incur net losses if welose clients, are unable to attract and retain new clients or do not properlyutilize our resources.  We cannot ensurethat we will be able to achieve or maintain consistent profitable operations.

 

***We may be unable to attract, train and retain keymanagement, technical and marketing personnel.***

 

Our success willdepend, in large part, on our ability to attract, retain and train highlyqualified technical, managerial and marketing personnel with the expertiserequired to successfully conduct our operations.  We have not entered into employmentagreements that obligate any of our key managerial or technical personnel toremain with us for any specified period of time. If we lose any key personnelor are unable to attract, retain, train or motivate qualified personnel, ourbusiness operations and financial condition may be materially and adverselyaffected.

 

***A failure of our computers, telecommunications equipment orsoftware systems could interrupt our ability to provide our services****.*

 

Our businessdepends to a large extent on computers, telecommunications equipment andsoftware systems (both equipment and systems maintained by us and equipment andsystems maintained by third parties).  Anatural disaster, human error, equipment malfunction or inadequacy or multipleother events could result in a prolonged interruption in our ability to providesupport services to clients or their customers. The temporary or permanent loss of computer or telephone equipment orsystems, through casualty, operating malfunctions or otherwise, could have amaterial adverse effect on our operations, property or financial condition, andbusiness interruption insurance may not be adequate to compensate for alllosses that may be incurred.

 

***We rely on a third-party software company for our chat andemail applications*.**

 

We contract with athird-party software company to provide chat and email tools used with our CRMsoftware, reporting and management services. If this software company fails in its business efforts, we may lose our accessto these software tools.  Our failure toobtain adequate replacement software tools would cause us to experience servicedelays, interruptions or cancellations.

 

***We are subject to collections risks and may be unable tocollect our accounts receivable balances.***

 

We provide unsecuredcredit terms to our clients.  Based oncredit evaluations and other information gathered by our management, weestablish credit terms for each client; however, there can be no assurance thatour

 

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future creditlosses will be consistent with management’s expectations.  A significant change in the liquidity orfinancial condition of one or more key clients, or a larger number of smallerclients, or further deterioration in the economic environment, in general,could have an adverse impact on the collectability of our accounts receivableand our future operating results.

 

***Managing the utilization level of our resources is necessaryin order to achieve our desired profitability.***

 

Our businessstrategy requires us to fully utilize excess personnel and physical facilitiesin an effort to increase our profits.  Aswe expand our operations, we may not always be able to manage the level ofpersonnel and facilities to reach our desired levels of utilization, which mayaffect our profitability.  Also, if welose existing clients, we may have excess personnel and physical facilitiesthat would have an adverse effect on our business operations and ourprofitability.

 

***Implementation of our growth plans will be dependent on ourability to market and sell our services to new and existing clients.***

 

Our growth plansare dependent upon our ability to attract and retain new clients and togenerate additional business from existing clients.  Our efforts to market and sell our serviceswill be affected by fluctuations in technology and industry standards, changesin customer requirements and preferences, and general economic conditions,among other factors.  Many of thesefactors are beyond our control.  If weare incorrect in our assessment of the feasibility of our growth plans, if weare not effective in our efforts to market and sell our services or ifcircumstances change in a way that we did not foresee or anticipate, we may notgrow as planned or our growth strategy may have an adverse effect on businessoperations and our profitability.

 

***Competitive pressures could harm our financial performance.***

 

The market forcustomer contact services is highly fragmented and very competitive.  In certain segments of the industry, however,the customer contact services industry has begun to experience a degree ofconsolidation, and the development of major customer contact center companieshas resulted in an additional level of competition from service providers thathave greater name recognition, larger installed customer bases, andsignificantly greater financial, technical, and marketing resources than wehave.  Large established enterprisesoftware companies may leverage their existing relationships and capabilitiesto offer customer service applications. In other instances, many large companies provide their own in-housecustomer care support and customer training. Also, a number of existing companies have experienced rapid internalgrowth, and several of these companies have been active in acquiring smallerregional customer contact services companies and are becoming major competitorswith a measurable share of this rapidly expanding market.  If our competitors provide more efficient orless expensive services, we may lose market share and revenues.

 

***A delay in market acceptance of our products and servicescould negatively impact our business and revenues.***

 

The customercontact services market is extremely competitive.  We were a relatively early entrant in thecustomer self-services and chat markets; however, we have struggled in ourefforts to market and sell our products and services and have been slow todevelop certain business operations. Further delays in the development of our products and services wouldallow our competitors additional time to improve their service or productofferings, and also provide time for new competitors to develop e-businesscustomer service applications and solicit prospective clients within our targetmarkets.  This would increase competitionthat could result in additional pricing pressures, and we may lose market shareand revenues.

 

***If we do not keep up with the rapid technological changeexperienced by the customer contact service market, our products and servicesmay become obsolete and we may lose clients.****.*

 

The customercontact service industry is characterized by rapid technological change,alterations in customer requirements and preferences, and the emergence of newindustry standards and practices.  Ouroperating results and financial condition will depend, in part, on our abilityto develop solutions that keep pace with continuing changes in informationtechnology, evolving industry standards, and changing client requirements.  There can be no assurance that we will besuccessful in adequately addressing these developments on a timely basis

 

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or that, if thesedevelopments are addressed, we will be successful in the marketplace.  In addition, products or technologiesdeveloped by others could render our services non-competitive or obsolete.  Our failure to address these developmentscould have a material negative effect on our business and financial condition.

 

***If companies reduce their reliance on outsourced services,our revenues and financial condition may be adversely affected.***

 

Our businessdepends in large part on the trend within the IT industry to outsource certainservices.  We cannot provide anyassurance that this trend will continue or that, if the trend continues, itwill continue at the same rate of growth. The failure of this trend to continue could have a material adverseeffect on our business, financial condition, and results of operations.

 

***Market volatility and fluctuations in our stock price andtrading volume may cause sudden decreases in the value of an investment in ourcommon stock.***

 

The market price of our common stock has historically been,and we expect it to continue to be, volatile. This price has ranged between $1.41 and $17.89 in the fifty-two weekperiod ended April 30, 2004.  The marketfor our common stock has, from time-to-time, experienced extreme price andvolume fluctuations, which have often appeared to be unrelated to our operatingperformance.  Our stock price has alsobeen affected by our own public announcements regarding such things asquarterly earnings, changes in clients, obtaining financing and corporatepartnerships.  Consequently, events bothwithin and beyond our control may cause shares of our common stock to losetheir value rapidly.

 

***Our revenues andquarterly results can be volatile, which makes evaluating our businessdifficult.***

 

Individual client revenue transactions can constitute asubstantial percentage of our quarterly revenue, and some revenue transactionsmay generate a substantial portion of the operating profits for a quarter.  Our revenues are also a function of thenumber of support requests we receive, and the time we spend on suchrequests.  Thus, if we receive fewersupport requests than anticipated or the time spent in resolving inquiries isgreater than anticipated, our revenues may decline.  Further, delays in the receipt of orders cancause significant fluctuation in revenues from quarter to quarter.

 

Because our staffing and other operating expenses are basedon anticipated revenue levels, and a high percentage of our expenses are fixed,the volatility in our revenues can cause significant variations in operatingresults from quarter to quarter and we may not be able to achieve or sustainprofitability on a quarterly basis.  Inaddition, we may expend significant resources pursuing potential sales thatwill not be consummated.  Furthermore, wemay choose to reduce prices or to increase spending in response to competitionor to pursue new market opportunities, which may adversely affect our operatingresults.

 

For the reasons identified above, we believe thatperiod-to-period comparisons of our revenues and operating results may not bemeaningful and should not be considered an indication of future performance.

 

***Shares eligible forfuture sale may cause the market price for our common stock to dropsignificantly, even if our business is doing well.***

 

We cannot predict the effect, if any, that future sales ofour common stock or the availability of shares for future sale will have on themarket price of our common stock from time to time.  We have entered into registration rightsagreements which contemplate that substantially all of our outstanding sharesof common stock will become freely tradable in the public market.  Other shares of our common stock issued inthe future, including shares issued upon exercise of outstanding options andwarrants, may become available for resale in the public market from time totime, and the market price of shares of our common stock could dropsignificantly if the holders of these shares sell them or are perceived by themarket as intending to sell them.  Inaddition, sales of a substantial number of shares of our common stock in ashort period of time could adversely affect the market price of our shares.

 

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***Provisions of ourArticles of Incorporation and Bylaws could impair or delay stockholders’ability to replace or remove our management and could discourage takeovertransactions that stockholders might consider to be in their best interests.***

 

Our Articles of Incorporation and Bylaws, the Utah RevisedBusiness Corporation Act, and the Utah Control Shares Acquisition Act eachcontain certain provisions that may have the effect of inhibiting anon-negotiated merger or other business combination.  Our Articles of Incorporation grant to ourBoard of Directors the authority, without further action by our stockholders,to fix the rights and preferences of, and issue shares of preferred stock.  These provisions may deter hostile takeoversor delay or prevent changes in control of us or changes in our management,including transactions in which stockholders might otherwise receive a premiumfor their shares over the then-current market prices.  In addition, these provisions may limit theability of stockholders to approve transactions that they may deem to be intheir best interests.

 

***We have never declared adividend on our common stock and we do not anticipate paying dividends in theforeseeable future.***

 

No dividends have ever been declared or paid on our commonstock.  We intend to retain any futureearnings for use in our business and do not anticipate paying any dividends onthe Common Stock in the foreseeable future.

 

## ***Item 2.***   Description ofProperty

## *** ***

Our principal executive offices are located in AmericanFork, Utah.  This facility currentlyserves as our headquarters for our senior management and as a customer contactsolution center.  We have additionalcustomer contact solution centers in American Fork and Orem, Utah, and inEvanston, Wyoming.  We believe ourexisting facilities are adequate to meet current requirements and our immediategrowth plans.  All of our facilities areleased.  The following table sets forthadditional information concerning our facilities:

 
| **Loca****tion**      | ** ** | **General Usage**                                      | ** ** | **Approximate  Square Feet** | ** ** | **Monthly  Rent** | ** ** | **Lease  Expiration** | ** **   |
|-----------------------|------------|--------------------------------------------------------|------------|------------------------------|------------|-------------------|------------|-----------------------|--------------|
|                  |       |                                                   |       |                         |       |              |       |                  |         |
| American  Fork, Utah  |       | Customer Contact Solution Center and Executive Offices |       | 40,000                       |       | $                 | 37,869     | (1)                   | September 05 |   |
|                  |       |                                                   |       |                         |       |              |       |                  |         |
| American  Fork, Utah  |       | Customer Contact Solutions Center                      |       | 15,300                       |       | $                 | 17,876     |                  | August 05    |   |
|                  |       |                                                   |       |                         |       |              |       |                  |         |
| Orem,  Utah           |       | Customer Contact Solutions Center                      |       | 29,300                       |       | $                 | 30,566     | (2)                   | December 08  |   |
|                  |       |                                                   |       |                         |       |              |       |                  |         |
| Evanston,  Wyoming    |       | Customer Contact Solutions Center                      |       | 33,000                       |       | $                 | 9,625      |                  | June 05      |   |
|                  |       |                                                   |       |                         |       |              |       |                  |         |
| Green  River, Wyoming |       | Currently not in use                                   |       | 10,000                       |       | $                 | 11,920     | (3)                   | July 08      |   |

 

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(1)                                       We have entered into asublease agreement for 19,678 square feet of this facility.  The sublease agreement provides for paymentto us of rental income of $16,565 per month through September 2005.

 

(2)                                       Monthly rent includes realestate taxes, insurance against loss, facility and property maintenance,security services and all utilities.  Ourlease agreement provides for a rent abatement, pursuant to which we will not berequired to pay rent for nine of the months between July 2004 and December2005.

 

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(3)                                       Monthly rent includes realestate taxes, insurance against loss and facility and propertymaintenance.  We have entered into asublease agreement for 5,500 square feet of this facility.  The sublease agreement provides for paymentto us of rental income of $3,896 per month through July 2008.

 

In addition to the above space, we currently have an optionto rent approximately 29,000 additional square feet in the Orem, Utah facilityunder the same basic terms and conditions of the current lease.

 

## ***Item 3.***   Legal Proceedings

## *** ***

From time to time, we are involved in litigation, most ofwhich is incidental to our business.  Inour opinion, no litigation to which we currently are a party is likely to havea material adverse effect on the Company’s results of operations or financialcondition.

 

## ***Item 4.***   Submission ofMatters to a Vote of Security Holders.

## *** ***

No matters were submitted to a vote of security holdersduring the fourth quarter of the fiscal year covered by this Report.

 

# **PART II**

# ** **

## ***Item 5.***   Market for CommonEquity and Related Stockholder Matters

## *** ***

Our common stock, par value $.25, is listed and tradedunder the symbol “SNTO” on the NASDAQ Small Cap Market maintained by theNational Association of Securities Dealers (the “**NASD**”). The following table sets forth the range of high andlow closing prices for our common stock for the periods indicated, as reportedby the NASD.  The quotations representprices in the market between dealers in securities; they do not include retailmarkup, markdown or commissions, and do not necessarily represent actualtransactions.

 
| **Quarter  Ended**  | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------|------------|----------|------------|---------|------------|
| March 31,  2004     | ** ** | $        | 12.35      |    | $          | 3.97 |   |
| December  31, 2003  | ** ** | $        | 4.57       |    | $          | 2.28 |   |
| September  30, 2003 |       | $        | 3.17       |    | $          | 1.94 |   |
| June 30,  2003      |       | $        | 2.19       |    | $          | 1.35 |   |
| March 31,  2003     | ** ** | $        | 1.68       |    | $          | 1.15 |   |
| December  31, 2002  | ** ** | $        | 2.40       |    | $          | 1.57 |   |
| September  28, 2002 |       | $        | 2.92       |    | $          | 2.00 |   |
| June 29,  2002      |       | $        | 4.12       |    | $          | 2.88 |   |

 

We did not pay or declare dividends on our common stockduring the fiscal years ended March 31, 2004 and March 31, 2003.  We currently anticipate that we will retainall available funds to finance our future growth and business expansion.  We do not presently intend to pay cashdividends in the foreseeable future.

 

As of July 1, 2004, we had 3,726,986 shares of common stockoutstanding, held by 385 stockholders of record, which does not includestockholders whose shares are held in securities position listings.

 

### RecentSales of Unregistered Securities

###  

*2004 Private Placement*.  On March 30, 2004, we issued 634,962 sharesof our common stock, together with warrants to purchase 126,992 shares of ourcommon stock, to a group of institutional investors in a private

 

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placement for aggregate consideration of $6,705,198.  The shares of common stock and warrants weresold in units of one share of common stock and one-fifth warrant at a price of$10.56 per unit.  The Shemano Group, aregistered broker-dealer, acted as agent in connection with the privateplacement in exchange for a payment of $469,364 and our issuance of warrants topurchase 30,000 shares of common stock. Each purchaser in the private placement provided representations thatsuch purchaser was an accredited investor and was provided with informationdescribing our business and financial condition. The warrants permit theholders to acquire shares of our common stock at an exercise price of $12.67per share, are first exercisable on September 30, 2004, and remain exercisablefor 42 months.  The warrants includestandard anti-dilution provisions pursuant to which the exercise price and numberof shares issuable thereunder will be adjusted proportionately in the event ofa stock split, stock dividend, recapitalization or similar transaction.

 

*Shareholder Relations Warrant*.  Pursuant to a consulting agreement withShareholder Relations, we issued to Shareholder Relations on or about August 1,2003, as partial consideration for shareholder relations and other consultingservices, a warrant to purchase 20,000 shares of our common stock.  The warrant permits the holder to acquireshares of our common stock at an exercise price of $2.70 per share at any timeprior to August 1, 2005.  The warrantsinclude standard anti-dilution provisions pursuant to which the exercise priceand number of shares issuable thereunder will be adjusted proportionately inthe event of a stock split, stock dividend, recapitalization or similartransaction.

 

*Consultant Warrant*.  Pursuant to a consulting agreement withRemsen Funding Corporation of New York (“Remsen”), we have agreed to issue toRemsen, as partial consideration for consulting services, a warrant to purchase5,000 shares of our common stock each month during the term of the agreement,which is terminable by either party at any time upon sixty days advancenotice.  Through July 1, 2004, we haveissued to Remsen warrants to purchase 35,000 shares of common stock.  The warrants permit the holder to acquireshares of common stock at an exercise price of $3.00 per share at any timeprior to the date that is three and one-half years after the date of issuance.  Each warrant vests with respect to 25% of theshares subject thereto on the first day of each calendar quarter following itsissuance.  The warrants also include anet exercise provision and anti-dilution provisions pursuant to which theexercise price and number of shares issuable thereunder will be adjustedproportionately in the event of a stock split, stock dividend, recapitalizationor similar transaction.  We have alsogranted the warrant holder piggyback registration rights with respect to anyregistration (other than on Form S-4 or Form S-8) that permits the registrationof secondary sales.

 

We anticipate that we will recognize compensation expensebased on the fair value of the warrants as the warrants vest.  Because the fair value of the warrants willchange based on the changes in the underlying value of the common stock duringthe vesting period, compensation expense related to this agreement couldincrease or decrease significantly based on the changes in the value of ourcommon stock.

 

*Bank Warrant*.  In March 2004, we issued to our bank 47,655shares of common stock pursuant to the exercise of warrants to purchase 60,000shares of common stock under cashless exercise provisions of the warrantagreement.  These warrants were issued onApril 15, 2003 to our bank in connection with a refinancing and the renewal ofour credit line.

 

*2003 Debentures*.  On April 15, 2003, we issued anaggregate of $1 million of convertible debentures to 38 purchasers. Eachdebenture accrued interest at the rate of 8% per year, was convertible intoshares of our common stock at $1.75 per share, expired in three years, andhad attached warrants with an exercise price of $2.25 to purchase one share ofour common stock for each $4 of debentures purchased. Those warrants expire onApril 15, 2006. Each purchaser provided to us representations that suchpurchaser was an accredited investor and was provided with a private placementmemorandum detailing our business and financial condition, including copies ofour Annual Report on Form 10-KSB for the fiscal year ended March 31,2002 and our Quarterly Reports on Form 10-QSB for the periods endedJune 29, 2002, September 28, 2002 and December 31, 2002. We paidcommissions of $46,960 to a placement agent in connection with the sale of theconvertible debentures and issued a warrant to purchase 50,000 shares to afinder. As of March 31, 2004, all such debentures had been converted into576,380 shares of common stock.  Inaddition, we issued 21,428 shares of common stock pursuant to the exercise ofwarrants to purchase 37,500 shares of our common stock associated with theabove mentioned convertible

 

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debentures.  Of thewarrants exercised, 35,000 were exercised under cashless exercise provisions ofthe warrant agreements.

 

Based onrepresentations provided by the other parties to the transactions describedabove, we believe the securities issued and sold in the above transactions wererestricted securities taken for investment. Certificates for all shares ofcommon stock, warrants and debentures (and shares of common stock issued uponconversion of debentures or exercise of warrants) issued in such transactions bore a restrictive legendconspicuously on their face and stop-transfer instructions were notedrespecting such certificates on our transfer records, except in circumstancesin which we received a written opinion from legal counsel to the holders ofsuch securities to the effect that due to the tacking of holding periods ofpreviously held debentures (given in exchange for the recently issueddebentures) the common stock certificates issued on debenture conversion didnot need to bear a restrictive legend. Each of the foregoing transactions waseffected in reliance on the exemption from registration provided inSection 4(2) of the Securities Act of 1933 or Rule 506 ofRegulation D adopted thereunder as transactions not involving a publicoffering.

 

### Description of Capital Stock

###  

**General**

 

Thissection describes the general terms and provisions of the shares of our commonstock, par value $0.25 per share, and preferred stock, no par value.  This summary is not complete, and isqualified in its entirety by reference to our Amended and Restated Articles ofIncorporation (the “Articles”) which are filed as an exhibit to this Report andour Bylaws.  You should read ourArticles, as well as our Bylaws, for additional information regarding ourcapital stock.

 

**Common Stock**

 

Our Articles authorize the issuance of  50,000,000 shares of  common stock. As of July 1, 2004, there were 3,726,986 shares of common stock issuedand outstanding, held by approximately 385 stockholders of record, which doesnot include stockholders whose shares are held in securities positionlistings.  Except as otherwise requiredby law, each share of our common stock entitles the stockholder to one vote oneach matter which stockholders may vote on at all meetings of ourstockholders.  Holders of our commonstock are not entitled to cumulative voting in the election of directors.  Holders of our common stock do not havepreemptive, subscription or conversion rights, and there are no redemption orsinking fund provisions applicable thereto. Shares of common stock are entitled to share equally and ratably individends paid from the funds legally available for the payment thereof, when,as and if declared by our Board of Directors. The declaration of dividends, however, is subject to the discretion ofour Board of Directors.  Holders of ourcommon stock are also entitled to share ratably in any of our assets availablefor distribution to holders of our common stock after payment of liabilitiesupon liquidation or dissolution of Sento, whether voluntary orinvoluntary.  All the outstanding sharesof our common stock are fully paid and non-assessable.

 

We have no present intention of paying any cash dividendson our common stock and plan to retain any earnings to finance the developmentand expansion of our operations.  Thepayment of cash dividends also may be restricted by a number of other factors,including our future earnings, capital requirements and financial condition,covenants with lenders, lessors or other parties, as well as restrictions onthe payment of dividends imposed under Utah law.

 

**Preferred Stock**

 

As of July 1, 2004, our authorized preferred stock was 5,000,000shares, of which none were issued and outstanding.

 

We may issue preferred stock with such designations,powers, preferences and other rights and qualifications, limitations orrestrictions as our Board of Directors may authorize, without further action byour stockholders, including but not limited to:

 

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•                                           the distinctive designation of each seriesand the number of shares that will constitute such series;

 

•                                           the voting rights, if any, of shares of theseries and the terms and conditions of such voting rights;

 

•                                           the dividend rate on the shares of theseries, the dates on which dividends are payable, any restriction, limitationor condition upon the payment of dividends, whether dividends will becumulative and the dates from and after which dividends shall accumulate;

 

•                                           the prices at which, and the terms andconditions on which, the shares of the series may be redeemed, if such sharesare redeemable;

 

•                                           the terms and conditions of a sinking orpurchase fund for the purchase or redemption of shares of the series, if such afund is provided;

 

•                                           any preferential amount payable upon sharesof the series in the event of the liquidation, dissolution or winding up of, orupon the distribution of any of our assets; and

 

•                                           the prices or rates of conversion orexchange at which, and the terms and conditions on which, the shares of suchseries may be converted or exchanged into other securities, if such shares areconvertible or exchangeable.

 

**Registration Rights**

 

We have granted registration rights to the holdersof shares of common stock we sold in private offering transactionscompleted during 2003 and 2004.  We have also agreed to register shares ofcommon stock issuable upon the exercise of warrants sold in such privateoffering transactions or issued to consultants in exchange for consultingand shareholder relations services performed for Sento.  The total numberof shares of common stock which we are obligated to register under the SecuritiesAct is approximately 1,022,343, subject to adjustment for stocksplits, stock dividends recapitalizations or similartransactions.  Of the total number of shares of common stock subjectto such registration rights, 634,962 shares, together with warrants to purchase126,992 shares, were issued in a private offering transaction completed onMarch 30, 2004 (the “2004 Private Placement”).  Pursuant to theregistration rights agreement executed in connection with the 2004 PrivatePlacement, we were obligated to file a registration statement covering suchshares (including the shares issuable upon conversion of the associatedwarrants) on or before May 31, 2004 and to use our best efforts to cause theregistration statement to be declared effective.  The holders of the remainingshares subject to registration rights (approximately 260,389 shares) possess“piggyback” registration rights, enabling them to requestregistration of such shares in connection with the filing of the registrationstatement required to be filed in connection with the 2004 Private Placement.

 

**Utah Control Shares Acquisition Act**

 

The UtahControl Shares Acquisition Act (the “Control Shares Act”) provides that anyperson or entity that acquires “control shares” of a publicly-held Utahcorporation in a “control share acquisition” is denied voting rights withrespect to the acquired shares, unless a majority of the disinterestedstockholders of the corporation elects to restore such voting rights. TheControl Shares Act provides that a person or entity acquires “control shares”whenever it acquires shares that, but for the operation for the Control SharesAct would bring its voting power within any of the following three ranges: (i)20% to 33 1/3%, (ii) 33 1/3% to 50%, or (iii) 50% or more. A “control shareacquisition” is generally defined as the direct or indirect acquisition ofeither ownership or voting power associated with issued and outstanding controlshares. The directors or stockholders of a corporation may elect to exempt thestock of the corporation from the provisions of the Control Shares Act throughadoption of a provision to that effect in the articles of incorporation orbylaws of the corporation. Our Articles and Bylaws do not exempt our commonstock from the provisions of the Control Shares Act.

 

Thestockholders of a corporation must consider the status of the voting rights ofcontrol shares of the corporation acquired in a control share acquisition atthe next annual or special meeting of stockholders held following suchacquisition. The acquiror may accelerate the decision and require thecorporation to hold a special meeting of stockholders for the purpose ofconsidering the status of those rights if the acquiror (i) files an “acquiringperson statement” with the corporation, and (ii) agrees to pay all expenses ofthe meeting. If the stockholders do not vote to restore voting rights to thecontrol shares, the corporation may, if its articles of incorporation or bylawsso provide, redeem the control shares from the acquiror at fair market value.If the acquiror fails to file an acquiring

 

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person statement, the corporation may, if its articles ofincorporation or bylaws so provide, redeem the control shares at any timewithin 60 days of the acquiror’s last acquisition of control shares, regardlessof the decision of the stockholders to restore voting rights. Our Articles andBylaws do not provide for such redemption. Unless otherwise provided in thearticles of incorporation or bylaws of a corporation, stockholders are entitledto dissenters’ rights if the control shares are accorded full voting rights andthe acquiror has obtained majority or more control shares. Our Articles andBylaws do not deny such dissenters’ rights to our stockholders.  The provisions of the Control Shares Act maydiscourage companies interested in acquiring a significant interest in orcontrol of us.

 

**Certain Indemnification and LimitedLiability Provisions**

 

Our Articles provide that we shall indemnify any person whois or was a director, officer, employee or agent of our company, or who wasserving at our request as a director, officer, employee or agent of anotherentity, trust or plan to the fullest extent permitted by the Utah RevisedBusiness Corporation Act.  Our Bylawsalso include mandatory indemnification provisions with respect of our officersand directors and discretionary indemnification provisions with respect toemployees and agents, each subject to limitations generally reflecting thelimitations on indemnification set forth in the Utah Revised BusinessCorporation Act.

 

Our Bylaws provide that we may purchase and maintaininsurance on behalf of any person who is or was one of our directors, officers,employees or agents, or is or was serving at our request as a director,officer, employee or agent of another corporation, partnership, joint venture,trust or other enterprise against any liability asserted against him or her orincurred by him or her in such capacity or arising out of his or her status insuch capacity, whether or not we would have the power to indemnify him or heragainst such liability under the indemnification provisions of our bylaws orthe laws of the State of Utah, as the same are amended or modified.  We maintain insurance from commercialcarriers against certain liabilities that may be incurred by our directors andofficers.

 

As a result of the indemnification provisions describedabout and contained in the Utah Revised Business Corporations Act, subject tocertain limitations in the Utah Revised Business Corporation Act, we may bepermitted or compelled to provide indemnification and advancement of expensesto our directors, officers, agents, and employees when they are made parties toan investigation or legal action in connection with services performed at ourrequest, including when such persons are alleged to have violated theSecurities Act.  Insurance purchased withrespect to such persons may also cover expenses or other liabilities associatedwith an allegation of violations of the Securities Act.

 

Insofar as indemnification for liabilities arising underthe Securities Act of 1933 may be permitted to our directors, officers andcontrolling persons or pursuant to the foregoing provisions, or otherwise, wehave been advised that in the opinion of the SEC such indemnification isagainst public policy as expressed in the Securities Act and is, therefore,unenforceable.

 

**Change in Control Arrangements**

 

During the fiscal year ended March 30, 2002, our Boardof Directors reviewed the time and insight provided by our directors, as wellas our limited ability to provide additional cash payments to our directors ascompensation for their services to Sento.  Based upon this review, as wellas an assessment that the directors would likely be required to devoteincreased time and attention during the fiscal year ended March 30, 2002to several strategic initiatives, including review and negotiation ofprospective transactions intended to promote shareholder value and liquidity,our Board of Directors adopted resolutions intended to compensate our directorsif Sento completes such a transaction. Pursuant to resolutions adopted inApril 2001 and March 2002, our Board approved a contingent issuanceof shares of common stock to each of our directors (18,750 shares to GaryFiller, Chairman of the Board, and 12,500 shares to each other director thenserving). The shares of common stock are issuable only upon the completion ofcertain merger, consolidation, acquisition, sale and liquidation transactionsconstituting a “change of control” under our 1999 Omnibus Stock Incentive Plan.Because none of the conditions has been satisfied as of the date of thisReport, there have been no shares or other rights issued or granted to thedirectors as of this date.  The resolutions remain effective and couldresult in future issuances of shares of common stock if the resolutions are notrescinded and one or more of the stated conditions occurs.

 

16

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**Transfer Agent and Registrar**

 

The transfer agent and registrar for our Common Stock isAmerican Stock Transfer Company.

 

## ***Item 6.***   Management’sDiscussion and Analysis or Plan of Operations

## *** ***

### Overview

###  

We provide Web-enabled CRM solutions for a diversifiedportfolio of organizations.  Theseservices include self-help, live chat, Web collaboration, email, andtelephone.  Utilizing a tested and proventechnology set, we provide an enhanced customer experience at a significantcost reduction when compared to traditional models.  We deploy a distributed workforce strategyand customer-centric applications to provide the best in customer care andsupport.  We conduct our principalbusiness operations through our wholly-owned subsidiary, Sento TechnicalServices Corporation.

 

We believe that a significant issue currently facing ourcompany relates to the variable pricing of a significant number of ouroutstanding employee stock options.  InApril 2003, we re-priced the majority of the then outstanding employee stockoptions to the then current market price of $1.60 per share.  This re-pricing was done to give ouremployees incentive to grow revenues and improve profitability, with theobjective of increasing stockholder value. We believe this re-pricing contributed in a large part to our improvedoperating results during the fiscal year ended March 31, 2004.  Under accounting principles generallyaccepted in the United States (“**GAAP**”),we are required to “mark to market” these employee options, by adjusting thenon-cash compensation expense we record on these stock options on a quarterlybasis until they are exercised, forfeited or expire. This non-cash expense iscalculated by multiplying the number of currently exercisable options by theamount that the current market price of our common stock is above the exerciseprice of $1.60 per share, less any amounts previously recorded as expense forvested shares.  Thus, in a period ofincreasing stock prices we may record a significant amount of non-cashcompensation expense.  Conversely, if ourstock price falls in a future period, we may subsequently reverse a portion ofthe expense previously recognized with respect to stock options that remainoutstanding.  These periodic adjustmentsof our non-cash compensation expense may result in significant volatility inthe results of our operations.  Duringthe years ended March 31, 2004 and 2003, we recognized non-cash compensationexpense of $1,562,108 and $0, respectively, to reflect adjustments to the valueof the options due to the increase in market price of our common stock abovethe exercise price of $1.60 per share. See Notes 2 and 9 to our Consolidated Financial Statements.

 

Because the actual amount of compensation expense werecognize with respect to outstanding stock options will depend on the marketprice of our common stock at the end of each quarterly period and the timing ofexercise, forfeiture or expiration of outstanding options, we are not be ableto forecast the amount of non-cash compensation expense related to these stockoptions that we may incur in any future period.

 

Additionally, we have entered into a two-year contract witha consultant to provide strategic and shareholder relations advisoryservices.  As partial consideration forthe services, we have agreed to issue a warrant to purchase 5,000 shares ofcommon stock each month during the term of the agreement.  Each warrant vests with respect to 25% of theshares subject thereto on the first day of each calendar quarter following itsissuance.  We anticipate that we willrecognize compensation expense based on the fair value of the warrants as thewarrants vest.  Because the fair value ofthe warrants will change based on the changes in the underlying value of thecommon stock during the vesting period, compensation expense related to thisagreement could increase or decrease significantly based on the changes in thevalue of our common stock.

 

In May 2004, the Company extended the term of warrants topurchase 94,688 shares of common stock issued in conjunction with a privateplacement of common stock in 1999. The warrants were originally set to expireon May 31, 2004, and have now been extended to August 31, 2004. The Company isstill evaluating the accounting impact of this extension that will be reflectedin the Company's financial statements for the quarter ended June 30, 2004.Initially, the Company has accounted for the warrant modification as an equitytransaction with no impact on the statement of operations. However, in theevent that it is determined that the warrant modification should be expensed,the net loss for the quarter ended June 30, 2004 would increase byapproximately $38,000.

 

Further, we have issued warrants in conjunction withvarious debt financings, including convertible debentures refinanced in April2003.  A portion of the proceeds wereceived from such financings was allocated to the warrants and is amortized toexpense over the life of the debentures. Upon the conversion of the debentures to common stock during fiscal2004, the remaining unamortized warrant cost was immediately expensed.  During fiscal 2004 we recognized a total of$228,162 in non-cash interest expense related to amortization and amountsexpensed upon the conversion of the debentures in 2004.  Amortization of warrants in non-cash expensefor 2003 was $70,492.

 

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### Critical Accounting Policies

###  

Our significant accounting policies are described in Note 2to our Consolidated Financial Statements. Those financial statements wereprepared in accordance with accounting principles generally accepted in theUnited States.  Included within thesepolicies are our “critical accounting policies.”  Critical accounting policies are thosepolicies that are most important to the preparation of our consolidatedfinancial statements and require management’s subjective and complex judgmentsdue to the need to make estimates about the effect of matters that areinherently uncertain.  Our criticalaccounting policies relate to revenue recognition, credit risk and stock-basedcompensation.  The application of theseaccounting policies involves the exercise of judgment and the use ofassumptions as to future uncertainties, and as a result, actual results coulddiffer materially from these estimates. The development and selection of these critical accounting policies havebeen discussed, and are reviewed each year, with the Audit Committee of ourBoard of Directors.

 

*Revenue Recognition.* Revenue is recognized whenpersuasive evidence of an arrangement exists, delivery of services hasoccurred, the fee is fixed or determinable, and collection of the resultingreceivable is reasonably assured.  Wegenerate revenue by delivering technical assistance to users of our customers’products through the use of live chat, Web collaboration, email and telephoneinteractions.  We recognize revenues asservices are provided, according to the terms of the underlying agreement withour customers which specify how the customer will be charged, generally basedon a monthly, hourly, per minute or per-call rate.  Certain of our customer support services aredelivered over a period of time.  Revenueassociated with these services is deferred until the end customer support iscompleted and we have no remaining obligation to provide further supportservices.  During fiscal 2004, less than6% of our revenue was generated from end customer support services that weredelivered over a period of time.  Wereview end customer support cases in this revenue stream on a monthly basis toensure that the revenue is not recognized on open cases until the end usersupport services are completed.  We alsoprovide licenses to a limited number of our clients for the use of our customercontact software tools that we host.  Inthese arrangements, we charge our client a monthly fee based on the number ofusers.  Revenue under those arrangementsis recognized as the service is provided.

 

Revenues generated from professional and consultingservices are recognized as the service is provided, based on time and materialsincurred at contractually agreed upon rates.

 

*Credit Risk.* We have established anallowance for doubtful accounts to reserve for uncollectible accountsreceivable.  Each quarter we review thereceivables on an account-by-account basis and determine the probability ofcollection.  Management judgment isexercised in determining the probability of collection. Factors we consider inmaking this judgment are the age of the receivable, the financial resources ofour clients, previous client history and recent client communications.  Our credit losses have generally been withinour expectations, however, there can be no assurance that our future creditlosses will be within our expectations. In addition, our revenues and accounts receivable are concentrated in arelatively few number of customers.  Asignificant change in the liquidity or financial position of any one of thesecustomers or a further deterioration in the economic environment, in general,could have an adverse impact on the collectibility of our accounts receivableand our future operating results.

 

*Stock –Based Compensation.* Statement of FinancialAccounting Standards No. 123, *Accounting forStock Based Compensation* (SFAS 123) encourages entities to adopt afair-value-based method of accounting for stock options or similar equityinstruments.  However, it also allows anentity to continue measuring compensation cost for stock based compensationusing the intrinsic-value method of accounting prescribed by AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (APB 25).  We have elected to continue to apply theprovisions of APB 25 and provide pro forma disclosures required by SFAS 123 inthe footnotes to the consolidated financial statements.  We use the Black Scholes option-pricing modelto determine the amount of additional pro forma expense related to theseoptions as presented in our disclosures. Had we adopted a fair-value-based method of accounting for stockoptions, the pro forma expense for these options in our disclosures would berecorded as expense in our statements of operations and could materially affectour operating results.

 

In April 2003, we repriced certain of our outstandingemployee stock options. We account for stock options that were repriced inaccordance with FASB Interpretation No. 44 “Accounting for Certain TransactionsInvolving

 

18

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Stock Compensation” (“**Interpretation44**”), which requires that we adjust the compensation expense werecord on these stock options based on the market price of the Company’sunderlying stock until the options are exercised, forfeited or expire.  This adjustment to compensation expense isdone quarterly and can fluctuate significantly due to the volatility of themarket price of our common stock.

 

We also issue equity-based incentive compensation tonon-employees from time to time. Pursuant to Emerging Issues Task Force (EITF) 96-18, *Accounting for Equity Instruments that are Issued toOther than Employees for Acquiring or in Conjunction with Selling Goods orServices*, we account for these arrangements based on the fair valueof the equity instrument issued.  Thefair value of these instruments is measured each quarter as the related goodsor services are provided and the underlying securities vest.  We use the Black Scholes pricing model todetermine the value of these instruments. The resulting quarterly change in value of these instruments is eithercharged or credited to income and can also fluctuate significantly based on thechange in value of the underlying common stock.

 

### Results of Operations

###  

**Fiscal 2004 compared to Fiscal 2003**

 

*Revenues.*  Our revenues increased 22% or $3,900,000,from $17,496,000 for the fiscal year ended March 31, 2003 to $21,396,000 forthe fiscal year ended March 31, 2004. The primary reason for the increase is $3,009,000 of revenue generatedfrom six new clients.  We were also ableto generate a net increase of $891,000 in revenue from our existing clientbase.

 

*Cost of Sales.*  Our cost of sales increased $1,373,000 or 8%from $16,699,000 for the fiscal year ended March 31, 2003 to $18,072,000 forthe fiscal year ended March 31, 2004. This increase in cost is a result of increased business as discussed inthe revenue section above.  Our grossprofit as a percentage of sales increased to 16% for the fiscal year endedMarch 31, 2004.  This represents an 11point improvement in gross profit percentage, compared to our 5% gross profitpercentage for the year ended March 31, 2003. This improved gross profit percentage was due mainly to higherutilization of our capacity with increased business.  In addition, we have focused on costreductions over the past year and we were able to improve efficiencies,particularly in telecommunications costs. Even with the increase in business volume, we were able to reducetelecommunications costs by $484,000 during the fiscal year ended March 31,2004 when compared to the fiscal year ended March 31, 2003.

 

*Selling, General and AdministrativeExpenses.* Our selling, general and administrativeexpenses increased by 10%, or $235,000, from $2,431,000 for the fiscal yearended March 31, 2003 to $2,666,000 for the fiscal year ended March 31, 2004.  This increase was primarily due to increasedmarketing efforts that resulted in more revenues for the year ended March 31,2004.

 

*Stock-based compensation.*  In April 2003, our Board of Directorsapproved an employee stock option exchange program.  Under this program, options to purchase377,342 shares of common stock with exercise prices above $2.00 per share wereexchanged for options to purchase 313,592 shares of common stock at the thencurrent market price of $1.60.  Thisexchange program was considered to be an effective “repricing” of stockoptions, which requires us to adjust the amount of compensation expense werecognize each quarter until the stock options are exercised, forfeited orexpire.  The cumulative amount of thischarge is calculated by multiplying the exercisable number of options by thedifference between the market price of the stock and the exercise price of$1.60, less any amounts previously recognized. At March 31, 2004, the market value of our stock was $12.35.  This increase in market price over theexercise price required us to recognize $1,562,000 of non-cash compensationexpense.  There was no non-cashcompensation expense related to these repriced stock options during the fiscalyear ended March 31, 2003.

 

*Interest expense.*  Our interest expense decreased $72,000, or 23%, from $308,000 duringthe fiscal year ended March 31, 2003 to $236,000 during the fiscal year endedMarch 31, 2004.  The decrease in interestexpense was due primarily to the conversion of all of our convertible debt intoequity during fiscal 2004.  In addition,we had an overall reduction in our capital leases and notes payable which alsocaused a corresponding decline in interest expense.

 

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*Non-cash charge for valuation of warrantsand conversion of debentures.*  This expenserelates to the amortization of debt discount created by assigning a portion ofthe proceeds received in conjunction with convertible debentures and notespayable financings to warrants issued with the debt.  We amortize this cost over the life of the correspondingdebt.  This cost increased $158,000, or226%, from $70,000 for the fiscal year ended March 31, 2003 to $228,000 for theyear ended March 31, 2004.  Theconversion of all of our convertible debt to equity during the year ended March31, 2004 required us to accelerate the amortization of this cost and is theprimary reason for the increase in expense over the prior year.

 

### Liquidity and Capital Resources

###  

Our cash balances increased $3,985,000, or 154%, from$2,583,000 at March 31, 2003 to $6,568,000 at March 31, 2004.  During the year ended March 31, 2004, wegenerated $18,000 of cash flow from operations, used $1,308,000 of cash flowfor investing in property and equipment and generated $5,275,000 of cash flowfrom financing activities.  The primaryreason for the change in the amount of cash generated from operating activitieswas the timing of cash receipts and payments on working capital balances, suchas accounts receivable, accounts payable and accrued liabilities.  Accounts receivable increased due tosignificant revenue achieved during the fourth quarter of fiscal 2004, that hadnot been collected as of yearend. Because our business tends to be seasonal innature, with a significant increase in business in the fourth quarter of ourfiscal yearend, accounts receivable is typically higher at March 31 anddecreases in the first fiscal quarter of the subsequent fiscal year as wecollect receivables attributable to services performed during the fourth fiscalquarter.  There was a net increase in payablesand accrued liabilities due to increased business volume during the fourthquarter of fiscal 2004, which resulted in an increase in our cash flows fromoperations since the liabilities had been incurred but not yet paid as ofyearend.  Included in our cash flow fromfinancing activities is $6,670,198 of proceeds, including accrued offeringcosts, from the sale of common stock. Because the sale of common stock took place at the end of our fiscalyear, we accrued estimated offering costs of $627,000 at March 31, 2004 relatedto the March 30, 2004 private placement of our stock, which are included incash flows provided from financing activities since the offering costs had notbeen paid as of yearend.

 

During the year ended March 31, 2003, we generated$1,501,000 of cash flow from operations, generated $705,000 of cash flow frominvesting activities and used $700,000 of cash flow for financingactivities.  Cash flow from operationswas primarily the result of changes in working capital balances.  Accounts receivable decreased due toaccelerated collection efforts, thereby increasing cash flow fromoperations.  There was also an increasein payables and accrued liabilities due to the timing of payments, which contributedto our cash flow from operations.  Theprimary reason for the cash flow generated from investing activities was thesale of short-term investments, which was partially offset by capitalexpenditures.  Principal payments onlong-term debt was the main use of cash flow from financing activities.

 

Our working capital increased $6,130,000, or 573%, from$1,069,000 at March 31, 2003 to $7,199,000 at March 31, 2004.  In addition to our $3,985,000 increase incash, the other main source of our increased working capital was a $1,783,000increase in our accounts receivable. This increase in receivables was due primarily to an increase in ourrevenue, including increased amounts due from one of our largestcustomers.  Revenue from this customer isseasonal in nature with the majority of revenue from this customer beinggenerated during our fourth fiscal quarter. In addition, over $800,000 of our receivable balance at March 31, 2004was due from new customers in fiscal 2004.

 

We have contractual obligations, including debt agreementsand leases, that will require the use of cash. Subsequent to March 31, 2004, we extended our line of credit andrefinanced our existing term loans with a bank. Our long-term debt classification and our contractual obligationsrelated to our debt reflect this refinancing (see Notes 4 and 11 to ourfinancial statements).  The followingtable sets forth our contractual obligations as of March 31, 2004:

 

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**Contractual Obligations:**

 
| ** **                           | ** ** | **Payments Due  by Period** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **Under 1  Year**           | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5  Years** | ** ** | **Total** | ** ** |
| Long Term  Debt (principal only) (1) |       | 376,000                     |       | 324,000 |   | 15,000 |   | — |   | 715,000 |   |
| Capital  Leases                      |       | 415,000                     |       | 360,000 |   | — |   | — |   | 775,000 |   |
| Operating  Leases                    |       | 1,171,000                   |       | 1,307,000 |   | 932,000 |   | — |   | 3,410,000 |   |
| Less: subleases                      |       | (246,000                    | )          | (193,000 | ) | (62,000 | ) | — |   | (501,000 | ) |
| Total  Contractual Cash Obligations  |       | $                           | 1,716,000  |   | $ | 1,798,000 |   | $ | 885,000 |   | $ | — |   | $ | 4,399,000 |   |
|                                      |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)    Our long-termdebt carries interest rates of 6% to 10%.

 

At present, we believe we will be able to meet our currentobligations for operations as they come due.

 

Historically our primary sources of liquidity have beencash received through private sales of equity and debt as well as from the saleof assets.  During the four years endedMarch 31, 2004, we have had positive cash flow from operations, which has alsoprovided liquidity.  In addition, we havefinanced some of the equipment utilized in our business through long-termleasing and loan arrangements.  Ourgrowth and operations have consumed substantial amounts of cash.

 

On May 11, 2004, we refinanced our expired line of creditand existing term loans with a bank, wherein the line of credit was renewed andthe existing three terms loans were combined into one term loan.  The agreement also allows us to draw on anadditional term loan for up to $1,500,000 of equipment financing.  The line of credit was increased from amaximum of $2,500,000 to $3,000,000 (subject to a limit of 80% of eligibleaccounts receivable), has an interest rate of the bank’s prime rate plus 1% andhas a two-year term, including provisions for extension, subject toapproval.  The line of credit terms alsocontain an annual commitment fee of 0.75%. The new term loan for $750,000 includes the repayment of the threeexisting term loans plus $316,140 in additional equipment financing.  The terms of this loan include a 1.0%commitment fee, an interest rate of 7.46%, monthly payments of $23,316including interest, and a term of three years. We also have a commitment from the bank for a term loan of up to$1,500,000 for future equipment financing. We may take advances on this loan in a minimum amount of $100,000through March 31, 2005.  The underlyingterm loans will have a term of three years, require monthly principal and interestpayments, will have a fixed interest rate determined at the date of the advancebased on the three-year U.S. Treasury Bond rate plus 4.5%, and have acommitment fee of 1%.

 

### Seasonality

###  

Our operating results have historically been affected bythe seasonal variances experienced by several significant clients.  Our results are favorably affected by asignificant increase in service requests we experience during our fourth fiscalquarter, resulting primarily from our support of a client’s tax preparationsoftware programs during the months preceding April 15th of eachyear.  To a lesser degree, the operatingresults for our third fiscal quarter are favorably affected by increasedsupport requirements of an on-line retailer during the holiday months of Novemberand December.

 

### RecentlyIssued Accounting Pronouncements

###  

We have reviewed all recently issued accounting standards,which we have not yet adopted, in order to determine their potential effect, ifany, on our results of operations and financial position. Based on that review,we do not currently believe that any of these recent accounting pronouncementswill have a significant effect on our current or future financial position,results of operations, cash flows or disclosures.

 

## ***Item 7.***   Financial Statements.

## *** ***

The financial statement information required by Item 7 isincluded on pages F-1 to F-17.

 

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## ***Item 8.***   Changes in andDisagreements with Accountants on Accounting and Financial Disclosure.

## *** ***

None

 

## ***Item 8A.***                Controlsand Procedures

## *** ***

Under the supervision and with the participation of ourmanagement, including our principal executive officer and principalfinancial officer, we conducted an evaluation of our disclosure controls andprocedures, as such term is defined under Rule 13a-15(e) promulgated under theExchange Act, as of March 31, 2004. Based on this evaluation, our principalexecutive officer and principal financial officer concluded that our disclosurecontrols and procedures are effective in alerting them on a timely basis tomaterial information relating to our company required to be included in ourreports filed or submitted under the Exchange Act.  There have beenno significant changes (including corrective actions with regard to significantdeficiencies or material weaknesses) in our internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof the evaluation referenced above.

 

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# **PART III**

 

## ***Item 9***.   Directors andExecutive Officers of the Registrant.

## *** ***

**Directors**

 

Each of our directors serves until the next annual meetingof shareholders and until his successor is duly elected and qualified.  Certain information regarding our directorsis set forth below:

 
| **Name**                | ** ** | **Age** | ** ** | **Position**                                    | ** ** | **Director Since** |
|-------------------------|------------|---------|------------|-------------------------------------------------|------------|--------------------|
|                    |       |    |       |                                            |       |               |
| Gary B. Filler          |       | 63      |       | Chairman of the Board                           |       | 1998               |
|                    |       |    |       |                                            |       |               |
| Patrick F. O’Neal  |       | 58      |       | President, Chief Executive Officer and Director |       | 2002               |
|                    |       |    |       |                                            |       |               |
| Kieth E. Sorenson       |       | 58      |       | Director                                        |       | 1997               |
|                    |       |    |       |                                            |       |               |
| Kim A. Cooper           |       | 45      |       | Director                                        |       | 1999               |
|                    |       |    |       |                                            |       |               |
| Eric Olafson            |       | 44      |       | Director                                        |       | 2001               |
|                    |       |    |       |                                            |       |               |
| Phillip J. Windley, PhD |       | 45      |       | Director                                        |       | 2003               |
|                    |       |    |       |                                            |       |               |
| C. Lloyd Mahaffey       |       | 49      |       | Director                                        |       | 2004               |

 

*Gary B. Filler* has served as a directorsince August 1998 and as the Chairman of our Board of Directors since September26, 2000.  Mr. Filler has served as adirector of Altiris, Inc., a software company, since February 2002.  Mr. Filler served as the Chief Executive Officerand Chairman of the Board of Net Vision, Inc., a software company, fromNovember 2001 to December 2002.  Prior tohis appointment as a director, Mr. Filler was the Senior Vice President andChief Financial Officer of Diamond Multimedia Systems, Inc., a manufacturer ofgraphics boards and modems, from January 1995 to September 1996. From June 1994to January 1995, Mr. Filler was a business consultant and privateinvestor.  From February 1994 until June1994, he served as Executive Vice President and Chief Financial Officer of ASKGroup, Inc., a computer systems company. Mr. Filler was the Chairman of the Board of Seagate Technology, Inc., amanufacturer and distributor of data storage, retrieval and management products(“Seagate”), from September 1991 until October 1992, and was the Vice Chairmanof the Board of Seagate from October 1990 until September 1991.  Mr. Filler served as the Co-Chairman of theBoard of Seagate and as a director of Seagate Software, Inc., a subsidiary ofSeagate, from June 1998 until December 2000.

 

*Patrick F. O’Neal* was appointed to serve asour President and Chief Executive Officer, and as a director in January2002.  Prior to joining Sento, Mr. O’Nealwas the Managing Director of Digital Lighthouse Corporation since September1996.  Mr. O’Neal also served on theBoard of Directors of Digital Lighthouse Corporation from March 1996 to January2000 and as president of three subsidiaries that dealt with regulatedindustries (securities, insurance and mortgage services).  Mr. O’Neal received his bachelor’s degreefrom Indiana State University and his law degree (Doctor of Jurisprudence) fromIndiana University.

 

*Kieth E. Sorenson* has served as a directorsince June 1, 1997.  Mr. Sorensonserved as our President and Chief Executive Officer from December 1997 to April1999.  Prior to joining Sento, Mr.Sorenson was the founder of Truevision, Inc. (formerly RasterOps), a publiclytraded multi-media, graphics and video company. From 1993 to 2002, he was a managing partner of Sorenson, Thomas &Co. and President, Chief Executive Officer and Chairman of the Board ofTruevision, Inc., of which he continued to serve as a director until January1999.  From 1979 to 1987, he was employedby Ramtek, Inc., a Silicon Valley pioneer in computer graphics, as VicePresident of Engineering and Product Marketing. He is also currently the owner of Approach Systems, a private aviationelectronics manufacturing company, and a director of Sumeria, a developer ofCD-ROM titles.

 

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*Kim A Cooper* was appointed to serve as adirector of Sento in August 1999.  Mr.Cooper is the President and Chief Executive Officer of Exceed, LLC, aconsulting firm, and Chairman of the Board for multinational, TechTeam Global,Inc. At various times during the previous eight years, he was founder and ChiefExecutive Officer of the following companies: Digital Harbor, Inc., ComDais,Inc., GlobalSim, Inc., DriveSafety, Inc., Chief Strategy Officer of IMCentric,Inc., Chief Operating Officer of Sorenson Media, Inc., and General Counsel ofE-Idea Labs, Inc. Prior to this, Mr. Cooper was the Vice President of WorldwideMarketing and Business Development for Novell, Inc. for two years, and the VicePresident of Worldwide Customer Services, Sales & Marketing for WordPerfectCorporation for ten years. Mr. Cooper also currently serves as a director forAuthoritative.Net, Inc, and has recently finished writing a business book. Heis a practicing corporate attorney and graduated with honors from Brigham YoungUniversity Law School.

 

*Eric Olafson* was appointed to serve as adirector in October 2001.  Since 2000,Mr. Olafson has been the Chairman of the Board of Tomax Corporation, adeveloper and marketer of web-based software for retailers (“Tomax”). Prior tothat, from 1990 to 2000, Mr. Olafson served as the President and ChiefExecutive Officer of Tomax. From 1987 to 1990, Mr. Olafson served as the VicePresident of Marketing at Tomax.  From1986 to 1987, Mr. Olafson served as a consultant to Tomax. Prior to 1986, Mr.Olafson was a co-founder of Dyonix Greentree Technologies, a Canadian softwaredevelopment company.

 

*Phillip J. Windley, PhD* was appointed to serve as adirector in October 2003. Dr. Windley is a consultant, author and nationallyrecognized expert in using information technology. Dr. Windley served during 2001and 2002 as the Chief Information Officer for the State of Utah, serving in theGovernor’s Cabinet and as a member of the Governor’s Senior Staff. In 1999 and2000, Dr. Windley served as the Vice President for Product Development andOperations at Excite@Home, managing a large, interdisciplinary team of productmanagers, engineers, and technicians developing and operating large-scaleinternet and e-commerce products. Prior to joining Excite@Home, from 1998 to1999, Dr. Windley served as the Chief Technology Officer of iMall, Inc. Dr.Windley was a professor of Computer Science at Brigham Young University from1993 to 1999 and at the University of Idaho from 1990 to 1993. While at BrighamYoung University, Dr. Windley founded and directed the Laboratory for AppliedLogic. Dr. Windley received his PhD in Computer Science from the University ofCalifornia, Davis in 1990.

 

*C. Lloyd Mahaffey* was appointed to serve as adirector in March 2004.  Mr. Mahaffey hasover 25 years of experience in the development, funding and marketing ofadvanced technology systems to business, education, consumer and governmentmarkets.  Mr. Mahaffey is the ManagingPartner for Redleaf Group, Inc., a multi-million dollar US early-stage venture capitalfirm, specializing in cyber security, supply chain, network, paymenttechnologies, and business analytics. From 1995 to 1998, Mr. Mahaffey served as the Chief Operating Officer,as well as Senior Vice President and General Manager of Global Development andMarketing, of VeriFone.  While there, hewas responsible for VeriFone’s early stage investments in WebTV, CyberCash, andVeriSign.  He led the team that soldVeriFone to Hewlett Packard for $1.3 billion. Earlier in his career, Mr. Mahaffey founded a technology consultingfirm, Dynamis Group, with a client roster that included many Fortune 500companies and the U.S. Government.  Mr.Mahaffey joined Apple Computer, Inc. during its formative years and wasresponsible for the development of Apple’s highly regarded Education andFederal Government business segments worldwide. Mr. Mahaffey received his Bachelor’s degree in history at The Citadel,The Military College of South Carolina, in 1978, where he was an Honor Graduatewith Gold Stars and a Dean’s List member. He also attended Stanford University’s Graduate School of BusinessTechnology Executive Program in 1987.

 

**Executive Officers**

 

In addition to Mr. O’Neal, whose biography is set forthabove, certain biographical information is furnished below with respect to ourother executive officers:

 

*Anthony J. Sansone,*39,was appointed to serve as our Chief Financial Officer and Corporate Secretaryin July 2004.  Prior to joining Sento,Mr. Sansone was the Vice President of the Client Finance Group for JP MorganChase Commercial Card Solutions since January 2003.  From August 1997 to December 2002, Mr.Sansone served as Vice President, Treasurer and Corporate Secretary forConvergence Communications, Inc., which provided data, video and voice servicesin nine Latin America countries.  Mr.Sansone also serves as a director of the MountainWest Venture Group, anorganization fostering deal flow, capital growth and business development.  

 

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Mr. Sansonereceived his bachelor’s degree in Accounting from Utah State University and hismasters degree in Business Administration from the University of Utah.

 

*Chris Wells,* 44, was appointed as ourSenior Vice President of Sales in April 2003. Prior to joining Sento, Mr. Wells consulted as the General Manager for a$29 million dollar technology upgrade project for the State of Utah from June2002 to April 2003.  Mr. Wells was VicePresident and General Manager for Excite@Home Hosting Services from October1999 to March 2002. His responsibilities included building outsourcing sharedhosting and e-commerce services to major Fortune 500 accounts. Prior to servingas Vice President and General Manager, Mr. Wells served from  June 1998 to October 1999 as the VicePresident of Major Accounts at Imall Inc., a small Internet e-commercestart-up, which was purchased by Excite@Home for over $500 million.  Mr. Wells has over 13 years in sales andmarketing experience, including over three years as a director of majoraccounts at Novell Inc.

 

*Stephen W. Fulling*, 40, was appointed as ourSenior Vice President and Chief Technology Officer in January 2004.  From March 2002 until January 2004, Mr.Fulling was Director of Information Technology Services at the State of Utahwhere he was responsible for a $60 million information technology budget andover 250 employees.  From August 1999until February 2002, Mr. Fulling managed an engineering and operations divisionfor Excite@Home, in support of a $20 million E-commerce business.  From October 1996 until August 1999, Mr.Fulling was the Senior Vice President of Engineering and Operations at iMallInc., where he built a technology organization that was instrumental in theacquisition of iMall Inc. by Excite@Home in 1999.  Mr. Fulling has over 15 years of experiencein successfully developing products that use Internet and telecommunicationstechnologies.  Mr. Fulling graduated witha degree in Computer Science from the University of California.

 

**Section 16(a) Beneficial OwnershipReporting Compliance**

 

Section 16(a) of the Securities Exchange Act of 1934requires our executive officers and directors, as well as persons whobeneficially own more than ten percent of our common stock, to file initialreports of ownership and reports of changes in ownership with the Securitiesand Exchange Commission (the “SEC”). Reporting persons are also required by SEC regulations to furnish uswith copies of all Section 16(a) forms they file.  Based solely on a review of the copies ofsuch forms furnished to us and written representations from our executiveofficers and directors, we believe that for the fiscal year ended March 31,2004 all of our executive officers and directors, as well as personsbeneficially holding more than ten percent of our common stock, filed therequired reports on a timely basis, except that a Form 3 required to be filedby Mr. Mahaffey upon his appointment to our Board of Directors was filed late.

 

## ***Item 10.***                Executive Compensation.

## *** ***

**Summary Compensation Table**

 

The following table provides certain summary informationconcerning the compensation paid or accrued by us to or on behalf of our ChiefExecutive Officer, as well as all our other executive officers whose aggregatecompensation for the fiscal year ended March 31, 2004 exceeded $100,000(collectively, the “Named Executive Officers”).

 
| ** **                             | ** ** | ** **              | ** ** | ** **            | ** ** | ** **           | ** ** | ** **                                                      | ** ** | **Long-Term Compensation**                                   | ** ** | ** **                                                       | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------------|------------|-----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Annual Compensation** | ** ** | **Awards**            | ** ** | **Payouts**          | ** ** | ** **                                                      | ** ** |
| **Name and********Principal Position** | ** ** | **Year**                | ** ** | **Salary********($)** | ** ** | **Bonus********($)** | ** ** | **Other**** ****Annual********Compensa-  tion********($)** | ** ** | **Restricted**** ****Stock********Award(s)********($)** | ** ** | **Securi-  ties********Under-  lying********Options********(#)** | ** ** | **LTIP********Payouts********($)** | ** ** | **All********Other********Compensa-  tion********($)** | ** ** |
|                                   |       |                    |       |                  |       |                 |       |                                                            |       |                                                         |       |                                                             |       |   |   |   |   |
| Patrick F. O’Neal (1)             |       | 2004                    |       | 170,000               |       | 30,000               | (2)        | —                                                          |       | —                                                       |       | 20,000                                                           |       | — |   | — |   |
| Chief Executive Officer                |       | 2003                    |       | 170,000               |       | —               |       | —                                                          |       | —                                                       |       | —                                                           |       | — |   | — |   |
|                                   |       | 2002                    |       | 25,500                |       | —               |       | —                                                          |       | —                                                       |       | 83,750                                                           |       | — |   | — |   |
|                                   |       |                    |       |                  |       |                 |       |                                                            |       |                                                         |       |                                                             |       |   |   |   |   |
| Stanley J. Cutler(3)                   |       | 2004                    |       | 100,000               |       | 10,000               | (2)        | —                                                          |       | —                                                       |       | 10,000                                                           |       | — |   | — |   |

 

25

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| ** **                       | ** ** | ** **              | ** ** | ** **            | ** ** | ** **           | ** ** | ** **                                                      | ** ** | **Long-Term Compensation**                                   | ** ** | ** **                                                       | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------------|------------|-----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                       | ** ** | **Annual Compensation** | ** ** | **Awards**            | ** ** | **Payouts**          | ** ** | ** **                                                      | ** ** |
| **Name and  Principal Position** | ** ** | **Year**                | ** ** | **Salary********($)** | ** ** | **Bonus********($)** | ** ** | **Other**** ****Annual********Compensa-  tion********($)** | ** ** | **Restricted**** ****Stock********Award(s)********($)** | ** ** | **Securi-  ties********Under-  lying********Options********(#)** | ** ** | **LTIP********Payouts********($)** | ** ** | **All********Other********Compensa-  tion********($)** | ** ** |
| Senior Vice President of         |       | 2003                    |       | 98,077                |       | —               |       | —                                                          |       | —                                                       |       | —                                                           |       | — |   | — |   |
| Finance and Secretary            |       | 2002                    |       | 100,000               |       | 10,000               |       | —                                                          |       | —                                                       |       | 41,400                                                           |       | — |   | — |   |
|                             |       |                    |       |                  |       |                 |       |                                                            |       |                                                         |       |                                                             |       |   |   |   |   |
| Chris Wells (4)                  |       | 2004                    |       | 113,462               |       | —               |       | 9,601                                                           |       | —                                                       |       | 7,500                                                            |       | — |   | — |   |
| Senior Vice President of Sales   |       | 2003                    |       | —                |       | —               |       | —                                                          |       | —                                                       |       | —                                                           |       | — |   | — |   |
|                             |       | 2002                    |       | —                |       | —               |       | —                                                          |       | —                                                       |       | —                                                           |       | — |   | — |   |

 

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(1)          Mr.O’Neal was appointed to serve as our President and Chief Executive Officer onJanuary 14, 2002.

(2)          Reflectsbonus compensation accrued during the fiscal year ended March 31, 2004 and paidin May 2004.

(3)          Mr.Cutler retired from employment with the Company in July 2004.

(4)          Mr.Wells was appointed to serve as our Senior Vice President of Sales in April2004.

 

**Option Grants in Last Fiscal Year**

 

The following table sets forth individual grants of optionsto acquire shares of our common stock made to the Named Executive Officersduring the fiscal year ended March 31, 2004.

 
| **Name**                | ** ** | **Options  Granted** | ** ** | **Percent of  Total Options  Granted to Employees in  Fiscal Year** | ** ** | **Exercise Price** | ** ** | **Expiration Date** | ** ** |
|-------------------------|------------|----------------------|------------|---------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|
|                    |       |                 |       |                                                                |       |               |       |                |       |
| Patrick  F. O’Neal |       | 20,000               |       | 15                                                                  | %          |               | $          | 1.60                |       | April 23, 2013 |   |
|                    |       |                 |       |                                                                |       |               |       |                |       |   |
| Stanley  Cutler         |       | 10,000               |       | 7                                                                   | %          |               | $          | 1.60                |       | April 23, 2013 |   |
|                    |       |                 |       |                                                                |       |               |       |                |       |   |
| Chris  Wells            |       | 7,500                |       | 6                                                                   | %          |               | $          | 1.60                |       | April 23, 2013 |   |

 

**Aggregated Option Exercises in Last FiscalYear and Year End Option Values**

 

The following table sets forth the aggregate value ofunexercised options to acquire shares of our common stock held by the NamedExecutive Officers on March 31, 2004, and the value realized upon the exerciseof options during the fiscal year ended March 31, 2004.

 
| ** **              | ** ** | **Shares  Acquired** | ** ** | **Value**          | ** ** | **Number of  Unexercised  Options at FY End 2004(2)** | ** ** | **Value of  Unexercised   In-the-Money Options at FY********End  2004($)(3)** | ** ** |
|-------------------------|------------|----------------------|------------|--------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| **Name**                | ** ** | **on Exercise**      | ** ** | **Realized($)(1)** | ** ** | **Exercisable**                                       | ** ** | **Unexercisable**                                                             | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
|                    |       |                 |       |               |       |                                                  |       |                                                                          |       |   |   |   |   |
| Patrick  F. O’Neal |       | —               |       | —             |       | 35,659                                                |       | 68,091                                                                        |       | $ | 383,334 |   | $ | 731,978 |   |
|                    |       |                 |       |               |       |                                                  |       |                                                                          |       |   |   |   |   |
| Stanley  J. Cutler      |       | —               |       | —             |       | 56,414                                                |       | 19,686                                                                        |       | $ | 606,451 |   | $ | 211,625 |   |
|                    |       |                 |       |               |       |                                                  |       |                                                                          |       |   |   |   |   |
| Chris  Wells            |       | —               |       | —             |       | 2,031                                                 |       | 5,469                                                                         |       | $ | 21,833 |   | $ | 58,792 |   |

 

----

(1)          Calculatedbased on the difference between the exercise price and the value of the sharesas of the date acquired.

(2)          Includesshares of our common stock subject to options exercisable within 60 days ofMarch 31, 2004.

(3)          Calculatedbased on the difference between the exercise price and the price of a share ofour common stock on March 31, 2004.  Theprice of the our common stock on March 31, 2004 was $12.35 per share (asreported on the Nasdaq (SmallCap) Stock Market).

 

26

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**Director Compensation**

 

Our non-employee directors receive compensation of $1,500****for attendance at each Board meeting, $750for participation in each telephonic Board meeting, and $1,000 for attendancesat each committee meeting not held in conjunction with a regular Board meeting($500 if the committee meeting is held in conjunction with a Boardmeeting).  As additional incentive toserve, non-employee board members from time to time receive options to purchaseshares of our common stock.  Mr. Filler,Mr. Cooper and Mr. Sorenson each received options to purchase 2,500 shares ofour common stock at $1.60 per share during the year ended March 31, 2004.  Mr. Windley received options to purchase7,500 shares of our common stock at $3.20 during the year ended March 31,2004.  Subsequent to the year ended March31, 2004, Mr. Mahaffey received options to purchase 7,500 shares of our commonstock at $4.61 per share.

 

Inaddition, during the fiscal year ended March 30, 2002, our Board ofDirectors reviewed the time and insight provided by our directors, as well asour limited ability to provide additional cash payments to our directors ascompensation for their services to Sento. Based upon this review, as well as anassessment that our directors would likely be required to devote increased timeand attention during the fiscal year ended March 30, 2002 to severalstrategic initiatives, including review and negotiation of prospectivetransactions intended to promote shareholder value and liquidity, our Board ofDirectors adopted resolutions intended to compensate our directors if wecompleted such a transaction. Pursuant to resolutions adopted inApril 2001 and March 2002, our Board of Directors approved acontingent issuance of shares of our common stock to each of our directors(18,750 shares to Gary Filler, Chairman of the Board, and 12,500 shares to eachother director then serving). The shares of our common stock are issuable onlyupon the completion of certain merger, consolidation, acquisition, sale andliquidation transactions constituting a “change of control” under our 1999Omnibus Stock Incentive Plan. Because none of the conditions was satisfiedduring the fiscal year ended March 31, 2004, there were no shares or otherrights issued or granted to the directors during such fiscal year. Theresolutions remain effective and could result in future issuances of shares ofour common stock if one or more of the stated conditions occurs.

 

On March 30, 1999, we entered into a consulting agreementwith GT Investments, of which Gary B. Filler, our Chairman of the Board, is thesole shareholder.  Pursuant to suchagreement, we pay GT Investments a monthly fee for services provided by Mr.Filler.  During the year ended March 31,2004, we paid GT Investments the aggregate amount of $66,000 under thisagreement.  The agreement is cancelableby either party at any time.

 

**Annual Meetings, Board Meetings andCommittees**

 

We request that all of the members of our Board ofDirectors attend each annual meeting of shareholders.  All of the directors in office at such timeattended our annual meeting held in October 2004. During the year ended March31, 2004, our Board of Directors held seven formal board meetings and metinformally on numerous occasions and approved relevant matters by writtenconsent.  All incumbent directorsattended at least 75% of all board meetings and applicable committee meetings.

 

Our Board of Directors has standing Audit and CompensationCommittees.  The members of our AuditCommittee are Kieth E. Sorenson (Chairman), Phillip J. Windley and EricOlafson.  The members of our CompensationCommittee are Eric Olafson (Chairman), Kim A. Cooper and C. Lloyd Mahaffey.

 

All members of our Audit Committee are independentaccording to Nasdaq’s listing standards, and our Board of Directors hasdetermined that the Audit Committee has one member qualifying as an auditcommittee financial expert, as defined in Item 401(h) of Regulation S-K.  The person our Board of Directors hasdetermined is an audit committee financial expert is Kieth E. Sorenson.

 

27

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Our Board of Directors has also adopted a written AuditCommittee Charter, a copy of which has been filed previously with the SEC onSeptember 14, 2001 as an exhibit to our proxy statement prepared in connectionwith our 2001 annual meeting of shareholders. The Audit Committee oversees our accounting and financial reportingprocesses and related audits.  Thisinvolves, among other tasks, the selection of our external auditors for ratificationby our shareholders, pre-approving engagements of our auditors with respect toaudit and non-audit services, reviewing our accounting practices and controlsand administering our Code of Ethics for Officers and Finance DepartmentEmployees and whistleblower policy.

 

**Code of Ethics**

 

We haveadopted the Sento Corporation Code of Ethics for Officers and FinanceDepartment Employees, which constitutes a code of ethics that applies to theprincipal executive officer, principal financial officer, principal accountingofficer or controller, or persons performing similar functions, as defined inItem 406 of Regulation S-K under the Securities Exchange Act of 1934, asamended. We have posted our Code of Ethics for Officers and Finance DepartmentEmployees on our website at www.sento.com.

 

**Employment Agreements and Change ofControl Arrangements**

 

We have adopted the Sento Corporation 1999 Omnibus StockIncentive Plan (the “Incentive Plan”) which provides that upon a change incontrol of Sento and a subsequent relocation, termination or reassignment of aparticipant in the Incentive Plan within one year, the options granted to suchparticipant under the Incentive Plan immediately vest and becomeexercisable.  The Named ExecutiveOfficers are among the participants in the Incentive Plan.  In addition, options issued to the NamedExecutive Officers and all directors provide that upon a change in control ofSento all such options immediately vest and become exercisable.

 

## ***Item 11.***                Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters.

## *** ***

**Beneficial Ownership Table**

 

The following table sets forth information as of July 1,2004 with respect to the beneficial ownership of shares of our common stock byeach person known by us to be the beneficial owner of more than 5% of ourcommon stock, by each director, by each of the Named Executive Officers and byall directors and executive officers as a group. Unless otherwise noted, eachperson named has sole voting and investment power with respect to the sharesindicated.  The percentages set forthbelow have been computed based on the number of outstanding shares of ourcommon stock, which was 3,726,986 shares as of July 1, 2004.

 
| ** **                                                                                                                        | ** ** | **Beneficial Ownership****As of July 1, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| **Name and Address of Beneficial Owner**                                                                                          | ** ** | **Number of  Shares**                          | ** ** | **Percentage****of Class*** | ** ** |
| ** **                                                                                                                        | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Patrick F. O’Neal  President, CEO and Director  808 East Utah Valley Drive,  American Fork, UT 84003                         |       | 66,279                                         | (1)        | 2 | % |
|                                                                                                                              |       |                                           |       |   |   |
| Stanley J. Cutler  Senior Vice President of Finance and Corporate Secretary  808 East Utah Valley Drive,  American Fork, UT 84003 |       | 65,927                                         | (2)        | 2 | % |
|                                                                                                                              |       |                                           |       |   |   |
| Eric Olafson  Director  808 East Utah Valley Drive,  American Fork, UT 84003                                                      |       | 13,121                                         | (3)        |   | ** |

 

28

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| Kim A. Cooper  Director  808 East Utah Valley Drive,  American Fork, UT 84003                     |   | 9,375   | (4)    |   | **     |
|---------------------------------------------------------------------------------------------------|--------|---------|--------|--------|--------|
|                                                                                              |   |    |   |   |   |
| Gary B. Filler  Chairman of the Board  808 East Utah Valley Drive,  American Fork, UT 84003       |   | 8,850   | (5)    |   | **     |
|                                                                                              |   |    |   |   |   |
| Kieth E. Sorenson  Director  808 East Utah Valley Drive,  American Fork, UT 84003                 |   | 4,844   | (6)    |   | **     |
|                                                                                              |   |    |   |   |   |
| Chris Wells  Senior Vice President of Sales  808 East Utah Valley Drive,  American Fork, UT 84003 |   | 625     | (7)    |   | **     |
|                                                                                              |   |    |   |   |   |
| C. Lloyd Mahaffey  Director  808 East Utah Valley Drive,  American Fork, UT 84003                 |   | —  |   |   | **     |
|                                                                                              |   |    |   |   |   |
| Phillip J. Windley  Director  808 East Utah Valley Drive,  American Fork, UT 84003                |   | —  |   |   | **     |
|                                                                                              |   |    |   |   |   |
| All executive officers and directors as a group (10  persons)                                     |   | 169,021 | (8)    | 4      | %      |

 

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*                 Beneficialownership as a percentage of the class for each person holding options, warrantsor other rights exercisable within 60 days of July 1, 2004 has been calculatedas though shares of our common stock subject to such options were outstanding,but such shares have not been deemed outstanding for the purpose of calculatingthe percentage of the class owned by any other person.

 

**          Representsless than 1% of the outstanding shares of our common stock.

 

(1)          Includespresently exercisable options to purchase 43,887 shares of our common stock.

(2)          Includespresently exercisable options to purchase 55,000 shares of our common stock and2,500 shares of our common stock subject to presently exercisable warrants.

(3)          Includespresently exercisable options to purchase 5,165 shares of our common stock and7,956 shares of our common stock held by the Olafson Trust, of which Mr.Olafson is a trustee.

(4)          Includespresently exercisable options to purchase 9,375 shares of our common stock.

(5)          Includes1,250 shares of our common stock and 2,500 shares of our common stock subjectto presently exercisable warrants held by GT Investments, of which Mr. Filleris the sole shareholder, and presently exercisable options to purchase 5,100shares of our common stock.

(6)          Includespresently exercisable options to purchase 4,844 shares of our common stock.

(7)          Includespresently exercisable options to purchase 625 shares of our common stock.

(8)          Includespresently exercisable options to purchase 123,996 shares of our common stockand 5,000 shares of our common stock subject to presently exercisable warrants.

 

29

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**Securities Authorized for Issuance UnderEquity Compensation Plans**

 

The following table contains information regarding ourequity compensation plans as of March 31, 2004.

 

**EQUITY COMPENSATION PLAN INFORMATION**

 
| ** **                                                      | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding  options,  warrants and  rights** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **Number of  securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in the first  column)** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders (1)     |       | 403,535                                                                                                |       | $                                                                                   | 2.15       |                                                                                                                                                          | 323,026    |   |
| Equity  compensation plans not approved by security holders (2) |       | 130,000                                                                                                |       | $                                                                                   | 5.34       |                                                                                                                                                          | —     |   |
| Total                                                           |       | 533,535                                                                                                |       | $                                                                                   | 2.93       |                                                                                                                                                          | 323,026    |   |

 

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(1)          Consistsof our stock option plan and employee stock purchase plan.  See Note 9 to the Consolidated FinancialStatements in this Form 10-KSB for additional information regarding theseplans.

 

(2)          Consistsof warrants to purchase shares of our common stock.  See Note 9 to the Consolidated FinancialStatements in this Form 10-KSB for additional information regarding thesewarrants.

 

The warrants disclosed in the preceding table were issuedto placement agents in conjunction with the issuance of convertible debt andcommon stock, and in exchange for consulting services pursuant to individualcompensation arrangements.  Thesewarrants give the holders the right to purchase share of our common stock at aprice equal to the fair market value of a share of our common stock at the timeof issuance of the warrants.  The termsof these warrants range from three to five years from the date of issuance ofthe warrants.

 

***Item 12  Certain Relationships and RelatedTransactions.***

 

On March 30, 1999, we entered into a consulting agreementwith GT Investments, of which Gary B. Filler, our Chairman of the Board, is thesole shareholder.  Pursuant to suchagreement, we pay GT Investments a monthly fee for services provided by Mr.Filler.  During the year ended March 31,2004, we paid GT Investments the aggregate amount of $66,000 under thisagreement.  The agreement is cancelableby either party at any time.

 

***Item 13. Exhibits and Reports on Form 8-K.***

 

(a)                                  EXHIBITS  

 
| **Number** | ** ** | **Description**                                                             | ** ** | **Incorporated  by Reference** | ** ** | **Filed  Herewith** |
|------------|------------|-----------------------------------------------------------------------------|------------|--------------------------------|------------|---------------------|
| 3.1        |       | Amended and Restated Articles of Incorporation                              |       | (1)                            |       |                |
| 3.3        |       | Bylaws                                                                      |       | (2)                            |       |                |
| 10.1       |       | Sento Corporation 1999 Omnibus Stock Incentive Plan                         |       | (3)                            |       |                |
| 10.2       |       | Sento Corporation 1996 Employee Stock Purchase Plan  (Amended and Restated) |       | (3)                            |       |                |

 

30

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| **Number** | ** ** | **Description**                                                                                                           | ** ** | **Incorporated  by Reference** | ** ** | **Filed  Herewith** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|---------------------|
| 10.3       |       | Lease Agreement, dated January 1, 2000, between the  Company and K.E.B. Enterprises LP                                    |       | (3)                            |       |                |
| 10.4       |       | Lease Agreement, dated May 24, 2000, between the Company  and Abinadi, Inc.                                               |       | (3)                            |       |                |
| 10.5       |       | Business Lease with Wyoming Financial Properties Inc.                                                                     |       | (4)                            |       |                |
| 10.6       |       | Loan agreement between Sento Corporation and Wyoming  Industrial Development Corporation dated January 12, 2000.          |       | (5)                            |       |                |
| 10.7       |       | Modification of promissory note with a blended rate (USDA  Loan Identification No. 59-021-087028497) dated April 9, 2001. |       | (5)                            |       |                |
| 10.8       |       | Equipment Lease with NTFC Capital Corporation                                                                             |       | (6)                            |       |                |
| 10.9       |       | Lease agreement between the Company and Pracvest LLC                                                                      |       | (7)                            |       |                |
| 10.10      |       | Loan and security agreement between the Company and  Silicon Valley Bank dated April 15, 2003                             |       | (8)                            |       |                |
| 10.11      |       | Form of 8% Convertible Subordinated Debentures                                                                            |       | (8)                            |       |                |
| 10.12      |       | Form of Warrant to purchase shares of Common Stock                                                                        |       | (8)                            |       |                |
| 10.13      |       | Equipment lease with General Electric Capital Corporation  dated April 30, 2002                                           |       | (8)                            |       |                |
| 10.14      |       | First Amendment to Sento Corporation 1999 Omnibus Stock  Incentive Plan                                                   |       | (8)                            |       |                |
| 10.15      |       | Canyon Park Technology Center Office Building Lease  Agreement                                                            |       | (9)                            |       |                |
| 10.16      |       | Sublease agreement between Sento Corporation and Symantec  Corporation                                                    |       | (9)                            |       |                |
| 10.17      |       | Securities Purchase Agreement dated March 30, 2004                                                                        |       | (1)                            |       |                |
| 10.18      |       | Registration Rights Agreement dated March 30, 2004                                                                        |       | (1)                            |       |                |
| 10.19      |       | Form of Common Stock Purchase Warrant                                                                                     |       | (1)                            |       |                |
| 10.20      |       | Amendment to Loan Documents with Silicon Valley Bank                                                                      |       | (1)                            |       |                |
| 10.21      |       | Amended and Restated Schedule to Loan and Security  Agreement with Silicon Valley Bank                                    |       | (1)                            |       |                |
| 10.22      |       | Warrant to purchase Common Stock issued to Shareholder  Relations                                                         |       | (1)                            |       |                |
| 10.23      |       | Form of Warrant to purchase Common Stock issuable to  Remsen Funding Corporation                                          |       | (1)                            |       |                |
| 21         |       | Subsidiaries of the Registrant                                                                                            |       | (1)                            |       |                |
| 23         |       | Consent of Ernst & Young LLP, independent registered  public accounting firm                                          |       |                           |       | (10)                |
| 31.1       |       | Certification of the Company’s Principal Executive  Officer                                                          |       |                           |       | (10)                |
| 31.2       |       | Certification of the Company’s Principal Financial  Officer                                                          |       |                           |       | (10)                |
| 32.1       |       | Certification of the Company’s Principal Executive  Officer                                                          |       |                           |       | (10)                |
| 32.2       |       | Certification of the Company’s Principal Financial  Officer                                                          |       |                           |       | (10)                |

 

31

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| (1)    |   | Incorporated by reference to Annual Report on Form 10-KSB  for the fiscal year ended March 31, 2004, filed with the Commission on May  20, 2004.                                                                            |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                        |
| (2)    |   | Incorporated by reference to Annual Report on Form 10-KSB  for the fiscal year ended April 30, 1996, filed with the Commission on July  29, 1996, as amended by Form 10-KSB/A filed with the Commission on August 1,  1996. |
|   |   |                                                                                                                                                                                                                        |
| (3)    |   | Incorporated by reference to Annual Report on Form 10-KSB  for the fiscal year ended March 31, 2000, filed with the Commission on June  16, 2000.                                                                           |
|   |   |                                                                                                                                                                                                                        |
| (4)    |   | Incorporated by reference to Quarterly Report on Form  10-QSB for the fiscal quarter ended December 31, 2000, filed with the  Commission on February 12, 2001.                                                              |
|   |   |                                                                                                                                                                                                                        |
| (5)    |   | Incorporated by reference to Quarterly Report on Form  10-QSB for the fiscal quarter ended September 29, 2001.                                                                                                              |
|   |   |                                                                                                                                                                                                                        |
| (6)    |   | Incorporated by reference to Annual Report on Form 10-KSB  for the fiscal year ended March 31, 2002, filed with the Commission on June  28, 2002.                                                                           |
|   |   |                                                                                                                                                                                                                        |
| (7)    |   | Incorporated by reference to Quarterly Report on Form  10-QSB for the fiscal quarter ended December 31, 1998, filed with the  Commission on February 5, 1999.                                                               |
|   |   |                                                                                                                                                                                                                        |
| (8)    |   | Incorporated by reference to Annual Report on Form 10-KSB  for the fiscal year ended March 31, 2003, filed with the Commission on June  30, 1993.                                                                           |
|   |   |                                                                                                                                                                                                                        |
| (9)    |   | Incorporated by reference to Quarterly Report on Form  10-QSB for the fiscal quarter ended September 30, 2003, filed with the  Commission on November 13, 2003.                                                             |
|   |   |                                                                                                                                                                                                                        |
| (10)   |   | Filed herewith and attached to this Amendment No. 3 to  Annual Report on Form 10-KSB/A.                                                                                                                                     |
|   |   |                                                                                                                                                                                                                        |

(b)                                 REPORTS ON FORM 8-K

 

Current Report on Form 8-K, filed on April 21, 2003,reporting our financial results for the fourth fiscal quarter and the fiscalyear ended March 31, 2004 (Items 7 and 12 reported).

 

Current Report on Form 8-K, filed April 23, 2003, reportingour issuance of two press releases, the first of which announced the executionof a new agreement to provide outsourced call center support services and theextension of the term of two other such agreements.  The second press release provided additionalinformation regarding the effect of stock options granted to our employees onour financial results for the fourth fiscal quarter and year ended March 31,2004 (Items 7, 9 and 12 reported).

 

***Item 14.        *****PrincipalAccountant Fees and Services**

 

**Audit Fees**

 

The aggregate fees billed by Ernst & Young LLP, ourindependent public accountants (“E&Y”), for professional services renderedfor the audit of our financial statements and the reviews of our interimfinancial statements included in our Quarterly Reports on Forms 10-Q wereapproximately $61,000 for the fiscal year ended March 31, 2004 andapproximately $60,000 for the fiscal year ended March 31, 2003.

 

**Audit-Related Fees**

 

The aggregate fees billed by E&Y for assurance andrelated services performed by E&Y that were reasonably related to theperformance of the audit of our financial statements and are not reported inthe preceding paragraph were approximately $17,000 for the fiscal year endedMarch 31, 2004 and approximately $20,000 for the fiscal year

 

32

----

 

ended March 31, 2003.  Audit-related fees relate primarily to auditsof employee benefit plans and miscellaneous accounting and internal controlrelated consultations.

 

**Tax Fees**

 

The aggregate fees billed by E&Y for tax compliance,tax advice and tax planning were approximately $15,000 for the fiscal yearended March 31, 2004 and approximately $17,000 for the fiscal year ended March31, 2003.

 

**All Other Fees**

 

There were no fees billed for other non-audit servicesduring fiscal years 2004 and 2003.

 

**Pre-Approval Policies and Procedures**

 

The Audit Committee of our Board of Directors ensures thatwe engage our public accountants to provide only audit and non-audit servicesthat are compatible with maintaining the independence of our publicaccountants.  Our Audit Committeeapproves or pre-approves all services provided by our public accountants.  Permitted services include audit andaudit-related services, tax and other non-audit related services.  Certain services are identified asrestricted.  Restricted services arethose services that may not be provided by our external public accountants,whether identified in statute or determined in the opinion of our AuditCommittee to be incompatible with the role of an independent auditor.  All fees identified in the preceding fourparagraphs were approved by our Audit Committee.  During the fiscal year ended March 31, 2004,our Audit Committee reviewed all non-audit services provided by our externalpublic accountants, and concluded that the provision of such non-audit serviceswas compatible with maintaining the independence of the external publicaccountants.

 

33

----

 

# **SIGNATURES**

# ** **

In accordance with Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has caused this Amendment No. 3 to AnnualReport on Form 10-KSB/A to be signed on its behalf by the undersigned,thereunto duly authorized, on August 9, 2004.

 
|   | SENTO CORPORATION |
|--------|-------------------|
|   |              |
|   |              |
|   | By:               | /s/  PATRICK F. O’NEAL |   |
|   |              | Patrick  F. O’Neal |
|   |              | President  and Chief Executive Officer |

 

34

----

 

## Report of Independent Auditors

##  

The Board of Directorsand Stockholders

Sento Corporation andSubsidiary

 

We have audited theaccompanying consolidated balance sheets of Sento Corporation and subsidiary asof March 31, 2004 and 2003, and the related consolidated statements ofoperations, stockholders’ equity and comprehensive income (loss) and cash flowsfor the years then ended. These financial statements are the responsibility ofthe Company’s management.  Our responsibilityis to express an opinion on these financial statements based on our audits.

 

We conducted ouraudits in accordance with auditing standards generally accepted in the UnitedStates.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Sento Corporation andsubsidiary at March 31, 2004 and 2003, and the consolidated results oftheir operations and their cash flows for the years then ended in conformitywith accounting principles generally accepted in the United States.

 
|                                                                          | /s/ Ernst & Young  LLP |   |
|-------------------------------------------------------------------------------|----------------------------|--------|
| Salt Lake City, Utah                                                          |
|                                                                          |
| April 20, 2004, except for Note 11  as to which the date is May 11, 2004 |

 

F-1

----

 

# Sento Corporation and Subsidiary

#  

# Consolidated Balance Sheets

#  

| ** **                                                                                                                                                          | ** ** | **March 31  2004** | ** **     | **March 31  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|----------------|-------------------------|------------|
| Assets                                                                                                                                                              |       |                    |           |                    |       |
| Current  assets:                                                                                                                                                    |       |                    |           |                    |       |
| Cash  and cash equivalents                                                                                                                                          |       | **$**                   | **6,567,811**  | ** **              | $          | 2,583,337 |   |
| Accounts  receivable, less allowance for doubtful accounts of $264,000 and $77,000 at  March 31, 2004 and 2003, respectively                                   |       | **4,632,111**           | ** **     | 2,848,863               |       |
| Prepaid  and other current assets                                                                                                                                   |       | **456,182**             | ** **     | 220,091                 |       |
| Total current assets                                                                                                                                                |       | **11,656,104**          | ** **     | 5,652,291               |       |
|                                                                                                                                                                |       | ** **              | ** **     |                    |       |
| Property  and equipment, net                                                                                                                                        |       | **4,220,560**           | ** **     | 4,130,921               |       |
| Other  assets                                                                                                                                                       |       | **132,896**             | ** **     | 321,521                 |       |
| Total  assets                                                                                                                                                       |       | **$**                   | **16,009,560** | ** **              | $          | 10,104,733 |   |
|                                                                                                                                                                |       | ** **              | ** **     |                    |       |
| Liabilities  and stockholders’ equity                                                                                                                          |       | ** **              | ** **     |                    |       |
| Current  liabilities:                                                                                                                                               |       | ** **              | ** **     |                    |       |
| Accounts  payable                                                                                                                                                   |       | **$**                   | **1,334,409**  | ** **              | $          | 1,728,768 |   |
| Accrued  salaries and payroll taxes                                                                                                                                 |       | **923,757**             | ** **     | 460,769                 |       |
| Accrued  liabilities                                                                                                                                                |       | **814,784**             | ** **     | 788,969                 |       |
| Accrued  financing costs                                                                                                                                            |       | **627,364**             | ** **     | —                  |       |
| Deposits  on debenture offering                                                                                                                                     |       | **—**              | ** **     | 225,000                 |       |
| Line  of credit                                                                                                                                                     |       | **—**              | ** **     | 304,492                 |       |
| Current  portion of long-term debt and capital leases                                                                                                               |       | **728,357**             | ** **     | 944,499                 |       |
| Current  portion of convertible debt                                                                                                                                |       | **—**              | ** **     | 84,179                  |       |
| Deferred  revenue and customer deposits                                                                                                                             |       | **28,299**              | ** **     | 46,453                  |       |
| Total  current liabilities                                                                                                                                          |       | **4,456,970**           | ** **     | 4,583,129               |       |
|                                                                                                                                                                |       | ** **              | ** **     |                    |       |
| Long-term  debt and capital leases, net of current portion                                                                                                          |       | **656,324**             | ** **     | 888,825                 |       |
| Convertible  debt, net of current portion                                                                                                                           |       | **—**              | ** **     | 1,202,821               |       |
| Total  long-term liabilities                                                                                                                                        |       | **656,324**             | ** **     | 2,091,646               |       |
|                                                                                                                                                                |       | ** **              | ** **     |                    |       |
| Commitments  and contingencies                                                                                                                                      |       | ** **              | ** **     |                    |       |
|                                                                                                                                                                |       | ** **              | ** **     |                    |       |
| Stockholders’  equity:                                                                                                                                         |       | ** **              | ** **     |                    |       |
| Common  stock, $.25 par value, 50,000,000 shares authorized; shares issued and  outstanding, 3,452,898 and 2,099,810 at March 31, 2004 and 2003,  respectively |       | **863,225**             | ** **     | 524,953                 |       |
| Additional  paid-in capital                                                                                                                                         |       | **20,512,919**          | ** **     | 11,919,653              |       |
| Accumulated  deficit                                                                                                                                                |       | **(10,479,878**         | **)**          | (9,014,648              | )          |
| Total  stockholders’ equity                                                                                                                                    |       | **10,896,266**          | ** **     | 3,429,958               |       |
| Total  liabilities and stockholders’ equity                                                                                                                    |       | **$**                   | **16,009,560** | ** **              | $          | 10,104,733 |   |

 

*See accompanying notes.*

 

F-2

----

 

Sento Corporationand Subsidiary

 

# Consolidated Statements of Operations

 
| ** **                                                                                                                                | ** ** | **Year Ended**    | ** **     |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|----------------|
| ** **                                                                                                                                | ** ** | **March 31** | ** **     | **March 31** | ** ** |
| ** **                                                                                                                                | ** ** | **2004**          | ** **     | **2003** | ** ** |
|                                                                                                                                      |       |              | ** **     |   |   |
| Revenue,  net                                                                                                                             | ** ** | **$**             | **21,396,118** | ** ** | $ | 17,495,882 |   |
| Cost  of sales (excluding stock based compensation of $233,635 and $0 for 2004 and  2003, respectively)                                   | ** ** | **18,071,787**    | ** **     | 16,699,235 |   |
| Gross  profit                                                                                                                             | ** ** | **3,324,331**     | ** **     | 796,647 |   |
| Selling,  general, and administrative expenses (excluding stock based compensation of  $1,328,473 and $0 for 2004 and 2003, respectively) | ** ** | **2,665,723**     | ** **     | 2,430,973 |   |
| Stock  based compensation                                                                                                                 | ** ** | **1,562,108**     | ** **     | — |   |
| Income  (loss) from operations                                                                                                            | ** ** | **(903,500**      | **)**          | (1,634,326 | ) |
|                                                                                                                                      |       |              | ** **     |   |   |
| Interest  income                                                                                                                          | ** ** | **23,452**        | ** **     | 41,132 |   |
| Interest  expense                                                                                                                         | ** ** | **(236,244**      | **)**          | (308,383 | ) |
| Non-cash  interest expense related to warrants issued with convertible debentures                                                         | ** ** | **(228,162**      | **)**          | (70,492 | ) |
| Other  expense, net                                                                                                                       | ** ** | **(120,776**      | **)**          | (139,279 | ) |
|                                                                                                                                      |       |              | ** **     |   |   |
| Net  loss                                                                                                                                 | ** ** | **$**             | **(1,465,230** | **)** | $ | (2,111,348 | ) |
|                                                                                                                                      |       |              | ** **     |   |   |
| Net  loss per share – basic and diluted                                                                                              | ** ** | **$**             | **(0.63**      | **)** | $ | (1.01 | ) |
|                                                                                                                                      |       |              | ** **     |   |   |
| Weighted  average shares outstanding                                                                                                      | ** ** | **2,317,516**     | ** **     | 2,099,397 |   |

 

*See accompanying notes.*

 

F-3

----

 

Sento Corporationand Subsidiary

 

ConsolidatedStatement of Stockholders’ Equity and Comprehensive Income (Loss)

 
| ** **                                                | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** **  | **Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Total  Stockholders’** | ** **      |
|-----------------------------------------------------------|------------|------------------|------------|-------------------------|-------------|-----------------|------------|---------------------------------------|------------|-------------------------------|-----------------|
| ** **                                                | ** ** | **Shares**       | ** ** | **Amount**              | ** **  | **Capital**     | ** ** | **Deficit**                           | ** ** | **Income (Loss)**             | ** **      | **Equity** | ** ** |
| Balances  at March 30, 2002                          |       | 2,093,193        |       | $                       | 523,298     |            | $          | 11,892,629                            |       | $                             | (6,903,300      | ) | $ | (28,772 | ) | $ | 5,483,855 |   |
| Revaluation  of non-employee warrants issued for services |       | —           |       | —                  |        | 7,131           |       | —                                |       | —                        |            | 7,131 |   |
| Purchase  and cancellation of fractional shares           |       | (161             | )          | (40                     | )           | (311            | )          | —                                |       | —                        |            | (351 | ) |
| Employee  stock purchases                                 |       | 6,778            |       | 1,695                   |        | 20,204          |       | —                                |       | —                        |            | 21,899 |   |
| Comprehensive  loss:                                      |       |             |       |                    |        |            |       |                                  |       |                          |            |   |   |
| Net  loss                                                 |       | —           |       | —                  |        | —          |       | (2,111,348                            | )          | —                        |            | (2,111,348 | ) |
| Change  in unrealized losses on securities                |       | —           |       | —                  |        | —          |       | —                                |       | 28,772                        |            | 28,772 |   |
| Net  comprehensive loss                                   |       | —           |       | —                  |        | —          |       | —                                |       | —                        |            | (2,082,576 | ) |
| Balances  at March 31, 2003                          |       | 2,099,810        |       | 524,953                 |        | 11,919,653      |       | (9,014,648                            | )          | —                        |            | 3,429,958 |   |
| ** **                                                | ** ** | ** **       | ** ** | ** **              | ** **  | ** **      | ** ** | ** **                            | ** ** | ** **                    | ** **      | ** ** | ** ** |
| Issuance  of common stock and warrants                    | ** ** | **634,962**      | ** ** | **158,740**             | ** **  | **5,884,094**   | ** ** | **—**                            | ** ** | **—**                    | ** **      | **6,042,834** | ** ** |
| Exercise  of warrants                                     | ** ** | **69,083**       | ** ** | **17,271**              | ** **  | **(11,646**     | **)**      | **—**                            | ** ** | **—**                    | ** **      | **5,625** | ** ** |
| Exercise  of stock options                                | ** ** | **54,432**       | ** ** | **13,608**              | ** **  | **73,963**      | ** ** | **—**                            | ** ** | **—**                    | ** **      | **87,571** | ** ** |
| Employee  stock purchases                                 | ** ** | **18,231**       | ** ** | **4,558**               | ** **  | **21,877**      | ** ** | **—**                            | ** ** | **—**                    | ** **      | **26,435** | ** ** |
| Issuance  of common stock upon conversion of debentures   | ** ** | **576,380**      | ** ** | **144,095**             | ** **  | **776,961**     | ** ** | **—**                            | ** ** | **—**                    | ** **      | **921,056** | ** ** |
| Issuance  of warrants in conjunction with debt            | ** ** | **—**       | ** ** | **—**              | ** **  | **262,992**     | ** ** | **—**                            | ** ** | **—**                    | ** **      | **262,992** | ** ** |
| Stock-based  compensation on revaluation of stock options | ** ** | **—**       | ** ** | **—**              | ** **  | **1,562,108**   | ** ** | **—**                            | ** ** | **—**                    | ** **      | **1,562,108** | ** ** |
| Revaluation  of non-employee warrants issued for services | ** ** | **—**       | ** ** | **—**              | ** **  | **22,917**      | ** ** | **—**                            | ** ** | **—**                    | ** **      | **22,917** | ** ** |
| Comprehensive  loss:                                      | ** ** | ** **       | ** ** | ** **              | ** **  | ** **      | ** ** | ** **                            | ** ** | ** **                    | ** **      | ** ** | ** ** |
| Net  loss                                                 | ** ** | **—**       | ** ** | **—**              | ** **  | **—**      | ** ** | **(1,465,230**                        | **)**      | **—**                    | ** **      | **(1,465,230** | **)** |
| Net  comprehensive loss                                   | ** ** | **—**       | ** ** | **—**              | ** **  | **—**      | ** ** | **—**                            | ** ** | **—**                    | ** **      | **(1,465,230** | **)** |
| Balances  at March 31, 2004                          | ** ** | **3,452,898**    | ** ** | **$**                   | **863,225** | ** **      | **$**      | **20,512,919**                        | ** ** | **$**                         | **(10,479,878** | **)** | **$** | **—** | ** ** | **$** | **10,896,266** | ** ** |

 

*See accompanying notes.*

 

F-4

----

 

Sento Corporationand Subsidiary

 

ConsolidatedStatements of Cash Flows

 
| ** **                                                                             | ** ** | **Year Ended**    | ** **     |
|----------------------------------------------------------------------------------------|------------|-------------------|----------------|
| ** **                                                                             | ** ** | **March 31** | ** **     | **March 31** | ** ** |
| ** **                                                                             | ** ** | **2004**          | ** **     | **2003** | ** ** |
| Cash  flows from operating activities:                                                 |       |              |           |   |   |
| Net  loss                                                                              |       | **$**             | **(1,465,230** | **)** | $ | (2,111,348 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities:       |       | ** **        | ** **     |   |   |
| Depreciation                                                                           |       | **1,478,989**     | ** **     | 1,701,336 |   |
| Amortization  of debt offering costs                                                   |       | **83,598**        | ** **     | 89,416 |   |
| Non-cash  interest expense related to warrants issued with convertible debentures      |       | **228,162**       | ** **     | 70,492 |   |
| Stock  based compensation on revaluation of stock options                              |       | **1,562,108**     | ** **     | — |   |
| Revaluation  of non-employee warrants issued for services                              |       | **22,917**        | ** **     | 7,131 |   |
| Provision  for losses on accounts receivable and sales returns and allowances          |       | **280,469**       | ** **     | 49,000 |   |
| Loss  on sale of short term investments                                                |       | **—**        | ** **     | 11,618 |   |
| Net  loss on disposal of assets                                                        |       | **2,668**         | ** **     | 82,392 |   |
| Changes  in operating assets and liabilities:                                          |       | ** **        | ** **     |   |   |
| Accounts  receivable                                                                   |       | **(2,063,717**    | **)**          | 616,624 |   |
| Other  assets                                                                          |       | **(214,882**      | **)**          | 287,146 |   |
| Accounts  payable                                                                      |       | **(394,359**      | **)**          | 498,660 |   |
| Accrued  liabilities                                                                   |       | **515,423**       | ** **     | 402,446 |   |
| Deferred  revenue and customer deposits                                                |       | **(18,154**       | **)**          | (204,215 | ) |
| Net  cash provided by operating activities                                             |       | **17,992**        | ** **     | 1,500,698 |   |
| Cash  flows from investing activities:                                                 |       | ** **        | ** **     |   |   |
| Capital  expenditures                                                                  |       | **(1,309,442**    | **)**          | (295,038 | ) |
| Proceeds  from sale of assets                                                          |       | **1,362**         | ** **     | 37,934 |   |
| Principal  payments received on note receivable                                        |       | **—**        | ** **     | 15,937 |   |
| Proceeds  from sale of short-term investments                                          |       | **—**        | ** **     | 965,238 |   |
| Purchase  of short-term investments                                                    |       | **—**        | ** **     | (19,562 | ) |
| Net  cash provided by (used in) investing activities                                   |       | **(1,308,080**    | **)**          | 704,509 |   |
| Cash  flows from financing activities:                                                 |       | ** **        | ** **     |   |   |
| Proceeds  from issuance of long-term debt and line of credit                           |       | **381,563**       | ** **     | 304,492 |   |
| Principal  payments on long-term debt, capital leases, and credit line                 |       | **(1,371,560**    | **)**          | (1,220,641 | ) |
| Proceeds  received from debenture offering                                             |       | **240,000**       | ** **     | 225,000 |   |
| Principal  payments on debentures                                                      |       | **(765,270**      | **)**          | — |   |
| Proceeds  from issuance of common stock (including $627,364 of accrued offering costs) |       | **6,670,198**     | ** **     | — |   |
|                                                                                   |       | ** **        | ** **     |   |   |
| Proceeds  from exercise of stock options, warrants and employee stock purchases        |       | **119,631**       | ** **     | 21,899 |   |
| Repurchase  of fractional shares                                                       |       | **—**        | ** **     | (351 | ) |
| Net  cash provided by (used) in financing activities                                   |       | **5,274,562**     | ** **     | (669,601 | ) |
|                                                                                   |       | ** **        | ** **     |   |   |
| Net  increase in cash and cash equivalents                                             |       | **3,984,474**     | ** **     | 1,535,606 |   |
| Cash  and cash equivalents at beginning of year                                        |       | **2,583,337**     | ** **     | 1,047,731 |   |
| Cash  and cash equivalents at end of year                                              |       | **$**             | **6,567,811**  | ** ** | $ | 2,583,337 |   |
|                                                                                   |       | ** **        | ** **     |   |   |
| Supplemental  disclosures of cash flow information                                     |       | ** **        | ** **     |   |   |
| Cash  paid for interest                                                                |       | **$**             | **264,420**    | ** ** | $ | 312,101 |   |
| Non  cash investing and financing activities:                                          |       | ** **        | ** **     |   |   |
| Assets  acquired under capital lease                                                   |       | **$**             | **263,216**    | ** ** | $ | 431,288 |   |
| Conversion  of debentures for common stock                                             |       | **$**             | **982,080**    | ** ** | — |   |

 

See accompanying notes.

 

F-5

----

 

**1. Description of Business**

 

Sento Corporation provides the latest inWeb-enabled CRM (Customer Relations Management) solutions for a diversifiedportfolio of organizations.  Theseservices include self-help, live chat, Web collaboration, email, and telephone.  Sento deploys a distributed workforcestrategy and customer-centric applications to provide customer care andsupport.** **Sento conducts its principal business through itswholly-owned subsidiary Sento Technical Services Corporation.

 

**2. Significant AccountingPolicies**

 

**Principles of Consolidation**

 

The accompanying financial statements include the consolidatedfinancial statements of Sento and its wholly-owned subsidiary (collectively,the Company).  All significantintercompany balances and transactions have been eliminated in consolidation.

 

**Cash and Cash Equivalents**

 

The Company considers all highly-liquid investments with originalmaturities of three months or less to be cash equivalents.

 

**Property and Equipment**

 

Property and equipment are stated at cost. Depreciation of fixed assetsis computed on the straight-line method over the estimated useful lives ofindividual classes of assets.  Leaseholdimprovements are depreciated over the shorter of the remaining lease term orthe useful life of the improvements.  Theestimated useful lives of equipment and furniture are three to ten years.  Major replacements, which extend the usefullives of equipment, are capitalized and depreciated over the remaining usefullives.  Normal maintenance and repairitems are expensed as incurred.

 

Costs associated with Software developed for internal use are accountedfor pursuant to State of Position 98-1 “Accounting for the Costs of ComputerSoftware Developed or obtained for Internal Use” and are capitalized andamortized over the estimated useful life of the software, generally threeyears.

 

**Financial Instruments**

 

The carrying value of accounts receivable, accounts payable, accruedexpenses, and debt approximate their estimated fair value.

 

**Income Taxes**

 

Income taxes are accounted for under the asset and liabilitymethod.  Deferred tax assets and deferredtax liabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets and deferred tax liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be

 

F-6

----

 

recovered orsettled.  The effect on deferred taxassets and deferred tax liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.

 

**Common Stock**

 

OnNovember 14, 2002, the stockholders of the Company’s common stock approveda one-for-four reverse split of the Company’s common stock.  The record date of the reverse split wasNovember 25, 2002.  All referencesto common stock, additional paid in capital, accumulated deficit, common sharesoutstanding, average number of common stock shares outstanding, stock options,warrants to purchase common stock and per share amounts in these consolidatedfinancial statements and notes to consolidated financial statements prior tothe record date of the reverse stock split have been restated to reflect thereverse stock split on a retroactive basis.

 

**Revenue Recognition**

 

Revenue is recognizedwhen persuasive evidence of an arrangement exists, delivery of services hasoccurred, the fee is fixed or determinable, and collection of the resultingreceivable is reasonably assured. Revenue is recognized when the services have been provided to the endcustomer and the customer interaction is completed.

 

The Company primarilygenerates revenue by delivering technical assistance to users of its customers’products through the use of live chat, Web collaboration, email and telephoneinteractions.  Revenue is recognized asthe service is provided, based on the terms of the underlying customercontract, generally based on a monthly, hourly, per minute or per call rate.  The Company also provides licenses to itscustomers for the use of certain of its customer contact software tools thatare hosted by the Company.  In thesearrangements, the customer is charged a monthly fee based on the number ofusers.  Revenue under these arrangementsis recognized as the service is provided.

 

Certain of the Company’s customer support services aredelivered over a period of time (generally two months or less).  Revenue associated with these services isdeferred until the end customer support is completed and the Company has noremaining obligation to provide further support services.

 

Revenues generated fromprofessional and consulting services are recognized as the service is provided,based on time and materials incurred at contractually agreed upon rates.

 

**Stock-Based Compensation**

 

The Company has adoptedthe footnote disclosure provisions of Statement of Financial AccountingStandards No. 123, *Accounting for StockBased-Compensation* (SFAS 123). SFAS 123 encourages entities to adopt a fair value based method ofaccounting for stock options or similar equity instruments.  However,

 

it also allows an entityto continue measuring compensation cost for stock-based compensation using theintrinsic-value method of accounting prescribed by Accounting Principles BoardOpinion No. 25, *Accounting for Stock Issued to Employees*(APB 25).  The Company has elected tocontinue to apply the provisions of APB 25 and provide pro forma footnotedisclosures required by SFAS 123, which has been determined as if the Companyhad accounted for its employee stock options under the fair value method.  The fair value of each option grant isestimated on the date of grant using the Black Scholes option-pricing model.  The Company’s valuation assumptions and proforma information is as follows:

 

F-7

----

 

 
| ** **                                 | ** ** | ** **  | ** ** | **2004**     | ** **     | **2003** | ** ** |
|--------------------------------------------|------------|-------------|------------|--------------|----------------|----------|------------|
| Risk  free interest rate                   |       |        |       | **2.7**      | **%**          | 3.3      | %          |
| Dividend  yield                            |       |        |       | **—**   | ** **     | —   |       |
| Weighted-average  expected life            |       |        |       | **5  years** | ** **     | 5 years  |       |
| Volatility                                 |       |        |       | **68.0**     | **%**          | 66.0     | %          |
|                                       |       |        |       | ** **   | ** **     |     |       |
| Net  income (loss)                         |       | As reported |       | **$**        | **(1,465,230** | **)**    | $          | (2,111,348 | ) |
|                                       |       | Pro  forma  |       | **$**        | **(1,893,726** | **)**    | $          | (2,697,532 | ) |
|                                       |       |        |       | ** **   | ** **     |     |       |
| Basic  and diluted income (loss) per share |       | As reported |       | **$**        | **(0.63**      | **)**    | $          | (1.01 | ) |
|                                       |       | Pro forma   |       | **$**        | **(0.82**      | **)**    | $          | (1.28 | ) |

 

The full impact ofcalculating compensation cost for stock options under SFAS 123 may not berepresentative of the effects on reported net income (loss) for future years.

 

**Advertising**

 

Advertising costs are expensed as incurred.  Advertising costs amounted to $82,497 and$61,588 in fiscal 2004 and 2003, respectively.

 

**Net Income (Loss) Per CommonShare**

 

Basic income (loss) pershare is computed in accordance with Financial Accounting Standards BoardStandards No. 128, *Earnings Per Share*.  Basic net income (loss) per share is computedas net income or loss divided by the weighted average number of common sharesoutstanding for the period.  Diluted netincome (loss) per share reflects the potential dilution that could occur from commonshares issueable through stock options, warrants, and other convertiblesecurities, if dilutive.  The computationof diluted net income (loss) per share does not assume exercise or conversionof securities that would have an antidilutive effect on net income (loss) percommon share. During the years ended March 31, 2004 and 2003, stockoptions and warrants for the purchase of 646,101 and 4,420 shares of commonstock, respectively, were excluded from the computation of diluted net income(loss) per share.

 

**Comprehensive Income (Loss)**

 

Comprehensive income(loss) is comprised of net income (loss) and other comprehensive income(loss).  Other comprehensive income(loss) in 2003 includes certain changes in equity of the Company that areexcluded from net income (loss).  Therewere no items of other comprehensive loss during fiscal 2004.

 

**Concentration of Credit Risk**

 

In the normalcourse of business, the Company provides unsecured credit terms to itscustomers.  Accordingly, the Companyperforms ongoing credit evaluations of its customers and maintains allowancesfor possible losses.  Two customersaccounted for 47% of revenues for the year ended March 31, 2004.  These two customers accounted for 29% and18%, respectively, of fiscal 2004 revenue. Four customers accounted for 70% of revenues for the year endedMarch 31, 2003.  These fourcustomers accounted for 27%, 20%, 12%, and 11%, respectively, of fiscal 2003revenue.

 

F-8

----

 

**Use of Estimates**

 

Management of the Company has made a number of estimates andassumptions relating to the reporting of assets, liabilities, revenues, andexpenses and the disclosure of contingent assets and liabilities to preparethese consolidated financial statements in conformity with generally acceptedaccounting principles.  Actual resultscould differ from those estimates.

 

**Reclassifications**

 

Certain items in the 2003 consolidated financial statements have beenreclassified to conform to the 2004 presentation.

 

**3.****Property and Equipment**

 

Property and equipmentconsisted of the following:

 
| ** **                                   | ** ** | **March 31,** | ** **    | **March 31,** | ** ** |
|----------------------------------------------|------------|--------------------|---------------|--------------------|------------|
| ** **                                   | ** ** | **2004**           | ** **    | **2003**           | ** ** |
|                                         |       |               |          |               |       |
| Leasehold  improvements                      |       | **$**              | **1,713,258** | ** **         | $          | 1,606,415 |   |
| Furniture,  fixtures, equipment and software |       | **8,127,359**      | ** **    | 7,018,964          |       |
|                                         |       | **9,840,617**      | ** **    | 8,625,379          |       |
| Less  accumulated depreciation               |       | **(5,620,057**     | **)**         | (4,494,458         | )          |
|                                         |       | **$**              | **4,220,560** | ** **         | $          | 4,130,921 |   |

 

Depreciationfor the fiscal 2004 and fiscal 2003 years was $1,478,989 and $1,701,336,respectively.  Depreciation expenseincludes amortization of assets acquired under capital leases.

 

**4. Notes Payable and CapitalLeases**

 

InApril 2003, the Company renewed its line of credit with a bank that allowsthe Company to borrow up to $2,500,000 or 75% of eligible accounts receivable,after taking into account reserves that are based primarily on outstandingbalances of the first of the two term loans. The line of credit accrues interest at 2% over of the greater of 4.25%or the bank’s prime rate (6.25% as of March 31, 2004) and matures onApril 15, 2004.  There were noamounts drawn on this line of credit at March 31, 2004.

 

In April 2003, theCompany also refinanced the Company’s existing equipment financing term debtwith the bank.  The loan was limited tothe remaining principal balance on existing term loans with the bank in theamount of $513,983.  The loan calls formonthly principal and interest payments over 18 months and accrues interest at8%.  A second term loan was extended torefinance a portion of the Company’s existing convertible debt.  The second term loan is in the amount of$300,000, calls for monthly principal and interest payments over three years,and accrues interest at 8%.  A third termloan was entered into with the bank in the amount of $81,563 for the purchaseof equipment, which calls for monthly principal and interest payments over 30months, and accrued interest at 10%.  Substantially all of the assets of the Companyserve as collateral for the above line of credit and loans.

 

F-9

----

 

The foregoing loanagreements call for the Company to maintain certain profitability and net worthcovenants.  The Company was in compliancewith all debt covenants at March 31, 2004.

 

The Company also issued awarrant to the bank, in connection with obtaining the above credit facilities,to purchase 60,000 shares of common stock at $1.79 per share.  The relative fair value of the warrant of$42,000 (as determined using the Black Scholes valuation model with thefollowing assumptions: contractual life – 3 years; volatility – 66%; risk freeinterest rate – 3.34%) was recorded as a debt discount and is being amortizedto interest expense over the life of the underlying debt.  During fiscal 2004, $16,000 of interestexpense was recognized related to the amortization of the debt discount.  During 2004, the bank exercised the abovewarrant utilizing cashless exercise provisions by tendering all 60,000 warrantsfor a net 47,655 shares of common stock.

 

Subsequent toMarch 31, 2004, the Company renewed its line of credit with the bank,refinanced its term loans, and obtained a commitment for an additional termloan for future equipment purchases  (seenote 11).  Long-term debt classificationsat March 31, 2004 and 2003 included in the accompanying financialstatements reflect these refinancings.

 

Long-term debt, includingcapital lease obligations, consist of the following:

 
| ** **                                                                                                           | ** ** | **March 31,** | ** **  | **March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|--------------------|------------|
| ** **                                                                                                           | ** ** | **2004**           | ** **  | **2003**           | ** ** |
|                                                                                                                 |       |               |        |               |       |
| 6.0%  note payable in monthly installments totaling $25,131, including interest,  secured by furniture and equipment |       | **$**              | **195,757** | ** **         | $          | 476,118 |   |
|                                                                                                                 |       | ** **         | ** **  |               |       |
| 6.7%  note payable in monthly installments totaling $1,973, including interest,  secured by equipment                |       | **5,784**          | ** **  | 28,013             |       |
|                                                                                                                 |       | ** **         | ** **  |               |       |
| 8.0%  note payable to a bank in monthly installments of $28,555 plus interest,  secured by furniture and equipment   |       | **228,437**        | ** **  | 610,031            |       |
|                                                                                                                 |       | ** **         | ** **  |               |       |
| 8.0%  note payable to a bank in monthly installments of $8,333 plus interest,  secured by furniture and equipment    |       | **216,667**        | ** **  | —             |       |
|                                                                                                                 |       | ** **         | ** **  |               |       |
| 10.0%  notes payable to a bank in monthly installments of $2,719 plus interest,  secured by furniture and equipment  |       | **67,969**         | ** **  | —             |       |
| Gross  installment notes payable                                                                                     |       | **714,614**        | ** **  | 1,114,162          |       |
| Less:  discount on installment note payable                                                                          |       | **(26,354**        | **)**       | —             |       |
| Net  installment notes payable                                                                                       |       | **688,260**        | ** **  | 1,114,162          |       |
| Present  value of net minimum capital lease payments                                                                 |       | **696,421**        | ** **  | 719,162            |       |
| Total  debt and capital leases                                                                                       |       | **1,384,681**      | ** **  | 1,833,324          |       |
| Less:  current portion                                                                                               |       | **(728,357**       | **)**       | (944,499           | )          |
| Long-term  debt and capital leases, net of current portion                                                           |       | **$**              | **656,324** | ** **         | $          | 888,825 |   |

 

F-10

----

 

Capital leases are forequipment.  Future minimum capital leasepayments, excluding taxes, insurance and other costs, and aggregate maturitiesof installment notes payable as of March 31, 2004 were as follows:

 
| ** **                                           | ** ** | **Capital  Leases** | ** ** | **Notes  Payable** | ** ** |
|------------------------------------------------------|------------|---------------------|------------|--------------------|------------|
| Fiscal  Year                                         |       |                |       |               |       |
| 2005                                                 |       | $                   | 415,167    |               | $          | 375,907 |   |
| 2006                                                 |       | 272,222             |       | 157,131            |       |
| 2007                                                 |       | 87,897              |       | 167,165            |       |
| 2008                                                 |       | —              |       | 14,411             |       |
| Total  payments                                      |       | 775,286             |       | $                  | 714,614    |   |
| Less  amounts representing interest                  |       | (78,865             | )          |               |       |
| Present  value of net minimum capital lease payments |       | $                   | 696,421    |               |       |   |

 

**5. Convertible Debentures**

 

In February 2000,the Company issued $1,287,000 of 7% convertible subordinated debentures in$1,000 units consisting of one $990 debenture and warrants to purchase 100shares of common stock.  Pursuant to theoriginal terms of the debenture, in January 2001, the interest rate on thedebentures increased to 8%.   InFebruary 2003, the debentures became due and payable, and the associatedwarrants expired.

 

On April 15, 2003,the Company completed a refinancing of its convertible subordinated debentureswhich included a new $300,000, 8% term loan with a bank (note 4) that was usedto pay down a portion of the Company’s existing debentures and the issuance ofnew debentures whereby all of the February 2000 debentures were repaid orexchanged for new convertible subordinated debentures.  The classification of convertible debt in theaccompanying financial statements as of and for the year ended March 31,2003, was presented to reflect the effect of the refinancing.  In total, the Company issued 1,002 units at$1,000 each, consisting of one $990 debenture and warrants to purchase 250shares of the Company’s common stock at $2.25 per share.  The debentures were convertible at any timeinto shares of the Company’s common stock at $1.75 per share.  The debentures mature on April 15, 2006,and the exercise period for the warrants expire on the same date.  Each existing debenture holder had theability to exchange all or part of his/her old debentures for the newdebentures.  New debentures totaling$991,980 were issued, including the exchange of $531,630 in existingdebentures.  During 2004, all of theoutstanding convertible debentures were converted into common stock and certaindebenture holders exercised warrants utilizing cashless exercise provisions bytendering 37,500 warrants for a net 21,428 shares of common stock.  Subsequent to March 31, 2004, additionalwarrants were exercised utilizing cashless exercise provisions (see note 11).

 

Based on the terms of thedebentures and pursuant to the provisions of Emerging Issues Task Force IssueNo. 00-27 regarding certain convertible instruments, it was determined that thedebentures included a

 

F-11

----

 

 

beneficial conversionfeature.  Based on the value of thewarrants issued with the debentures, as described below, and the statedconversion terms of the debentures, the beneficial conversion feature wasdetermined to have an implied value of approximately $53,000.  This amount was reflected as a debt discountand an increase to additional paid-in capital to be amortized to interestexpense over the term of the debt.  Uponconversion of the debentures in 2004, the remaining debt discount related tothe beneficial conversion feature was recognized as interest expense.

 

The Company also issuedwarrants for the purchase of 50,000 shares of common stock to a placement agentfor services rendered in conjunction with the refinancing.  The warrants expire April 15, 2006, ofwhich, warrants for 37,500 shares of common stock are exercisable at $1.60 pershare, and warrants for 12,500 shares common stock are exercisable at $2.25 pershare.  The relative fair value of thewarrant of $36,000 (as determined using the Black Scholes valuation model withthe following assumptions: contractual life – 3 years; volatility – 66%; riskfree interest rate – 3.34%) was recorded as a deferred financing cost (includedin other assets) and additional paid-in capital and was amortized to interestexpense over the life of the underlying debt.

 

**6. Income Taxes**

 

As ofMarch 31, 2004 and 2003, the Company had federal and state net operatingloss carryforwards of approximately $8,255,000 and $7,465,000respectively.  The net operating loss andcredit carryforwards will expire at various dates beginning in 2020 through2024, if not utilized.

 

Income tax expense(benefit) consists of:

 
| ** **                       | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total**  | ** ** |
|----------------------------------|------------|-------------|------------|--------------|------------|------------|------------|
| Year  ended March 31, 2004: |       |        |       |         |       |       |       |
| Federal                          |       | **$**       | **—** | ** **   | **$**      | **—** | ** ** | **$** | **—** |   |
| State                            |       | **—**  | ** ** | **—**   | ** ** | **—** |       |
|                             |       | **$**       | **—** | ** **   | **$**      | **—** | ** ** | **$** | **—** |   |
| Year  ended March 31, 2003: |       | ** **  | ** ** | ** **   | ** ** | ** ** |       |
| Federal                          |       | **$**       | **—** | ** **   | **$**      | **—** | ** ** | **$** | **—** |   |
| State                            |       | **—**  | ** ** | **—**   | ** ** | **—** |       |
|                             |       | **$**       | **—** | ** **   | **$**      | **—** | ** ** | **$** | **—** |   |

 

F-12

----

 

Actual income tax expensediffers from the “expected” tax expense (computed by applying the U.S. federalcorporate income tax rate of 34% to income before income taxes) as follows:

 
| ** **                                             | ** ** | **Year Ended**    | ** **   |
|--------------------------------------------------------|------------|-------------------|--------------|
| ** **                                             | ** ** | **March 31** | ** **   | **March 31** | ** ** |
| ** **                                             | ** ** | **2004**          | ** **   | **2003** | ** ** |
| Computed  “expected” tax (benefit) expense   |       | **$**             | **(498,178** | **)** | $ | (717,858 | ) |
| Increase  (decrease) in income taxes resulting from:   |       | ** **        | ** **   |   |   |
| State  income taxes, net of federal tax benefit        |       | **(48,352**       | **)**        | (85,532 | ) |
| Change  in valuation allowance                         |       | **759,000**       | ** **   | 838,000 |   |
| Nondeductible  meals and entertainment and other       |       | **33,797**        | ** **   | 9,234 |   |
| Change  in estimates and return to accrual differences |       | **(246,267**      | **)**        | (43,844 | ) |
| Income  tax (benefit) expense                          |       | **$**             | **—**   | ** ** | $ | — |   |

 

Significant components ofthe Company’s deferred tax assets and liabilities for federal and state incometaxes are as follows:

 
| ** **                         | ** ** | **March 31,** | ** **    | **March 31,** | ** ** |
|------------------------------------|------------|--------------------|---------------|--------------------|------------|
| ** **                         | ** ** | **2004**           | ** **    | **2003**           | ** ** |
| Deferred  tax assets:              |       |               |          |               |       |
| Net operating  loss carryforwards  |       | **$**              | **3,079,000** | ** **         | $          | 2,997,000 |   |
| Deferred  and accrued compensation |       | **80,000**         | ** **    | 62,000             |       |
| Intangible  assets                 |       | **131,000**        | ** **    | 137,000            |       |
| Accrued  liabilities               |       | **—**         | ** **    | 83,000             |       |
| Allowances  and reserves           |       | **99,000**         | ** **    | —             |       |
| Stock-based  compensation          |       | **489,000**        | ** **    | —             |       |
| Other,  net                        |       | **6,000**          | ** **    | 56,000             |       |
| Deferred  tax assets               |       | **3,884,000**      | ** **    | 3,335,000          |       |
|                               |       | ** **         | ** **    |               |       |
| Deferred  tax liabilities:         |       | ** **         | ** **    |               |       |
| Property  and equipment            |       | **(62,000**        | **)**         | (272,000           | )          |
| Net  deferred tax assets           |       | **3,822,000**      | ** **    | 3,063,000          |       |
| Valuation  allowance               |       | **(3,822,000**     | **)**         | (3,063,000         | )          |
| Total                              |       | **$**              | **—**    | ** **         | $          | — |   |

 

F-13

----

 

Utilization of theCompany’s net operating loss carryforwards is limited to the future taxableincome of the Company. Under the “change of ownership” provisions of theInternal Revenue Code, utilization of the net operating loss carryforwards maybe subject to an annual limitation.

 

The net valuationallowance increased by $759,000 and $838,000 during the years endedMarch 31, 2004 and 2003, respectively.

 

The valuation allowanceincreased by $6,000 and $0 in the years ended March 31, 2004 and 2003,respectively, related to excess tax benefits resulting from stock optionexercises. If and when the Company is able to utilize these excess tax benefitsin future periods, the reduction in the valuation allowance will be crediteddirectly to additional paid-in capital.

 

**7. Operating Leases**

 

The Company hasnon-cancelable operating leases for office space.  The Company incurred rent expense of $845,748and $883,648 for the years ended March 31, 2004 and March 30, 2003,respectively.  The Company subleasesspace in two of its facilities under non-cancelable operating leases.    Future minimum rent payments, and amountsdue under subleases, under non-cancelable operating leases are as follows:

 
| ** **   | ** ** | **Minimum  Lease  Payment** | ** ** | **Amounts  Due Under  Subleases** | ** ** | **Net Amount  After  Subleases** | ** ** |
|--------------|------------|-----------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| Fiscal  Year |       |                        |       |                              |       |                             |       |
| 2005         |       | $                           | 1,171,393  |                              | $          | (245,532                         | )          | $ | 925,861 |   |
| 2006         |       | 749,019                     |       | (146,142                          | )          | 602,877                          |       |
| 2007         |       | 558,123                     |       | (46,752                           | )          | 511,371                          |       |
| 2008         |       | 572,782                     |       | (46,752                           | )          | 526,030                          |       |
| 2009         |       | 359,398                     |       | (15,584                           | )          | 343,814                          |       |
|              |            |                             |            |                                   |            |                                  |            |  |  |  |

 

**8. Retirement Plan**

 

The Company has a qualified defined contribution retirement plan underSection 401(k) of the Internal Revenue Code.  The plan covers all employees who meetminimum age and service requirements, and allows participants to defer aportion of their annual compensation on a pretax basis.  In addition, employer contributions are madeat the discretion of the Board of Directors. Participants are fully vested at all times in employee contributions.Employer contributions vest over a six-year period.  No employer contributions were made duringfiscal years ended 2004 and 2003.

 

F-14

----

 

**9. Common Stock**

 

**Issuanceof Common Stock**

 

In March 2004,the Company completed a private placement for the sale of 634,962 shares ofcommon stock at a price of $10.56 per share, resulting in net proceeds of$6,042,834.  The terms of the privateplacement require the Company to file a registration statement covering suchshares of common stock before May 31, 2004. Failure to file such registration statement and to meet other relatedterms by certain deadlines will subject the Company to periodic liquidateddamage payments of 1.0 percent of the offering price to the private placementstockholders.

 

In conjunction with theprivate placement, the Company issued warrants for the purchase of 126,993shares of common stock.  The warrants areexercisable beginning in September 2004, have a term of three and one-halfyears, and an exercise price of $12.67. In certain circumstances, the Company may have the right to call thewarrants.  The Company also issuedwarrants to purchase 30,000 shares of common stock, with the same terms, to aplacement agent for services rendered in conjunction with the privateplacement.

 

**Stock Options**

 

The Company has adopted a stock option plan (the “Plan”) pursuant towhich the Company’s Board of Directors may grant stock options to officers andkey employees.  The Plan authorizes grantsof options to purchase up to 875,000 shares of authorized but unissued commonstock.  Stock options are granted with anexercise price not less than the stock’s fair market value at the date ofgrant.  All stock options granted toemployees have ten-year terms; stock options granted to non-management membersof the Board of Directors generally have a five-year term.  The number of shares granted, vesting period,and price per share are determined by the Board of Directors.  Stock options generally vest over one to fouryears.  At March 31, 2004, therewere 266,095 additional shares available for future grant under the Plan.

 

Stock optionactivity under the Plan, relating to qualified and nonqualified options duringthe periods indicated is as follows:

 
| ** **                                | ** ** | **2004**                | ** ** | **2003**                                | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **Number   of  Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number  of  Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Balance  outstanding at beginning of year |       | **439,845**             | ** ** | **$**                                   | **6.71**   | ** ** | 566,445 |   | $ | 8.40 |   |
| Granted                                   |       | **448,267**             | ** ** | **1.88**                                | ** ** | 41,525 |   | 2.46 |   |
| Exercised                                 |       | **(54,432**             | **)**      | **1.61**                                | ** ** | — |   | — |   |
| Forfeited                                 |       | **(430,145**            | **)**      | **6.79**                                | ** ** | (168,125 | ) | 10.86 |   |
| Balance  outstanding at end of year       |       | **403,535**             | ** ** | **2.15**                                | ** ** | 439,845 |   | 6.90 |   |
| Exercisable  at end of year               |       | **132,760**             | ** ** | **$**                                   | **2.39**   | ** ** | 246,416 |   | $ | 6.71 |   |

 

Subsequent to March 31, 2004, certain stock options were exercised(see note 11).

 

F-15

----

 

 

The following tablesummarizes information about stock options outstanding at March 31, 2004:

 
| **Exercise  Price** | ** ** | **Number  Outstanding  at  March 31, 2004** | ** ** | **Weighted-  Average  Remaining  Contractual Life** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number  Exercisable   at  March 31, 2004** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|---------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------|------------|
| ** **          | ** ** | ** **                                       | ** ** | **(Years)**                                         | ** ** | ** **                              | ** ** | ** **                                        | ** ** | ** **                              | ** ** |
| $1.60-1.80          |       | **347,518**                                      |       | 8.0                                                 |       | $                                       | 1.60       |                                              | 125,945    |                                    | $          | 1.60 |   |
| 2.16-2.88           |       | **7,667**                                        |       | 9.3                                                 |       | 2.75                                    |       | 10                                                |       | 2.16                                    |       |
| 3.20-3.23           |       | **13,100**                                       |       | 9.6                                                 |       | 3.21                                    |       | —                                            |       | —                                  |       |
| 4.57-4.99           |       | **29,000**                                       |       | 9.4                                                 |       | 4.70                                    |       | 555                                               |       | 4.99                                    |       |
| 18.00               |       | **6,250**                                        |       | 5.0                                                 |       | 18.00                                   |       | 6,250                                             |       | 18.00                                   |       |
|                |       | **403,535**                                      |       | 8.1                                                 |       | 2.15                                    |       | 132,760                                           |       | 2.39                                    |       |
|                     |            |                                                  |            |                                                     |            |                                         |            |                                                   |            |                                         |            |  |  |

 

On April 23, 2003, the Company’s Board of Directors approved anemployee stock option exchange program (“Exchange Program”), pursuant to whichthe Company granted options to purchase 313,592 shares of the Company’s commonstock at an exercise price of $1.60 per share in exchange for options topurchase 377,342 shares of the Company’s common stock at exercise prices inexcess of $2.00 per share.  The newoptions issued under the Exchange Program are subject to variable planaccounting in accordance with FASB Interpretation No. 44 “Accounting forCertain Transactions Involving Stock Compensation” (“Interpretation 44”).  Under variable plan accounting, the Companyis required to recognize compensation expense in its consolidated statements ofoperations for any increase in the market price of the Company’s common stock above$1.60 (the market price at the effective date of the exchange).  This compensation must be recorded on aquarterly basis until the new options issued under the Exchange Program areexercised, forfeited or expire unexercised. The impact of the new options issued under the Exchange Program on theCompany’s consolidated financial statements will depend on quarterlyfluctuations in the Company’s common stock price and the dates of exercises,forfeitures or cancellations of the new options by employees.  Moreover, because the precise amount ofcompensation expense will depend on the market price of the Company’s commonstock at the end of each quarterly period, the Company will not be able toforecast in advance the amount of compensation expense that it will incur inany future period.  During the year endedMarch 31, 2004 and 2003, the Company recognized stock based compensationexpense of $1,562,108 and $0, respectively, to reflect adjustments to the valueof the options due to the increase in market price of the Company’s commonstock above the exercise price of $1.60 per share.

 

**Employee Stock Purchase Plan**

 

The Company has adopted astock purchase plan under which 125,000 shares of common stock are reserved forfuture issuance to employees of the Company. The purpose of the stock purchase plan is to provide a method wherebyemployees of the Company may acquire a proprietary interest in the Companythrough the purchase of shares of common stock. The stock purchase plan is intended to qualify as an “employee stockpurchase plan” under Section 423 of the Internal Revenue Code.  As of March 31, 2004, the Company hadsold 68,069 shares to employees of the Company under this plan.

 

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**Stock Warrants**

 

The Company hasperiodically issued warrants in exchange for consulting services tonon-employees.  Warrants to non-employeesfor services have been accounted for pursuant to Emerging Issues Task Force(EITF) Issue No. 96-18.  Accordingly, thewarrants are periodically revalued based on the then fair market value of theunderlying common stock during the performance period.  The Company recognized non-employee stockbased compensation expense of $22,917 and $7,131 for the year endedMarch 31, 2004 and 2003, respectively.

 

In January 2004, theCompany entered into a two–year consulting agreement for services with termsthat require the Company to issue the consultant warrants to purchase 5,000shares of common stock each month.  As ofMarch 31, 2004, warrants to purchase 15,000 shares of common stock hadbeen issued to the consultant under this agreement.  The warrants vest 25 percent every threemonths from date of issuance, have a term of three and one-half years, and havean exercise price of $3.00 per share. The consultant agreement can be terminated upon 60 days written notice,subject to various cancellation provisions. Unless terminated earlier, the Company is obligated under this agreementto issue additional warrants for the purchase of 105,000 shares of common stockover the next 21 months.

 

Outstanding warrants topurchase shares of the Company’s common stock, as of March 31, 2004, areas follows:

 
| **Warrants**                                                            | ** ** | **Fiscal  Year  Issued** | ** ** | **Number  Of  Warrants** | ** ** | **Exercise  Price** | ** ** | **Expiration**                   | ** **       |
|-------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|---------------------|------------|----------------------------------|------------------|
| Private  placement of common stock                                      |       | 1999                     |       | 94,688                   |       | $                   | 10.00      |                             | August 2004 |   |
| Consultant  for services                                                |       | 2003                     |       | 15,000                   |       | 8.48                |       | December 2004               |             |
| Consultant  for services                                                |       | 2004                     |       | 20,000                   |       | 2.70                |       | August 2005                 |             |
| Purchasers  of convertible debentures                                   |       | 2004                     |       | 213,000                  |       | 2.25                |       | April 2006                  |             |
| Placement  agent in conjunction with issuance of convertible debentures |       | 2004                     |       | 37,500                   |       | 1.60                |       | April 2006                  |             |
| Placement  agent in conjunction with issuance of convertible debentures |       | 2004                     |       | 12,500                   |       | 2.25                |       | April 2006                  |             |
| Consultant  for services                                                |       | 2004                     |       | 15,000                   |       | 3.00                |       | July -  September 2007 |             |
| Private  placement of common stock                                      |       | 2004                     |       | 126,992                  |       | 12.67               |       | September 2007              |             |
| Placement  agent in conjunction with issuance of common stock           |       | 2004                     |       | 30,000                   |       | 12.67               |       | September 2007              |             |
|                                                                    |       |                     |       | 564,680                  |       |                |       |                             |             |
|                                                                         |            |                          |            |                          |            |                     |            |                                  |                  |  |

 

Subsequent toMarch 31, 2004, the expiration date of certain warrants issued in the 1999private placement of common stock was extended and certain warrants issued topurchasers of convertible debentures were exercised (see note 11).

 

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**10. Related Party Transactions**

 

In March of 1999,Sento entered into a consulting agreement with GT Investments, a company thatis wholly owned by Gary B. Filler, Sento’s Chairman.  Under the agreement, Sento pays GTInvestments a monthly fee for services provided by Mr. Filler.  The total expense incurred by Sento under itsarrangement with GT Investments was $66,000 for each of the years endedMarch 31, 2004 and 2003.  Theconsulting agreement is cancelable by either party at any time.

 

**11. Subsequent Events**

 

InMay 2004, the Board of Directors made effective an extension of three months tothe term for warrants to purchase 94,688 shares of common stock issued inconjunction with a private placement of common stock in 1999.  The warrants that were to expire on May 31,2004, now expire on August 31, 2004.

 

Subsequentto March 31, 2004, stock options for 33,234 shares of common stock wereexercised at $1.60 per share for proceeds of $53,174.  Additionally, warrants issued to purchasersof convertible debentures were exercised utilizing cashless exercise provisionsby tendering 183,000 warrants for a net 150,709 shares of common stock.

 

OnMay 11, 2004, the Company refinanced its expired line of credit and existingterm loans with a bank, wherein the line of credit was renewed and the existingthree terms loans were combined into one term loan.  The agreement also allows the Company to drawon an additional term loan for up to $1,500,000 of equipment financing.  The line of credit was increased from amaximum of $2,500,000 to $3,000,000 (subject to a limit of 80% of eligibleaccounts receivable), has an interest rate of the bank’s prime rate plus 1% andhas a two-year term, including provisions for extension, subject to approval.  The line of credit terms also contain anannual commitment fee of 0.75%.  The newterm loan for $750,000 includes the repayment of the three existing term loansplus $316,140 in additional equipment financing.  The terms of this loan include a 1.0%commitment fee, an interest rate of 7.46%, monthly payments of $23,316including interest, and a term of three years. The Company also has a commitment from the bank for a term loan of up to$1,500,000 for future equipment financing. The Company may take advances on this loan in a minimum amount of$100,000 through March 31, 2005. The underlying term loans will have aterm of three years, require monthly principal and interest payments, will havea fixed interest rate determined at the date of the advance based on thethree-year U.S. Treasury Bond rate plus 4.5%, and have a commitment fee of 1%.

 

The covenants associatedwith all of the financing arrangements with the bank include minimum debtservice coverage of 1.5-to-1.0 and an adjusted quick ratio of 2.0-to-1.0.  Substantiallyall of the assets of the Company serve as collateral for the above line ofcredit and term loans.

 

**12. Recently Issued AccountingPronouncements**

 

The Company has reviewedall recently issued accounting standards, which have not yet been adopted, inorder to determine their potential effect, if any, on the results of operationsand financial position of the Company. Based on that review, the Company does not currently believe that any ofthese recent accounting pronouncements will have a significant effect on itscurrent or future financial position, results of operations, cash flows ordisclosure.

 

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