**UNITED STATES**

**S****ECURITIES AND****E****XCHANGE****C****OMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-KSB/A**

**(AmendmentNo. 2)**

 

| **ý** | ** ** | **Annual report under  Section 13 or 15(d) of the Securities Exchange Act of 1934**      |
|------------|------------|-----------------------------------------------------------------------------------------------|
| ** ** | ** ** | **for the fiscal year ended March 31, 2004 or**                                          |
| **o**      | ** ** | **Transition  report under Section 13 or 15(d) of the Securities Exchange Act of 1934.** |

 

**Sento Corporation**

(Name of small business issuer in itscharter)

 

| **Utah**                                         | ** ** | **000-06425**         | ** ** | **87-0284979**                     |
|--------------------------------------------------|------------|-----------------------|------------|------------------------------------|
| (State or other  jurisdiction  of incorporation) |       | (Commission File No.) |       | (IRS Employer  Identification No.) |

 

**808 East Utah Valley DriveAmerican Fork, Utah 84003**

(Addressof principal executive offices, including zip code)

 

Issuer’s telephone number, including areacode:  **(801)772-1100**

 

Securities registered underSection 12(b) of the Exchange Act:

 

**None**

 

Securities registered underSection 12(g) of the Exchange Act:

 

**Common Stock, $.25 par value**

 

Check whether the Issuer (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepast 12 months (or for such shorter period that the Issuer was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ýNo o

 

Check if there is no disclosure of delinquent filers pursuant to Item405 of Regulation S-Bcontained herein, and no disclosure will be contained, to the best of theIssuer’s knowledge, in definitive proxy or information statements incorporatedby reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB. o

 

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

 

The aggregate market value of the Common Stock held by non-affiliatesof the issuer, based upon the closing sale price of the Common Stock reportedby the NASDAQ SmallCap Market on July 1, 2004, was approximately$31,818,000.

 

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

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

None

 

Transitional Small Business Disclosure Format (check one): Yes oNo ý

 

 

** **

**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**

 

SentoCorporation (“we,” “us,” Sento or the “Company”) is filing this Amendment No. 2on Form 10-KSB for the year ended March 31, 2004 for the purpose ofamending and restating the information set forth in our Annual Report on Form10-KSB for the year ended March 31, 2004, filed May 20, 2004, and ourAmendment No. 1 to Annual Report on Form 10-KSB/A, filed July 13, 2004. Allsubsequent references to “Form 10-KSB” or this “Report” shall refer to ourinitial Form 10-KSB, as amended by this Amendment No. 2.

 

**Special Note Regarding Forward-LookingStatements**

 

*ThisAnnual Report on Form 10-KSB (this “**Report**”)contains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended (the “**SecuritiesAct**”), and Section 21E of the Securities Exchange Act of 1934,as amended (the “**Exchange Act**”). Such statementscan be identified by the use of 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’ orbusiness partners’, future plans, objectives, expectations, intentions andfinancial performance and the assumptions that underlie these statements. Suchforward-looking statements are included under Item 1. “Business,” Item 2. “Properties” and Item 6.  “Management’sDiscussion and Analysis or Plan of 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. It is important to note that suchstatements may not prove to be accurate and that our actual results and futureevents will differ, and could differ materially, from those anticipated in suchstatements. Among the factors that could cause actual results to differmaterially from our Company’s expectations are those described under Item 1. “Description of Business—Factors that May Affect Future Results.”Readers are also encouraged to review our other filings with the Securities andExchange Commission (the “**Commission**”)describing other factors that may affect our future results. All subsequentwritten and oral forward-looking statements attributable to us or personsacting on our behalf are expressly qualified in their entirety by thissection and other factors included elsewhere in this Report.*

 

# **PARTI**

 

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

 

### General Overview

 

Sento Corporation (**“Sento,”**the **“Company”** or **“we”**) designs, implements and manageshigh-tech solutions for customer acquisition, customer care, technical supportand help-desk functions.  We use moderncustomer contact centers, coupled with our state-of-the-art proprietarysoftware systems (the **“Customer ChoicePlatformSM”**), to provide domestic and internationalsupport services for Fortune 1000 companies, multinational companies, productmanufacturers, and software companies.

 

Our proprietary customer relationship management (**“CRM”**) software, known as **“ReciteSM”**and other reportingand management tools, when integrated with communications points such astelephone, internet, chat, email, call-back, and self-help, provide solutionsdesigned to help our clients reduce costs and improve customer satisfaction.

 

**By outsourcing customer care,customer acquisition, technical support or help-desk solutions to us, ourclients can focus on their core businesses. The staffing, operation and management of efficient and cost-effectivecustomer contact centers and the related technology are becoming more and morespecialized, a business unto itself, and very different from the core businessof most of our clients.  The engagementof an outsourced customer contact service offers our clients the opportunity tofocus their limited human and financial resources on lowering operating costs,reducing unnecessary capital 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 result, outsourcing continues to gainfavor**

 

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**across****the business spectrum.  Many business analysts believe this trendwill continue to grow as technology becomes more complex and expensive andclient resources need to be allocated in the most cost-effective mannerpossible.**

 

### Background

 

Sento was formed in 1986 as a value-added reseller, formerly known asSpire Technologies, Inc.  In 1996, weexecuted a share exchange with an existing public company.  Sento is incorporated under the laws of theState of Utah.  Our common stock istraded on the NASDAQ Small Cap Market under the symbol “SNTO.”  Throughout this Report, the word **“client”** refers to entities we serve, andthe word **“customer(s)”** refers toour clients’ customer(s).

 

In 1997 and 1998, we undertook a strategic transition to focus ourefforts on customer contact solutions. We constructed a new generation customer contact facility (**“Customer Contact Solutions Center”** or **“CCSC”)**in American Fork, Utah.  Subsequently, we have constructed fouradditional Customer Contact Solutions Centers, two of which are in Utah and twoof which are in Wyoming.  One of ourWyoming CCSCs is not currently 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 customer contact services industry encompasses a broad spectrum ofservices and technology used to build long-term relations between clients andtheir customers.  Effective outsourcersprovide cost-effective, high-quality customer support solutions that enableclients to reduce costs and increase focus on core competencies.

 

We believe many organizations face a rapidly changing, highlycompetitive environment in which improved customer contact center services andenhanced customer interactions can be a significant factor in improvingproducts and services, lowering costs, increasing customer satisfaction, and buildingcompetitive advantages.

 

Many senior executives and managers recognize the importance ofinformation technology in their organizations and the potential benefits ofimproved customer service.  At the sametime, technological changes and the costs and time associated with implementingand using current solutions create tremendous pressure on organizations andtheir management.  Asthe pace of advancement accelerates, an organization’s ability to evaluate,design, integrate, deploy, and leverage new technology becomes a criticalcompetitive issue.

 

Staying abreast of rapid technological change, while maintaining therequired operational efficiency of customer contact centers, is also becomingincreasingly more difficult and expensive for companies.  Running a contact center on a day-to-daybasis requires a skill set and a level of expertise that differs from the corebusiness of most clients.  Understandingthe inter-relationship of the various technological requirements as they relateto the needs of the various internal divisions of a client company requiressignificant time, as well as careful attention to the client’s businessneeds.  An outsourcer has the benefit ofseeing many companies and how they operate, then applying that knowledge to theissues at hand with other client businesses.

 

The challenge of maintaining an organization’s focus on core businessareas while attempting to recognize and benefit from rapid changes has promptedmore and more organizations to seek outsourced customer contact centersolutions.  Organizations lacking thisexperience and know-how are finding it increasingly difficult and expensive toservice all their needs in-house.  As aresult, “outsourcing” continues to gain favor across the business spectrum.

 

### Business Strategy

 

Our business strategy is to design, develop, implement, and managecustomer contact solutions that enable our clients to effectively useleading-edge technology and diversified workforce management.  By doing so, we position our clients toimprove business operations, reduce operating expenses and increase overallcustomer satisfaction.

 

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Our business strategy is based on the following strategic initiatives:

 

*Customer ChoicePlatformSM TechnologySuite.*Our proprietary 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 and goals.  We then develop appropriate strategies andprocesses, 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 ManageLeading Edge Customer Relationship Management and Contact Center Solutions andMethodologies.* 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’ customersto access a variety of contact points depending upon the customer’s desire andchoice at the time.

 

We have assisted many of our clients in deflecting expensive phoneinteractions to more cost-effective Web solutions while maintaining the same orhigher levels of service and quality.  Inall cases, we do not eliminate any single form of contact with the customer,but introduce more cost-effective forms and reallocate according to the needsand desires of our clients and their customers. This consultative function is designed to assist our clients indetermining the best solution for their customer base.  In situations when our clients desirecontinuing or an increased level of telephone contact with their customers, weprovide highly skilled and very personable phone agents to enhance bothfee-based and free-phone interactions. In consultation with our clients, we strive to deliver the preferredsolution and methodology using a combination of telephone and Web solutions.

 

*IntensiveKnowledgebase Architecture, Management and Scoring.*We deliver innovative Web solutions through our proprietary “Customer ChoicePlatformSM.”  This platformprovides customers access to highly-effective self-help tools.  If a particular issue is not resolved throughself-help, customers can then proceed seamlessly to live chat, email, phone,and other live Web services chosen by our clients.  This transition to live help is simply anextension 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.

 

*Capitalize on Technology.*Our Customer Contact Solutions Centers, which incorporate scientific workforcemanagement, proven call center infrastructure and leading-edge solutions, aredesigned to enable clients to rapidly deploy and quickly capitalize on trendswithin their customer base.  In addition,we use contact center resources in India.

 

Our systems incorporate 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 high levels of economy andefficiency.  Our technology policyrequires that infrastructure be fully scalable, meet or exceed customer needs,and provide adequate redundancy and security.

 

Our Customer Contact Solutions Centers go beyond a traditionaltelephone-centric customer support facility. We have acquired or developed systems that increase customer contactpoints through focusing on Internet interactions such as email, Web text chat,Internet calls, Web collaboration, Web callback interactions, and co-browsing,as well as using voice and fax communication. Our systems provide better efficiency than conventional telephoneinteractions.  The increasing use of theInternet, as well as the rising levels of comfort and confidence of consumerswith the Internet, is changing the manner in which businesses communicate andinteract with their customers.  Webelieve our Customer Choice Platform*SM*and Customer Contact Solutions Centers position us to take advantage of theseemerging opportunities.

 

*Utilize Global Labor Pools.*  We currently own and operate three CustomerContact Centers in Utah and one in nearby Wyoming.  In addition, we currently use contact centerresources in India on a contract basis. In the past we have operated and/or utilized centers in Scotland,Ireland and South Africa.  We havedetermined that we can, in some instances, gain significant cost savings and/orlanguage 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 integrated Customer Choice Platform*SM* and customer contact solutions are designed toenable our clients to effectively use leading-edge technology to improve theirbusiness processes and operating results. Clients rely on our Customer Choice Platform*SM*, methodologies, and customercontact solutions to reduce costs associated with product/services support,while increasing customer satisfaction and brand loyalty.  We strive to achieve these results in severalways:

 

*Customer ChoicePlatformSM.*** Weprovide clients, through web interfaces, a robust inventory of tools. Throughour Customer Choice Platform*SM*,customer specific information is made available to customers.  This information provides customers with theoption of answering questions and resolving problems without ever going to alive person for assistance.  If liveassistance is necessary, however, the Customer Choice Platform*SM* presents customer informationrelated to live contact options (voice, chat, email or forums).  The customer then can make an informed choiceas to the best possible live contact option for him or her.  For our clients, we track customer behaviorwhile on the Customer Choice Platform*SM*,which promotes quicker resolution to issues and increases customersatisfaction.  The direct result isincreased efficiency and overall cost reduction.

 

*Fee-Based Solution.*** Weprovide clients with a variety of fee-based options.  By adopting fee-based solutions andmethodologies, our clients charge customers for annual service contracts,multi-incident packets, single incidents, or even single minutes of supportassistance.  One option allows customersthe added ability to move to the front of the queue at those times when waitingfor a free contact is not acceptable. While currently used in the telephone environment, fee-based servicescan apply to any type of contact, whether delivered by telephone, chat, email,self-help, or a combination of these. Fee-based services can be used to route and prioritize interactions,enabling clients to offer multi-tiered service plans (e.g. silver, gold,platinum, etc.).

 

We currently invoice our clients’ customers directly using a creditcard or 900-number billing system (customers receive an invoiceon their telephone bills).  In the caseof credit card billing, funds are deposited directly into the clients’ merchantaccounts.  In some cases the revenuegenerated from these fee-based calls pays for a significant portion of thetotal cost of providing support.  Webelieve that this option will achieve greater acceptance as client companiesrecognize that significant revenues to offset support costs can be generatedfrom a very small number of transactions and that the customer has made aninformed decision to choose this option.

 

*Customer ContactSolutions.* We offer a broad range of customercontact outsourcing 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, including web-enableddatabases and reporting systems, Internet, local area networks (**“LAN”**), multi-user systems,

 

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

 

IVR is an automated self-help telephony system that responds with avoice menu that allows the user to make choices and enter information via theuser’s telephone keypad or by voice to receive information and accurately routethe call to a service representative. IVR systems are used in our Customer Contact Solutions Centers toenhance the customer experience by assisting in routing the caller to theappropriate resource as quickly as possible and by limiting the amount of timerequired by a live agent to complete the interaction.

 

Most importantly, our CRM tools allow our clients to view theactivities and behavior of their customers 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.

 

Customer Acquisitions.                  Our trainedrepresentatives 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 and marketingefforts.

 

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 innature than helpdesk or customer support services, are designed to providecustomers with immediate and efficient access to “best-of-class” productsupport.  We also deliver comprehensivefirst-level support (support related to product installation, features andconfiguration) to end users and manufacturers, combining hardware and networksupport with application support for proprietary and off-the-shelfprograms.  We have a history ofdelivering these services at significantly lower average handle times thanindustry norms.  Our cost-effective toolsand methodology enable us to deliver these services through self-service, freeand fee-based phone, 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 clients accounted for approximately 47% of our revenues for theyear ended March 31, 2004.  Thesetwo clients accounted for approximately 29%, and 18%, respectively, of ourrevenues for fiscal 2004.  For fiscal2003, four clients accounted for approximately 70% of our revenues.  These four clients accounted forapproximately 27%, 20%, 12%, and 11%, respectively, of revenues for fiscal2003.

 

Consistent with industry standards, our contracts are generallycancelable by the client on short-term notice. Our loss of a significant amount of business with any of our key clientscould have, and the loss of a substantial amount of business with any of ourlarger existing technical support clients would have, a material adverse effecton our business, 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 center industry is highly competitive, global in scope, andcomprised of myriad enterprises and individuals.  Methods of competition within the industryinclude, but are not limited to, marketing, product performance, price, productdifferentiation, service, technology, and compliance with industry standards.  We anticipate that present and potentialcompetition in the various markets we serve will come from enterprises andindividuals of various types, many of which will likely be larger and will havegreater resources than we.  Firms not nowin direct competition with us may introduce competing products in the future.  It is possible for companies to be at varioustimes 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 face significant and diverse competition in the customer contactsolutions industry from a broad spectrum of international, national, regionaland local enterprises.  Our ability tocompete will be driven by our niche approach, our competencies in leading-edgetechnologies, our deployment of Web solutions, our strategic and businessalliances, and our efforts to aggressively establish a presence in othervertical markets such as the health care and the financial sectors.

 

Given the extensive market opportunity in the customer contact centerspace, we believe that our strategy of providing the “best-of-breed” services,powered by the Web, will provide us with a competitive advantage in achievinggrowth and in capturing market share while reaching profitability objectives.Additionally, banks and other companies in the financial sector are beginningto recognize the value of outsourced customer contact solutions. We expect todirect considerable time and effort to establish a solid presence in thisvertical market.

 

### Patents and Proprietary Technology

 

We do not own any patents nor have we submitted any patent applicationsrelating to our products.  We have alimited number of copyrights and have obtained licenses to create derivativeworks relative to copyrights owned by third parties.  The ownership of such derivative works vestsin the licensor.  We claim trade name andtrademark protection for our proprietary names and marks, and are seekingformal registration of certain of our trademarks.  Accordingly, we do not believe that anyparticular patent or group of patents, copyrights, trademarks, or trade namesis of material importance to the business as a whole.

###  

### Research and Development

 

We compete in an industry that is characterized by rapid technologicalchange.  As our clients’ needs change andevolve, and as Internet and Web technologies proliferate, we expect to incuradditional expense in the development and improvement of our Customer ChoicePlatform*SM*, customercontact solutions tools and offerings, and in the integration of our technologywith third party platforms and software. To maintain our competitive edge in technology, we also intend toselectively utilize the research and development efforts of third-partytechnology providers and partners.

 

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### Employees

 

We maintain a staff of trained personnel to provide support to ourclients. We have a technically-competent employee base, which we enjoy frombeing geographically situated close to two major universities.  We enhance employees’ proficiency through oursophisticated performance management system. Employees receive positive performance feedback on a daily basis and aregiven access to training programs including Microsoft Certified SoftwareEngineer, Novell Certification, and operating systems including Windows, Unix, and Linux.  Wealso maintain a highly-proficient performance management team responsible fortraining and monitoring employees.  Ourrapidly expanding Customer Choice Platform*SM*business has 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 hadapproximately 542 total employees, of which approximately 494 were full-timeemployees 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 many third-party products represented by registered orcommon-law trademarks, including the following trademarks:  (1) Microsoft®, Windows® and MCSE®, which aretrademarks of Microsoft; (2) CNE®, which is a trademark of Novell Inc; and (3)Linuxä, which is atrademark of Linus Torvalds.  This Reportalso contains trademarks of other companies including Nortel, which is aregistered trademark of Nortel Networks; Cisco, which is a registered trademarkof Cisco Systems Inc; and AT&T, which is a registered trademark of AT&TCorporation.

 

### Factors that May Affect Future Results

 

*There are a number of factors that may affectour operating results, including the risks and uncertainties identified in thefollowing paragraphs.  In addition toother information set forth in this Report, readers should review and carefullyconsider the following factors.*

 

***Volatile economic conditionshave affected and will likely continue to affect our operations and financialresults.***

 

Volatile economic conditions have adversely affected our operations andfinancial results.  The slowing economyin recent years caused us to lose some clients and also resulted in increasedpricing pressures and lower call volumes from some existing clients.  Slower economic conditions may limit ourability to attract new clients or retain existing clients.  These factors contributed to the decline inour revenues and the net losses we experienced during most of 2002 and2003.  The slower economy also resultedin excess capacity to service call volumes. A substantial percentage of our expenses isattributable to labor costs associated with staffing Customer Contact SolutionsCenters, which we may not be able to significantly reduce on short notice inorder to compensate for unexpected shortfalls in call volumes.  We cannot forecast future fluctuations ineconomic conditions, and our operations and financial results may be materiallyand adversely affected by economic volatility.

 

***We repriced ouremployee stock options and may have significant volatility in our earnings ifour stock price increases or decreases.***

 

In April 2003, we repriced certain employee and director stockoptions in an effort to provide an adequate incentive to assist in theretention and motivation of our employees and directors.  Current accounting rules require us to adjustthe amount of compensation expense we recognize in our financial statements forchanges in the stock price until the stock options are exercised, forfeited orexpire.  In fiscal 2004 we recognizedexpense of $1,562,108

 

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related to our repriced stock options.  If our stock price is volatile, our futurestock compensation charges may affect our profitability, either positively ornegatively.

 

***Several key clientsrepresent a significant portion of our revenues, and the loss of a key clientcould affect our revenues and profitability.***

 

Two clients accounted for approximately 47% of our revenues for theyear ended March 31, 2004.  Thesetwo clients accounted for approximately 29% and 18%, respectively of ourrevenues for fiscal 2004.  A key client,who accounted for 28% of revenues in fiscal 2002, cancelled its contract withus early in fiscal 2003.  The loss ofthis client had a significant negative impact on our revenue and profitabilityin fiscal 2003 and for the first nine months of fiscal 2004, until thisbusiness was replaced.

 

Our clients can generally 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 oflosses and may continue to experience losses****.*

 

We experienced net losses 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 toattract, train and retain key management, technical and marketing personnel.***

 

Our success will depend, in large part, on our ability to attract,retain and train highly qualified technical, managerial and marketing personnelwith the expertise required 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 ourcomputers, telecommunications equipment or software systems could interrupt ourability to provide our services****.*

 

Our business depends to a large extent on computers, telecommunicationsequipment and software systems (both equipment and systems maintained by us andequipment and systems maintained by third parties).  A natural disaster, human error, equipmentmalfunction or inadequacy or multiple other events could result in a prolongedinterruption in our ability to provide support services to clients or theircustomers.  The temporary or permanentloss of computer or telephone equipment or systems, through casualty, operatingmalfunctions or otherwise, could have a material adverse effect on ouroperations, property or financial condition, and business interruptioninsurance may not be adequate to compensate for all losses that may beincurred.

 

***We rely on athird-party software company for our chat and email applications*.**

 

We contract with a third-party software company to provide chat andemail tools used with our CRM software, reporting and management services.  If this software company fails in itsbusiness efforts, we may lose our access to these software tools.  Our failure to obtain adequate replacementsoftware tools would cause us to experience service delays, interruptions orcancellations.

 

***We are subject tocollections risks and may be unable to collect our accounts receivablebalances.***

 

We provide unsecured credit terms to our clients.  Based on credit evaluations and otherinformation gathered by our management, we establish credit terms for eachclient; however, there can be no assurance that our

 

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future credit losses will be consistentwith management’s expectations.  Asignificant change in the liquidity or financial condition of one or more keyclients, or a larger number of smaller clients, or further deterioration in theeconomic environment, in general, could have an adverse impact on thecollectability of our accounts receivable and our future operating results.

 

***Managing theutilization level of our resources is necessary in order to achieve our desiredprofitability.***

 

Our business strategy requires us to fully utilize excess personnel andphysical facilities in an effort to increase our profits.  As we expand our operations, we may notalways be able to manage the level of personnel and facilities to reach ourdesired levels of utilization, which may affect our profitability.  Also, if we lose existing clients, we mayhave excess personnel and physical facilities that would have an adverse effecton our business operations and our profitability.

 

***Implementation ofour growth plans will be dependent on our ability to market and sell ourservices to new and existing clients.***

 

Our growth plans are dependent upon our ability to attract and retainnew clients and to generate 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.

 

***Competitivepressures could harm our financial performance.***

 

The market for customer contact services is highly fragmented and verycompetitive.  In certain segments of theindustry, however, the customer contact services industry has begun toexperience a degree of consolidation, and the development of major customercontact center companies has resulted in an additional level of competitionfrom service providers that have greater name recognition, larger installedcustomer bases, and significantly greater financial, technical, and marketingresources than we have.  Largeestablished enterprise software companies may leverage their existing relationshipsand capabilities to offer customer service applications.  In other instances, many large companiesprovide their own in-house customer care support and customer training.  Also, a number of existing companies haveexperienced rapid internal growth, and several of these companies have beenactive in acquiring smaller regional customer contact services companies andare becoming major competitors with a measurable share of this rapidlyexpanding market.  If our competitorsprovide more efficient or less expensive services, we may lose market share andrevenues.

 

***A delay in marketacceptance of our products and services could negatively impact our businessand revenues.***

 

The customer contact 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 upwith the rapid technological change experienced by the customer contact servicemarket, our products and services may become obsolete and we may lose clients.****.*

 

The customer contact service industry is characterized by rapidtechnological change, alterations in customer requirements and preferences, andthe emergence of new industry standards and practices.  Our operating results and financial conditionwill depend, in part, on our ability to develop solutions that keep pace withcontinuing changes in information technology, evolving industry standards, andchanging client requirements.  There canbe no assurance that we will be successful in adequately addressing thesedevelopments on a timely basis

 

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or that, if these developments areaddressed, 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 reducetheir reliance on outsourced services, our revenues and financial condition maybe adversely affected.***

 

Our business depends in large part on the trend within the IT industryto outsource certain services.  We cannotprovide any assurance that this trend will continue or that, if the trendcontinues, it will continue at the same rate of growth.  The failure of this trend to continue couldhave a material adverse effect on our business, financial condition, andresults of operations.

 

***Market volatilityand fluctuations in our stock price and trading volume may cause suddendecreases in the value of an investment in our common stock.***

 

The market price ofour 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 week period ended April 30, 2004.  The market for our common stock has, fromtime-to-time, experienced extreme price and volume fluctuations, which haveoften appeared to be unrelated to our operating performance.  Our stock price has also been affected by ourown public announcements regarding such things as quarterly earnings, changesin clients, obtaining financing and corporate partnerships.  Consequently, events both within and beyond ourcontrol may cause shares of our common stock to lose their value rapidly.

 

***Our revenues and quarterly results can be volatile, which makesevaluating our business difficult.***

 

**Individual client revenue transactions can constitute a substantialpercentage of our quarterly revenue, and some revenue transactions may generatea 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 such requests.  Thus, if we receive fewer support requeststhan anticipated or the time spent in resolving inquiries is greater thananticipated, our revenues may decline. Further, delays in the receipt of orders can cause significantfluctuation in revenues from quarter to quarter.**

 

Because ourstaffing and other operating expenses are based on anticipated revenue levels,and a high percentage of our expenses are fixed, the volatility in our revenuescan cause significant variations in operating results from quarter to quarterand we may not be able to achieve or sustain profitability on a quarterlybasis.  In addition, we may expendsignificant resources pursuing potential sales that will not beconsummated.  Furthermore, we may chooseto reduce prices or to increase spending in response to competition or to pursuenew market opportunities, which may adversely affect our operating results.

 

For the reasonsidentified above, we believe that period-to-period comparisons of our revenuesand operating results may not be meaningful and should not be considered anindication of future performance.

 

***Shares eligible for future sale may cause the market price for ourcommon stock to drop significantly, even if our business is doing well.***

 

We cannot predictthe effect, if any, that future sales of our commonstock or the availability of shares for future sale will have on the marketprice of our common stock from time to time. We have entered into registration rights agreements which contemplatethat substantially all of our outstanding shares of common stock will become freelytradable in the public market.  Othershares of our common stock issued in the future, including shares issued uponexercise of outstanding options and warrants, may become available for resalein the public market from time to time, and the market price of shares of ourcommon stock could drop significantly if the holders of these shares sell themor are perceived by the market as intending to sell them.  In addition, sales of a substantial number ofshares of our common stock in a short period of time could adversely affect themarket price of our shares.

 

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***Provisions of our Articles of Incorporation and Bylaws could impair ordelay stockholders’ ability to replace or remove our management and could discouragetakeover transactions that stockholders might consider to be in their bestinterests.***

 

Our Articles ofIncorporation and Bylaws, the Utah Revised Business Corporation Act, and theUtah Control Shares Acquisition Act each contain certain provisions that mayhave the effect of inhibiting a non-negotiated merger or other businesscombination.  Our Articles ofIncorporation grant to our Board of Directors the authority, without furtheraction by our stockholders, to fix the rights and preferences of, and issueshares of preferred stock.  Theseprovisions may deter hostile takeovers or delay or prevent changes in controlof us or changes in our management, including transactions in whichstockholders might otherwise receive a premium for their shares over thethen-current market prices.  In addition,these provisions may limit the ability of stockholders to approve transactionsthat they may deem to be in their best interests.

 

***We have never declared a dividend on our common stock and we do notanticipate paying dividends in the foreseeable future.***

 

No dividends haveever been declared or paid on our common stock. We intend to retain any future earnings for use in our business and donot anticipate paying any dividends on the Common Stock in the foreseeablefuture.

# ** **

## ***Item 2.***          Description of Property

 

**Our principal executive offices are located in American Fork, Utah.  This facility currently serves as ourheadquarters for our senior management and as a customer contact solutioncenter.  We have additional customercontact solution centers in American Fork and Orem, Utah, and in Evanston,Wyoming.  We believe our existingfacilities are adequate to meet current requirements and our immediate growthplans.  All of our facilities areleased.  The following table sets forthadditional information concerning our facilities:**

  
| **Location**         | ** ** | **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 a sublease agreement for 19,678 square feet of  this facility.  The sublease agreement  provides for payment to us of rental income of $16,565 per month through  September 2005.                                                                                                                 |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                             |
| (2)    |   | Monthly rent includes real estate taxes, insurance against loss,  facility and property maintenance, security services and all utilities.  Our lease agreement provides for a rent abatement, pursuant to which we will not be  required to pay rent for nine of the months between July 2004 and  December 2005. |

 

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| (3) |   | Monthly rent includes real estate taxes, insurance against loss and  facility and property maintenance.  We  have entered into a sublease agreement for 5,500 square feet of this  facility.  The sublease agreement  provides for payment to us of rental income of $3,896 per month through  July 2008. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

In addition to theabove space, we currently have an option to rent approximately 29,000additional square feet in the Orem, Utah facility under the same basic termsand conditions of the current lease.

 

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

 

From time to time,we are involved in litigation, most of which is incidental to ourbusiness.  In our opinion, no litigationto which we currently are a party is likely to have a material adverse effecton the Company’s results of operations or financial condition.

 

## ***Item 4.***          Submission of Matters to aVote of Security Holders.

 

No matters weresubmitted to a vote of security holders during the fourth quarter of the fiscalyear covered by this Report.

# ** **

# **PART II**

 

## ***Item 5.***          Market for Common Equity and Related Stockholder Matters

 

Our common stock,par value $.25, is listed and traded under the symbol “SNTO” on the NASDAQSmall Cap Market maintained by the National Association of Securities Dealers(the “**NASD**”). The following tablesets forth the range of high and low closing prices for our common stock forthe periods indicated, as reported by the NASD. The quotations represent prices in the market between dealers insecurities; they do not include retail markup, markdown or commissions, and donot necessarily represent actual transactions.

 
| **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 stock outstanding, held by 385stockholders of record, which does not include stockholders whose shares areheld in securities position listings.

 

### RecentSales of Unregistered Securities

 

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

 

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placement for aggregate considerationof $6,705,198.  The shares of commonstock and warrants were sold in units of one share of common stock andone-fifth warrant at a price of $10.56 per unit.  The Shemano Group, a registeredbroker-dealer, acted as agent in connection with the private placement inexchange for a payment of $469,364 and our issuance of warrants to purchase30,000 shares of common stock.  Eachpurchaser in the private placement provided representations that such purchaserwas an accredited investor and was provided with information describing ourbusiness and financial condition. The warrants permit the holders to acquireshares of our common stock at an exercise price of $12.67 per share, are firstexercisable on September 30, 2004, and remain exercisable for 42months.  The warrants include standardanti-dilution provisions pursuant to which the exercise price and number ofshares issuable thereunder will be adjusted proportionately in the event of astock split, stock dividend, recapitalization or similar transaction.

 

*ShareholderRelations Warrant*.  Pursuant to aconsulting agreement with Shareholder Relations, we issued to ShareholderRelations on or about August 1, 2003, as partial consideration forshareholder relations and other consulting services, a warrant to purchase20,000 shares of our common stock.  Thewarrant permits the holder to acquire shares of our common stock at an exerciseprice of $2.70 per share at any time prior to August 1, 2005.  The warrants include standard anti-dilutionprovisions pursuant to which the exercise price and number of shares issuablethereunder will be adjusted proportionately in the event of a stock split,stock dividend, recapitalization or similar transaction.

 

*Consultant Warrant.* Pursuantto a consulting agreement with Remsen Funding Corporation of New York(“Remsen”), we have agreed to issue to Remsen, as partial consideration forconsulting services, a warrant to purchase 5,000 shares of our common stockeach month during the term of the agreement, which is terminable by eitherparty at any time upon sixty days advance notice. Through July 1, 2004, wehave issued to Remsen warrants to purchase 35,000 shares of common stock. Thewarrants permit the holder to acquire shares of common stock at an exerciseprice of $3.00 per share at any time prior to the date that is three andone-half years after the date of issuance. Each warrant vests with respect to25% of the shares subject thereto on the first day of each calendar quarterfollowing its issuance. The warrants also include a net exercise provision andanti-dilution provisions pursuant to which the exercise price and number ofshares issuable thereunder will be adjusted proportionately in the event of astock split, stock dividend, recapitalization or similar transaction. We havealso granted the warrant holder piggyback registration rights with respect toany registration (other than on Form S-4 or Form S-8) that permits theregistration of secondary sales.

 

*Bank Warrant*.  In March 2004, we issued to our bank47,655 shares of common stock pursuant to the exercise of warrants to purchase60,000 shares 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 therenewal of our credit line.

 

*2003 Debentures*.  On April 15, 2003, we issued an aggregateof $1 million of convertible debentures to 38 purchasers. Each debentureaccrued interest at the rate of 8% per year, was convertible into shares of ourcommon stock at $1.75 per share, expired in three years, and had attachedwarrants with an exercise price of $2.25 to purchase one share of our commonstock 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 ended June 29,2002, September 28, 2002 and December 31, 2002. We paid commissionsof $46,960 to a placement agent in connection with the sale of the convertibledebentures and issued a warrant to purchase 50,000 shares to a finder. As ofMarch 31, 2004, all such debentures had been converted into 576,380 sharesof common stock.  In addition, we issued21,428 shares of common stock pursuant to the exercise of warrants to purchase37,500 shares of our common stock associated with the above mentionedconvertible debentures.  Of the warrantsexercised, 35,000 were exercised under cashless exercise provisions of thewarrant 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 transactionsbore a restrictive legend conspicuously on their face

 

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and stop-transferinstructions were noted respecting such certificates on our transfer records,except in circumstances in which we received a written opinion from legalcounsel to the holders of such securities to the effect that due to the tackingof holding periods of previously held debentures (given in exchange for therecently issued debentures) the common stock certificates issued on debentureconversion did not need to bear a restrictive legend. Each of the foregoingtransactions was effected in reliance on the exemptionfrom registration provided in Section 4(2) of the Securities Act of1933 or Rule 506 of Regulation D adopted thereunder as transactionsnot involving a public offering.

 

### Descriptionof Capital Stock

 

**General**

 

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

 

**CommonStock**

 

Our Articlesauthorize the issuance of 50,000,000 shares of common stock.  As of July 1, 2004, there were 3,726,986shares of common stock issued and outstanding, held by approximately 385stockholders of record, which does not include stockholders whose shares areheld in securities position listings. Except as otherwise required by law, each share of our common stockentitles the stockholder to one vote on each matter which stockholders may voteon at all meetings of our stockholders. Holders of our common stock are not entitled to cumulative voting in theelection of directors.  Holders of ourcommon stock do not have preemptive, subscription or conversion rights, andthere are no redemption or sinking fund provisions applicable thereto.  Shares of common stock are entitled to shareequally and ratably in dividends paid from the funds legally available for thepayment thereof, when, as and if declared by our Board of Directors.  The declaration of dividends, however, issubject to the discretion of our Board of Directors.  Holders of our common stock are also entitledto share ratably in any of our assets available for distribution to holders ofour common stock after payment of liabilities upon liquidation or dissolutionof Sento, whether voluntary or involuntary. All the outstanding shares of our common stock are fully paid andnon-assessable.

 

We have no present intention ofpaying any cash dividends on our common stock and plan to retain any earningsto finance the development and expansion of our operations. The payment of cashdividends also may be restricted by a number of other factors, including ourfuture earnings, capital requirements and financial condition, covenants withlenders, lessors or other parties, as well as restrictions on the payment ofdividends imposed under Utah law.

 

**PreferredStock**

 

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

 

We may issuepreferred stock with such designations, powers, preferences and other rightsand qualifications, limitations or restrictions as our Board of Directors mayauthorize, without further action by our stockholders, including but notlimited to:

 
| • | the distinctive  designation of each series and the number of shares that will constitute such  series;                                                                                                                                                                  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | the voting  rights, if any, of shares of the series and the terms and conditions of such  voting rights;                                                                                                                                                                 |
| • | the dividend rate  on the shares of the series, the dates on which dividends are payable, any  restriction, limitation or condition upon the payment of dividends, whether  dividends will be cumulative and the dates from and after which dividends  shall accumulate; |

 

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| • | the prices at  which, and the terms and conditions on which, the shares of the series may be  redeemed, if such shares are redeemable;                                                                                           |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | the terms and  conditions of a sinking or purchase fund for the purchase or redemption of  shares of the series, if such a fund is provided;                                                                                     |
| • | any preferential  amount payable upon shares of the series in the event of the liquidation,  dissolution or winding up of, or upon the distribution of any of our assets;  and                                                   |
| • | the prices or  rates of conversion or exchange at which, and the terms and conditions on  which, the shares of such series may be converted or exchanged into other  securities, if such shares are convertible or exchangeable. |

 

**Registration Rights**

 

We have granted registration rightsto the holders of shares of common stock we sold in private offeringtransactions completed during 2003 and 2004.  We have also agreed toregister shares of common stock issuable upon the exercise of warrantssold in such private offering transactions or issued to consultants inexchange for consulting and shareholder relations services performed forSento.  The total number of shares of common stock which we are obligatedto register under the Securities Act is approximately 1,022,343,subject to adjustment for stock splits, stock dividends recapitalizations orsimilar transactions.  Of the total number of shares of common stocksubject to such registration rights, 634,962 shares, together with warrants topurchase 126,992 shares, were issued in a private offering transactioncompleted on March 30, 2004 (the “2004 Private Placement”). Pursuant to the registration rights agreement executed in connection with the2004 Private Placement, we were obligated to file a registration statementcovering such shares (including the shares issuable upon conversion of theassociated warrants) on or before May 31, 2004 and to use our best efforts tocause the registration statement to be declared effective.  Theholders of the remaining shares subject to registration rights(approximately 260,389 shares) possess “piggyback” registrationrights, enabling them to request registration of such shares inconnection with the filing of the registration statement required to be filedin connection with the 2004 Private Placement.

 

**Utah Control Shares Acquisition Act**

 

The Utah Control Shares AcquisitionAct (the “Control Shares Act”) provides that any person or entity that acquires“control shares” of a publicly-held Utah corporation in a “control shareacquisition” is denied voting rights with respect to the acquired shares,unless a majority of the disinterested stockholders of the corporation electsto restore such voting rights. The Control Shares Act provides that a person orentity acquires “control shares” whenever it acquires shares that, but for theoperation for the Control Shares Act would bring its voting power within any ofthe following three ranges: (i) 20% to 33 1/3%, (ii) 33 1/3% to 50%, or (iii)50% or more. A “control share acquisition” is generally defined as the director indirect acquisition of either ownership or voting power associated withissued and outstanding control shares. The directors or stockholders of acorporation may elect to exempt the stock of the corporation from theprovisions of the Control Shares Act through adoption of a provision to thateffect in the articles of incorporation or bylaws of the corporation. OurArticles and Bylaws do not exempt our common stock from the provisions of theControl Shares Act.

 

The stockholders of a corporationmust consider the status of the voting rights of control shares of thecorporation acquired in a control share acquisition at the next annual orspecial meeting of stockholders held following such acquisition. The acquirormay accelerate the decision and require the corporation to hold a specialmeeting of stockholders for the purpose of considering the status of thoserights if the acquiror (i) files an “acquiring person statement” with thecorporation, and (ii) agrees to pay all expenses of the meeting. If thestockholders do not vote to restore voting rights to the control shares, thecorporation may, if its articles of incorporation or bylaws so provide, redeemthe control shares from the acquiror at fair market value. If the acquirorfails to file an acquiring person statement, the corporation may, if its articlesof incorporation 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 provisionsof the Control Shares Act may discourage companies interested in acquiring asignificant interest in or control of us.

 

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**CertainIndemnification and Limited Liability Provisions**

 

Our Articlesprovide that we shall indemnify any person who is or was a director, officer,employee or agent of our company, or who was serving at our request as adirector, officer, employee or agent of another entity, trust or plan to thefullest extent permitted by the Utah Revised Business Corporation Act.  Our Bylaws also include mandatoryindemnification provisions with respect of our officers and directors anddiscretionary indemnification provisions with respect to employees and agents,each subject to limitations generally reflecting the limitations onindemnification set forth in the Utah Revised Business Corporation 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 theindemnification provisions described about and contained in the Utah RevisedBusiness Corporations Act, subject to certain limitations in the Utah RevisedBusiness Corporation Act, we may be permitted or compelled to provideindemnification and advancement of expenses to our directors, officers, agents,and employees when they are made parties to an investigation or legal action inconnection with services performed at our request, including when such personsare alleged to have violated the Securities Act.  Insurance purchased with respect to suchpersons may also cover expenses or other liabilities associated with anallegation of violations of the Securities Act.

 

Insofar asindemnification for liabilities arising under the Securities Act of 1933 may bepermitted to our directors, officers and controlling persons or pursuant to theforegoing provisions, or otherwise, we have been advised that in the opinion ofthe SEC such indemnification is against public policy as expressed in the SecuritiesAct and is, therefore, unenforceable.

 

**Change in Control Arrangements**

 

During the fiscal year endedMarch 30, 2002, our Board of Directors reviewed the time and insightprovided by our directors, as well as our limited ability to provide additionalcash payments to our directors as compensation for their services toSento.  Based upon this review, as well as an assessment that thedirectors would likely be required to devote increased time and attentionduring the fiscal year ended March 30, 2002 to several strategicinitiatives, including review and negotiation of prospective transactionsintended to promote shareholder value and liquidity, our Board of Directorsadopted resolutions intended to compensate our directors if Sento completessuch a transaction. Pursuant to resolutions adopted in April 2001 andMarch 2002, our Board approved a contingent issuance of shares of commonstock to each of our directors (18,750 shares to Gary Filler, Chairman of theBoard, and 12,500 shares to each other director then serving). The shares ofcommon stock are issuable only upon the completion of certain merger,consolidation, acquisition, sale and liquidation transactions constituting a“change of control” under our 1999 Omnibus Stock Incentive Plan. Because noneof 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.

 

**TransferAgent and Registrar**

 

The transfer agentand registrar for our Common Stock is American Stock Transfer Company.

 

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***Item 6.******         ******Management’s Discussion and Analysis or Plan of Operations***

 

### Overview

 

We provideWeb-enabled CRM solutions for a diversified portfolio of organizations.  These services include self-help, live chat,Web collaboration, email, and telephone. Utilizing a tested and proven technology set, we provide an enhancedcustomer experience at a significant cost reduction when compared totraditional models.  We deploy adistributed workforce strategy and customer-centric applications to provide thebest in customer care and support.  Weconduct our principal business operations through our wholly-owned subsidiary,Sento Technical Services Corporation.

 

We believe that asignificant issue currently facing our company relates to the variable pricingof a significant number of our outstanding employee stock options.  In April 2003, we re-priced the majorityof the then outstanding employee stock options to the then current market priceof $1.60 per share.  This re-pricing wasdone to give our employees incentive to grow revenues and improveprofitability, with the objective of increasing stockholder value.  We believe this re-pricing contributed in alarge part to our improved operating results during the fiscal year ended March 31,2004.  Under accounting principlesgenerally accepted 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-cashcompensation expense of $1,562,108 and $0, respectively, to reflect adjustmentsto the value of the options due to the increase in market price of our commonstock above the exercise price of $1.60 per share.  See Notes 2 and 9 to our ConsolidatedFinancial Statements.

 

Because the actualamount of compensation expense we recognize with respect to outstanding stockoptions will depend on the market price of our common stock at the end of eachquarterly period and the timing of exercise, forfeiture or expiration ofoutstanding options, we are not be able to forecast the amount of non-cashcompensation expense related to these stock options that we may incur in anyfuture period.

 

Further, we have issued warrants in conjunction with various debtfinancings, including convertible debentures refinanced inApril 2003.  A portion of theproceeds we received from such financings was allocated to the warrants and isamortized to expense over the life of the debentures.  Upon the conversion of the debentures tocommon stock during fiscal 2004, the remaining unamortized warrant cost wasimmediately expensed.  During fiscal 2004we recognized a total of $228,162 in non-cash interest expense related toamortization and amounts expensed upon the conversion of the debentures in2004.  Amortization of warrants innon-cash expense for 2003 was $70,492.

 

Because of the volatility andvariable impact on our earnings from the adjustments to our non-cash expensesas described above, as well as the unique nature of such expenses and ourassessment that such expenses are not likely to have a material impact on ourfinancial results over an extended period, we believe that reporting theresults of our operations on a non-GAAP, “as adjusted” basis, which excludesthese non-cash compensation and financing charges, in addition to presentationunder GAAP, provides important information regarding the results of ouroperations. These compensation-related expenses were attributable primarily toa sudden and significant increase in the market price of our common stock atthe end of our 2004 fiscal year. We do not anticipate that we will incurexpenses of a similar magnitude in future periods, in part because asignificant number of the repriced options, as well as a majority of thewarrants subject to amortization, were exercised in March andApril 2004 and the number of options subject to variable accountingtreatment has been reduced substantially. As we have previously discussed inour quarterly earnings releases, beginning with our July 24, 2003 earningsrelease, these additional expenses have not required, and are not anticipatedto require, a cash payment by the Company. We intend to continue to provide thereported and “as-adjusted” results of our operations for the near future.

 

Our reported GAAPand non-GAAP as adjusted results are as follows:

 

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| ** **                                                        | ** ** | **2004**      | ** **     | **2003**   | ** ** |
|-------------------------------------------------------------------|------------|---------------|----------------|------------|------------|
| ** **                                                        | ** ** | ** **    | ** **     | ** ** | ** ** |
| **Reported net loss**                                             | ** ** | **$**         | **(1,465,230** | **)**      | **$**      | **(2,111,348** | **)** |
| **Add: non-cash  compensation related to repriced stock options** | ** ** | **1,562,108** | ** **     | **—** | ** ** |
| **Add: non-cash  interest expense related to warrants**           | ** ** | **228,162**   | ** **     | **70,492** | ** ** |
| **Net income (loss)  as adjusted**                                | ** ** | **$**         | **325,040**    | ** ** | **$**      | **(2,040,856** | **)** |
| ** **                                                        | ** ** | ** **    | ** **     | ** ** | ** ** |
| **Reported basic and  diluted loss per share**                    | ** ** | **$**         | **(0.63**      | **)**      | **$**      | **(1.01** | **)** |
| **Basic income (loss)  per share, as adjusted**                   | ** ** | **0.14**      | ** **     | **(0.97**  | **)**      |
| **Diluted income  (loss) per share, as adjusted**                 | ** ** | **0.13**      | ** **     | **(0.97**  | **)**      |

 

We use the non-GAAPas adjusted net income measures as a primary indicator in managing ourbusiness, including determining the pricing of our products and services andmanagement’s incentive compensation plans.

 

### CriticalAccounting Policies

 

Our significantaccounting policies are described in Note 2 to our Consolidated FinancialStatements. Those financial statements were prepared in accordance with accountingprinciples generally accepted in the United States.  Included within these policies are our“critical accounting policies.”  Criticalaccounting policies are those policies that are most important to thepreparation of our consolidated financial statements and require management’ssubjective and complex judgments due to the need to make estimates about theeffect of matters that are inherently uncertain.  Our critical accounting policies relate torevenue recognition, credit risk and stock-based compensation.  The application of these accounting policiesinvolves the exercise of judgment and the use of assumptions as to futureuncertainties, and as a result, actual results could differ materially fromthese estimates.  The development andselection of these critical accounting policies have been discussed, and arereviewed each year, with the Audit Committee of our Board of Directors.

 

*Revenue Recognition.*Revenue is recognized when persuasive evidence of an arrangement exists,delivery of services has occurred, the fee is fixed or determinable, andcollection of the resulting receivable is reasonably assured. We generaterevenue by delivering technical assistance to users of our customers’ productsthrough the use of live chat, Web collaboration, emailand telephone interactions. We recognize revenues as services are provided,according to the terms of the underlying agreement with our customers whichspecify how the customer will be charged, generally based on a monthly, hourly,per minute or per-call rate. Certain of our customer support services aredelivered over a period of time. Revenue associated with these services isdeferred until the end customer support is completed and we have no remainingobligation to provide further support services. During fiscal 2004, less than6% of our revenue was generated from end customer support services that weredelivered over a period of time. We review end customer support cases in thisrevenue stream on a monthly basis to ensure that the revenue is not recognizedon open cases until the end user support services are completed. We alsoprovide licenses to a limited number of our clients for the use of our customercontact software tools that we host. In these arrangements, we charge ourclient a monthly fee based on the number of users. Revenue under thosearrangements is recognized as the service is provided.

 

Revenues generatedfrom professional and consulting services are recognized as the service isprovided, based on time and materials incurred at contractually agreed uponrates.

 

*Credit Risk.*We have established an allowance for doubtful accounts to reserve foruncollectible accounts receivable. Each quarter we review the receivables on anaccount-by-account basis and determine the probability of collection. Managementjudgment is exercised in determining the probability of collection. Factors weconsider in making this judgment are the age of the receivable, the financialresources of our clients, previous client history and recent clientcommunications. Our credit losses have generally been within our expectations,however, there can be no assurance that our future credit losses will be withinour expectations. In addition, our revenues and accounts receivable areconcentrated in a relatively few number of customers. A significant change inthe liquidity or

 

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financial position of any one ofthese customers or a further deterioration in the economic environment, ingeneral, could have an adverse impact on the collectibility of our accountsreceivable and 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 repricedcertain of our outstanding employee stock options. We account for stock optionsthat were repriced in accordance with FASB Interpretation No. 44 “Accountingfor Certain Transactions Involving 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. Thisadjustment to compensation expense is done quarterly and can fluctuatesignificantly due to the volatility of the market price of our common stock.

 

We also issueequity-based incentive compensation to non-employees from time to time.  Pursuant to Emerging Issues Task Force (EITF)96-18, *Accounting for Equity Instrumentsthat are Issued to Other than Employees for Acquiring or in Conjunction withSelling Goods or Services*, we account for these arrangements basedon the fair value of the equity instrument issued.  The fair value of these instruments ismeasured each quarter as the related goods or services are provided and theunderlying securities vest.  We use theBlack Scholes pricing model to determine the value of these instruments.  The resulting quarterly change in value ofthese instruments is either charged or credited to income and can alsofluctuate significantly based on the change in value of the underlying commonstock.

 

### Results ofOperations

 

**Fiscal2004 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 $21,396,000for the 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 $18,072,000for the fiscal year ended March 31, 2004. This increase in cost is a result of increased business as discussed inthe revenue section above.  Ourgross profit as a percentage of sales increased to 16% for the fiscal yearended March 31, 2004.  Thisrepresents an 11 point improvement in gross profit percentage, compared to our5% gross profit percentage for the year ended March 31, 2003.  This improved gross profit percentage was duemainly to higher utilization 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 endedMarch 31, 2004 when compared to the fiscal year ended March 31, 2003.

 

*Selling, General and Administrative Expenses.*  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 endedMarch 31, 2004.  This increase wasprimarily due to increased marketing efforts that resulted in more revenues forthe year ended March 31, 2004.

 

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*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 stock options,which requires us to adjust the amount of compensation expense we recognizeeach quarter until the stock options are exercised, forfeited or expire.  The cumulative amount of this charge iscalculated by multiplying the exercisable number of options by the differencebetween the market price of the stock and the exercise price of $1.60, less anyamounts previously recognized.  AtMarch 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 expensedecreased $72,000, or 23%, from $308,000 during the fiscal year endedMarch 31, 2003 to $236,000 during the fiscal year ended March 31,2004.  The decrease in interest expensewas due primarily to the conversion of all of our convertible debt into equityduring fiscal 2004.  In addition, we hadan overall reduction in our capital leases and notes payable which also causeda corresponding decline in interest expense.

 

*Non-cashcharge for valuation of warrants and conversion of debentures.*  This expense relates to the amortization ofdebt discount created by assigning a portion of the proceeds received inconjunction with convertible debentures and notes payable financings towarrants issued with the debt.  Weamortize this cost over the life of the corresponding debt.  This cost increased $158,000, or 226%, from$70,000 for the fiscal year ended March 31, 2003 to $228,000 for the yearended March 31, 2004.  Theconversion of all of our convertible debt to equity during the year ended March 31,2004 required us to accelerate the amortization of this cost and is the primaryreason for the increase in expense over the prior year.

 

### Liquidityand Capital Resources

 

**Our cash balances increased$3,985,000, or 154%, from $2,583,000 at March 31, 2003 to $6,568,000 atMarch 31, 2004. During the year ended March 31, 2004, we generated$18,000 of cash flow from operations, used $1,308,000 of cash flow forinvesting in property and equipment and generated $5,275,000 of cash flow fromfinancing activities. The primary reason for the change in the amount of cashgenerated from operating activities was the timing of cash receipts andpayments on working capital balances, such as accounts receivable, accountspayable and accrued liabilities. Accounts receivable increased due tosignificant revenue achieved during the fourth quarter of fiscal 2004, that had not been collected as of yearend. Because ourbusiness tends to be seasonal in nature, with a significant increase inbusiness in the fourth quarter of our fiscal yearend, accounts receivable istypically higher at March 31 and decreases in the first fiscal quarter ofthe subsequent fiscal year as we collect receivables attributable to servicesperformed during the fourth fiscal quarter. There was a net increase inpayables and accrued liabilities due to increased business volume during thefourth quarter of fiscal 2004, which resulted in an increase in our cash flowsfrom operations since the liabilities had been incurred but not yet paid as ofyearend. Included in our cash flow from financing activities is $6,670,198 ofproceeds, including accrued offering costs, from the sale of common stock. Becausethe sale of common stock took place at the end of our fiscal year, we accruedestimated offering costs of $627,000 at March 31, 2004 related to theMarch 30, 2004 private placement of our stock, which are included in cashflows provided from financing activities since the offering costs had not beenpaid as of yearend.**

 

During the year endedMarch 31, 2003, we generated $1,501,000 of cash flow from operations, generated$705,000 of cash flow from investing activities and used $700,000 of cash flowfor financing activities. Cash flow from operations was primarily the result ofchanges in working capital balances. Accounts receivable decreased due toaccelerated collection efforts, thereby increasing cash flow from operations. Therewas also an increase in payables and accrued liabilities due to the timing ofpayments, which contributed to our cash flow from operations. The primaryreason for the cash flow generated from investing activities was the sale ofshort-term investments, which was partially offset by capital expenditures. Principal payments on long-term debt was the main use ofcash flow from financing activities.

 

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Our working capital increased$6,130,000, or 573%, from $1,069,000 at March 31, 2003 to $7,199,000 atMarch 31, 2004. In addition to our $3,985,000 increase in cash, the othermain source of our increased working capital was a $1,783,000 increase in ouraccounts receivable. This increase in receivables was due primarily to anincrease in our revenue, including increased amounts due from one of ourlargest customers. Revenue from this customer is seasonal in nature with themajority of revenue from this customer being generated during our fourth fiscalquarter. In addition, over $800,000 of our receivable balance at March 31,2004 was due from new customers in fiscal 2004.

 

We have contractualobligations, including debt agreements and leases, thatwill require the use of cash.  Subsequentto March 31, 2004, we extended our line of credit and refinanced ourexisting term loans with a bank.  Ourlong-term debt classification and our contractual obligations related to ourdebt reflect this refinancing (see Notes 4 and 11 to our financialstatements).  The following table setsforth our contractual obligations as of March 31, 2004:

 

**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-term debt carries interest rates of 6% to 10%.

 

At present, webelieve we will be able to meet our current obligations for operations as theycome due.

 

**Historically our primary sources of liquidity have been cash receivedthrough private sales of equity and debt as well as from the sale ofassets.  During the four years endedMarch 31, 2004, we have had positive cash flow from operations, which hasalso provided liquidity.  In addition, wehave financed some of the equipment utilized in our business through long-termleasing and loan arrangements.  Our growthand operations have consumed substantial amounts of cash.**

 

**On May 11, 2004, we refinanced our 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 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.  Theunderlying term loans will have a term of three years, require monthlyprincipal and interest payments, will have a fixed interest rate determined atthe date of the advance based on the three-year U.S. Treasury Bond rate plus4.5%, and have a commitment fee of 1%.**

 

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Seasonality

 

**Our operating results have historically been affected by the seasonalvariances 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 ofeach year.  To a lesser degree, theoperating results for our third fiscal quarter are favorably affected byincreased support requirements of an on-line retailer during the holiday monthsof November and December.**

 

### RecentlyIssued Accounting Pronouncements

 

**We have reviewed all recently issued accounting standards, which we havenot yet adopted, in order to determine their potential effect, if any, on ourresults of operations and financial position. Based on that review, we do notcurrently believe that any of these recent accounting pronouncements will havea significant effect on our current or future financial position, results ofoperations, cash flows or disclosures.**

 

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

 

The financialstatement information required by Item 7 is included on pages F-1 to F-17.

 

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

 

None

 

## ***Item 8A.***                                                 Controls and Procedures

 

Under the supervisionand with the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of ourdisclosure controls and procedures, as such term is defined under Rule13a-15(e) promulgated under the Exchange Act, as of March 31, 2004. Basedon this evaluation, our principal executive officer and principal financialofficer concluded that our disclosure controls and procedures are effective inalerting them on a timely basis to material information relating to our companyrequired to be included in our reports filed or submitted under the ExchangeAct.  There have been no significant changes (including correctiveactions with regard to significant deficiencies or material weaknesses) in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of the evaluation referenced above.

 

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# **PART III**

 

## ***Item 9.***          Directors and ExecutiveOfficers of the Registrant.

 

**Directors**

 

Each of our directors serves until the next annual meeting ofshareholders 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               |

 

*GaryB. Filler*has served as a director since August 1998 and as the Chairman of ourBoard of Directors since September 26, 2000.  Mr. Filler has served as a director ofAltiris, Inc., a software company, since February 2002.  Mr. Filler served as the Chief ExecutiveOfficer and Chairman of the Board of Net Vision, Inc., a software company, fromNovember 2001 to December 2002. Prior to his appointment as a director, Mr. Filler was the Senior VicePresident and Chief Financial Officer of Diamond Multimedia Systems, Inc., amanufacturer of graphics boards and modems, from January 1995 toSeptember 1996. From June 1994 to January 1995, Mr. Filler was abusiness consultant and private investor. From February 1994 until June 1994, he served as ExecutiveVice President and Chief Financial Officer of ASK Group, Inc., a computersystems company.  Mr. Filler was theChairman of the Board of Seagate Technology, Inc., a manufacturer anddistributor of data storage, retrieval and management products (“Seagate”),from September 1991 until October 1992, and was the Vice Chairman ofthe 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.

 

*PatrickF. O’Neal*was appointed to serve as our President and Chief Executive Officer,and as a director in January 2002. Prior to joining Sento, Mr. O’Neal was the Managing Director of DigitalLighthouse Corporation since September 1996.  Mr. O’Neal also served on the Board ofDirectors of Digital Lighthouse Corporation from March 1996 toJanuary 2000 and as president of three subsidiaries that dealt withregulated industries (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.

 

*KiethE. Sorenson*has served as a director since June 1, 1997.  Mr. Sorenson served as our President andChief Executive Officer from December 1997 to April 1999.  Prior to joining Sento, Mr. Sorenson was thefounder of Truevision, Inc. (formerly RasterOps), a publicly tradedmulti-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 of Truevision,Inc., of which he continued to serve as a director untilJanuary 1999.  From 1979 to 1987, hewas employed by Ramtek, Inc., a Silicon Valley pioneer in computer graphics, asVice President of Engineering and Product Marketing.  He is also currently the owner of ApproachSystems, a private aviation electronics manufacturing company, and a directorof Sumeria, a developer of CD-ROM titles.

 

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*KimA Cooper*was appointed to serve as a director of Sento in August 1999.  Mr. Cooper is the President and ChiefExecutive Officer of Exceed, LLC, a consulting firm, and Chairman of the Boardfor multinational, TechTeam Global, Inc. At various times during the previouseight years, he was founder and Chief Executive Officer of the followingcompanies: Digital Harbor, Inc., ComDais, Inc., GlobalSim, Inc., DriveSafety,Inc., Chief Strategy Officer of IMCentric, Inc., Chief Operating Officer ofSorenson Media, Inc., and General Counsel of E-Idea Labs, Inc. Prior to this,Mr. Cooper was the Vice President of Worldwide Marketing and BusinessDevelopment for Novell, Inc. for two years, and the Vice President of WorldwideCustomer Services, Sales & Marketing for WordPerfect Corporation for tenyears. Mr. Cooper also currently serves as a director for Authoritative.Net,Inc, and has recently finished writing a business book. He is a practicingcorporate attorney and graduated with honors from Brigham Young University LawSchool.

 

*EricOlafson*was appointed to serve as a director in October 2001.  Since 2000, Mr. Olafson has been the Chairmanof the Board of Tomax Corporation, a developer and marketer of web-basedsoftware for retailers (“Tomax”). Prior to that, from 1990 to 2000, Mr. Olafsonserved as the President and Chief Executive Officer of Tomax. From 1987 to1990, Mr. Olafson served as the Vice President of Marketing at Tomax.  From 1986 to 1987, Mr. Olafson served as aconsultant to Tomax. Prior to 1986, Mr. Olafson was a co-founder of DyonixGreentree Technologies, a Canadian software development company.

 

*PhillipJ. Windley, PhD* was appointed to serve as a director in October 2003.Dr. Windley is a consultant, author and nationally recognized expert in usinginformation technology. Dr. Windley served during 2001 and 2002 as the ChiefInformation Officer for the State of Utah, serving in the Governor’s Cabinetand as a member of the Governor’s Senior Staff. In 1999 and 2000, Dr. Windleyserved as the Vice President for Product Development and Operations at Excite@Home,managing a large, interdisciplinary team of product managers, engineers, andtechnicians developing and operating large-scale internet and e-commerceproducts. Prior to joining Excite@Home, from 1998 to 1999, Dr. Windley servedas 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 a director inMarch 2004.  Mr. Mahaffey has over25 years of experience in the development, funding and marketing of advancedtechnology systems to business, education, consumer and governmentmarkets.  Mr. Mahaffey is the ManagingPartner for Redleaf Group, Inc., a multi-million dollar US early-stage venturecapital firm, 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 Business TechnologyExecutive Program in 1987.

 

**ExecutiveOfficers**

 

In addition to Mr.O’Neal, whose biography is set forth above, certain biographical information isfurnished below with respect to our other executive officers:

 

*AnthonyJ. Sansone,*39, was appointed to serve as our ChiefFinancial Officer and Corporate Secretary in July 2004.  Prior to joining Sento, Mr. Sansone was theVice President of the Client Finance Group for JP Morgan Chase Commercial CardSolutions since January 2003.  FromAugust 1997 to December 2002, Mr. Sansone served as Vice President,Treasurer and Corporate Secretary for Convergence Communications, Inc., whichprovided data, video and voice services in nine Latin America countries.  Mr. Sansone also serves as a director of theMountainWest Venture Group, an organization fostering deal flow, capital growthand 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 theUniversity of Utah.

 

*ChrisWells,*44, was appointed as our Senior Vice President of Sales inApril 2003.  Prior to joining Sento,Mr. Wells consulted as the General Manager for a $29 million dollar technologyupgrade project for the State of Utah from June 2002 toApril 2003.  Mr. Wells was VicePresident and General Manager for Excite@Home Hosting Services fromOctober 1999 to March 2002. His responsibilities included buildingoutsourcing shared hosting and e-commerce services to major Fortune 500accounts. Prior to serving as Vice President and General Manager, Mr. Wellsserved from June 1998 to October 1999 as the Vice President of MajorAccounts at Imall Inc., a small Internet e-commerce start-up, which waspurchased by Excite@Home for over $500 million. Mr. Wells has over 13 years in sales and marketing experience, includingover three years as a director of major accounts 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 ofUtah where he was responsible for a $60 million information technology budgetand over 250 employees.  From August 1999until February 2002, Mr. Fulling managed an engineering and operationsdivision for Excite@Home, in support of a $20 million E-commerce business.  From October 1996 untilAugust 1999, Mr. Fulling was the Senior Vice President of Engineering andOperations at iMall Inc., where he built a technology organization that wasinstrumental in the acquisition 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 Ownership Reporting Compliance**

 

Section 16(a)of the Securities Exchange Act of 1934 requires our executive officers anddirectors, as well as persons who beneficially own more than ten percent of ourcommon stock, to file initial reports of ownership and reports of changes inownership with the Securities and Exchange Commission (the “SEC”).  Reporting persons are also required by SECregulations to furnish us with copies of all Section 16(a) forms theyfile.  Based solely on a review of thecopies of such forms furnished to us and written representations from ourexecutive officers and directors, we believe that for the fiscal year endedMarch 31, 2004 all of our executive officers and directors, as well aspersons beneficially holding more than ten percent of our common stock, filedthe required 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.

 

**SummaryCompensation Table**

 

**The following table provides certain summary information concerning thecompensation paid or accrued by us to or on behalf of our Chief ExecutiveOfficer, 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                     |       | —          |       | —         |       | —                                  |       | —                               |       | —                                         |       | — |   | — |   |

 

----

(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 andpaid in 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 inApril 2004.

 

**OptionGrants in Last Fiscal Year**

 

The following tablesets forth individual grants of options to acquire shares of our common stockmade to the Named Executive Officers during the fiscal year endedMarch 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 |   |

 

**AggregatedOption Exercises in Last Fiscal Year and Year End Option Values**

 

**The following table sets forth the aggregate value of unexercised optionsto acquire shares of our common stock held by the Named Executive Officers onMarch 31, 2004, and the value realized upon the exercise of options duringthe 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.  The price of the ourcommon stock on March 31, 2004 was $12.35 per share (as reported on theNasdaq (SmallCap) Stock Market).

 

26

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**DirectorCompensation**

 

Our non-employeedirectors receive compensation of $1,500****forattendance at each Board meeting, $750 for participation in each telephonicBoard meeting, and $1,000 for attendances at each committee meeting not held inconjunction with a regular Board meeting ($500 if the committee meeting is heldin conjunction with a Board meeting).  Asadditional incentive to serve, non-employee board members from time to timereceive options to purchase shares of our common stock.  Mr. Filler, Mr. Cooper and Mr. Sorenson eachreceived options to purchase 2,500 shares of our common stock at $1.60 pershare 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 endedMarch 31, 2004, Mr. Mahaffey received options to purchase 7,500 shares ofour common stock at $4.61 per share.

 

In addition, duringthe fiscal year ended March 30, 2002, our Board of Directors reviewed thetime and insight provided by our directors, as well as our limited ability toprovide additional cash payments to our directors as compensation for theirservices to Sento. Based upon this review, as well as an assessment that ourdirectors would likely be required to devote increased time and attentionduring the fiscal year ended March 30, 2002 to several strategicinitiatives, including review and negotiation of prospective transactionsintended to promote shareholder value and liquidity, our Board of Directorsadopted resolutions intended to compensate our directors if we completed such atransaction. Pursuant to resolutions adopted in April 2001 andMarch 2002, our Board of Directors approved a contingent issuance ofshares of our 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 our common stock are issuable only upon the completionof certain merger, consolidation, acquisition, sale and liquidationtransactions constituting a “change of control” under our 1999 Omnibus StockIncentive Plan. Because none of the conditions was satisfied during the fiscalyear ended March 31, 2004, there were no shares or other rights issued orgranted to the directors during such fiscal year. The resolutions remaineffective and could result in future issuances of shares of our common stock ifone or more of the stated conditions occurs.

 

On March 30,1999, we entered into a consulting agreement with GT Investments, of which GaryB. Filler, our Chairman of the Board, is the sole shareholder.  Pursuant to such agreement, we pay GTInvestments a monthly fee for services provided by Mr. Filler.  During the year ended March 31, 2004, wepaid GT Investments the aggregate amount of $66,000 under this agreement.  The agreement is cancelable by either partyat any time.

 

**Annual Meetings, Board Meetings and Committees**

 

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 endedMarch 31, 2004, our Board of Directors held seven formal board meetingsand met informally on numerous occasions and approved relevant matters bywritten consent.  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 ourAudit Committee are independent according to Nasdaq’s listing standards, andour Board of Directors has determined that the Audit Committee has one memberqualifying as an audit committee financial expert, as defined in Item 401(h) ofRegulation S-K.  The person our Board ofDirectors has determined is an audit committee financial expert is Kieth E.Sorenson.

 

27

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Our Board ofDirectors has also adopted a written Audit Committee Charter, a copy of whichhas been filed previously with the SEC on September 14, 2001 as an exhibitto our proxy statement prepared in connection with our 2001 annual meeting ofshareholders.  The Audit Committeeoversees our accounting and financial reporting processes and relatedaudits.  This involves, among othertasks, the selection of our external auditors for ratification by ourshareholders, pre-approving engagements of our auditors with respect to auditand non-audit services, reviewing our accounting practices and controls andadministering our Code of Ethics for Officers and Finance Department Employeesand whistleblower policy.

 

**Codeof Ethics**

 

We have adopted the****Sento Corporation Code of Ethics forOfficers and Finance Department Employees, which constitutes a code of ethics that applies to the principal executive officer, principalfinancial officer, principal accounting officer or controller, or personsperforming similar functions, as defined in Item 406 of Regulation S-K underthe Securities Exchange Act of 1934, as amended.  We have posted our Code of Ethics forOfficers and Finance Department Employees on our website at www.sento.com.

 

**EmploymentAgreements and Change of Control Arrangements**

 

We have adopted theSento Corporation 1999 Omnibus Stock Incentive Plan (the “Incentive Plan”)which provides that upon a change in control of Sento and a subsequentrelocation, termination or reassignment of a participant in the Incentive Planwithin one year, the options granted to such participant under the IncentivePlan immediately vest and become exercisable. The Named Executive Officers are among the participants in the IncentivePlan.  In addition, options issued to theNamed Executive Officers and all directors provide that upon a change incontrol of Sento all such options immediately vest and become exercisable.

 

## ***Item 11***.   Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.

 

**BeneficialOwnership Table**

 

**The following table sets forth information as of July 1, 2004 withrespect to the beneficial ownership of shares of our common stock by eachperson known by us to be the beneficial owner of more than 5% of our commonstock, by each director, by each of the Named Executive Officers and by alldirectors 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.**

 

28

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| ** **                                                                                                                        | ** ** | **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)        | ** |   |
|                                                                                                                              |       |                                               |       |   |   |
| 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,warrants or other rights exercisable within 60 days of July 1, 2004 hasbeen calculated as though shares of our common stock subject to such optionswere outstanding, but such shares have not been deemed outstanding for thepurpose of calculating the percentage of the class owned by any other person.

 

**            Represents lessthan 1% of the outstanding shares of our common stock.

 

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

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

(3)          Includes presently exercisable options to purchase 5,165shares of our common stock and 7,956 shares of our common stock held by theOlafson Trust, of which Mr. Olafson is a trustee.

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

(5)          Includes 1,250 shares of our common stock and 2,500 sharesof our common stock subject to presently exercisable warrants held by GTInvestments, of which Mr. Filler is the sole shareholder, and presentlyexercisable options to purchase 5,100 shares of our common stock.

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

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

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

 

29

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**SecuritiesAuthorized for Issuance Under Equity CompensationPlans**

 

The following tablecontains information regarding our equity compensation plans as ofMarch 31, 2004.

 

**EQUITYCOMPENSATION 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    |   |

 

----

(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 warrantsdisclosed in the preceding table were issued to placement agents in conjunctionwith the issuance of convertible debt and common stock, and in exchange forconsulting services pursuant to individual compensation arrangements.  These warrants give the holders the right topurchase share of our common stock at a price equal to the fair market value ofa share of our common stock at the time of issuance of the warrants.  The terms of these warrants range from threeto five years from the date of issuance of the warrants.

 

***Item 12******  Certain Relationships and Related Transactions.***

 

**On March 30, 1999, we entered into a consulting agreement with GTInvestments, of which Gary B. Filler, our Chairman of the Board, is the soleshareholder.  Pursuant to such agreement,we pay GT Investments a monthly fee for services provided by Mr. Filler.  During the year ended March 31, 2004, wepaid GT Investments the aggregate amount of $66,000 under this agreement.  The agreement is cancelable by either partyat 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 Accountants                                                                       |       |                           |       | (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

----

 

----

(1)           Incorporated byreference to Annual Report on Form 10-KSB for the fiscal year endedMarch 31, 2004, filed with the Commission on May 20, 2004.

 

(2)                                  Incorporated by reference toAnnual 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/Afiled with the Commission on August 1, 1996.

 

(3)                                  Incorporated by reference toAnnual 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 toQuarterly 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 toQuarterly Report on Form 10-QSB for the fiscal quarter ended September 29,2001.

 

(6)                                  Incorporated by reference toAnnual 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 toQuarterly 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 toAnnual 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 toQuarterly Report on Form 10-QSB for the fiscal quarter ended September 30,2003, filed with the Commission on November 13, 2003.

 

(10)         Filed herewith andattached to this Amendment No. 2 to Annual Report on Form 10-KSB/A.

 

(b)                                 REPORTS ON FORM 8-K

 

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

 

Current Report onForm 8-K, filed April 23, 2003, reporting our issuance of two pressreleases, the first of which announced the execution of a new agreement toprovide outsourced call center support services and the extension of the termof two other such agreements.  The secondpress release provided additional information regarding the effect of stockoptions granted to our employees on our financial results for the fourth fiscalquarter and year ended March 31, 2004 (Items 7, 9 and 12 reported).

 

## ***Item 14.***    Principal Accountant Fees and Services

 

**AuditFees**

 

The aggregate feesbilled by Ernst & Young LLP, our independent public accountants(“E&Y”), for professional services rendered for the audit of our financialstatements and the reviews of our interim financial statements included in ourQuarterly Reports on Forms 10-Q were approximately $61,000 for the fiscal yearended March 31, 2004 and approximately $60,000 for the fiscal year endedMarch 31, 2003.

 

**Audit-RelatedFees**

 

The aggregate feesbilled by E&Y for assurance and related services performed by E&Y thatwere reasonably related to the performance of the audit of our financialstatements and are not reported in the preceding paragraph were approximately$17,000 for the fiscal year

 

32

----

 

ended March 31, 2004 andapproximately $20,000 for the fiscal year ended March 31, 2003.  Audit-related fees relate primarily to auditsof employee benefit plans and miscellaneous accounting and internal controlrelated consultations.

 

**TaxFees**

 

The aggregate feesbilled by E&Y for tax compliance, tax advice and tax planning wereapproximately $15,000 for the fiscal year ended March 31, 2004 andapproximately $17,000 for the fiscal year ended March 31, 2003.

 

**AllOther Fees**

 

There were no feesbilled for other non-audit services during fiscal years 2004 and 2003.

 

**Pre-ApprovalPolicies and Procedures**

 

The Audit Committeeof our Board of Directors ensures that we engage our public accountants toprovide only audit and non-audit services that are compatible with maintainingthe independence of our public accountants. Our Audit Committee approves or pre-approves all services provided byour public accountants.  Permittedservices include audit and audit-related services, tax and other non-auditrelated services.  Certain services areidentified as restricted.  Restrictedservices are those services that may not be provided by our external publicaccountants, whether identified in statute or determined in the opinion of ourAudit Committee to be incompatible with the role of an independentauditor.  All fees identified in thepreceding four paragraphs were approved by our Audit Committee.  During the fiscal year ended March 31,2004, our Audit Committee reviewed all non-audit services provided by ourexternal public accountants, and concluded that the provision of such non-auditservices was compatible with maintaining the independence of the externalpublic accountants.

 

33

----

 

# **SIGNATURES**

 

In accordance with Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has caused thisAmendment No. 2 to Annual Report on Form 10-KSB/A to be signed on its behalf bythe undersigned, thereunto duly authorized, on July 29, 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 Directors and Stockholders

Sento Corporation and Subsidiary

 

We have audited the accompanying consolidated balance sheets of SentoCorporation and subsidiary as of March 31, 2004 and 2003, and the relatedconsolidated statements of operations, stockholders’ equity and comprehensiveincome (loss) and cash flows for the years then ended. These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon 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 Corporation and Subsidiary

 

# Consolidated Statements of Operations

 
| ** **                                                                                                                                | ** ** | **Year Ended**          | ** **     |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|----------------|
| ** **                                                                                                                                | ** ** | **March 31  2004** | ** **     | **March 31  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 Corporation and Subsidiary

 

Consolidated Statement of Stockholders’Equity and Comprehensive Income (Loss)

 
| ** **                                                | ** ** | ** **       | ** ** | **Additional Paid-  in** | ** **  | **Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Total  Stockholders’** | ** **      |
|-----------------------------------------------------------|------------|------------------|------------|--------------------------|-------------|-----------------|------------|---------------------------------------|------------|-------------------------------|-----------------|
| ** **                                                | ** ** | **Common Stock** | ** ** |
| ** **                                                | ** ** | **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 Corporation and Subsidiary

 

Consolidated Statements of Cash Flows

 
| ** **                                                                             | ** ** | **Year Ended**          | ** **     |
|----------------------------------------------------------------------------------------|------------|-------------------------|----------------|
| ** **                                                                             | ** ** | **March 31  2004** | ** **     | **March 31  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

----

 

Sento Corporation and Subsidiary

 

Notes to Consolidated Financial Statements

 

**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, andtelephone.  Sento deploys a distributedworkforce strategy and customer-centric applications to provide customer careand support.** **Sento conducts its principal business through itswholly-owned subsidiary Sento Technical Services Corporation.

 

**2. Significant Accounting Policies**

 

**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 statement of Position 98-1 “Accounting for the Costs ofComputer Software Developed or obtained for Internal Use” and are capitalizedand amortized 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

 

F-6

----

 

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 recovered or settled.  The effect on deferred tax assets anddeferred tax liabilities of a change in tax rates is recognized in income inthe period that includes the enactment date.

 

**Common Stock**

 

On November 14, 2002, the stockholders of the Company’s commonstock approved a 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 recognized when persuasive evidence of an arrangementexists, delivery of services has occurred, the fee is fixed or determinable,and collection of the resulting receivable is reasonably assured.  Revenue is recognized when the services havebeen provided to the end customer and the customer interaction is completed.

 

The Company primarily generates revenue by delivering technicalassistance 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 callrate.  The Company also provides licensesto its customers for the use of certain of its customer contact software toolsthat are 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.

 

Revenues generated from professional and consulting services arerecognized as the service is provided, based on time and materials incurred atcontractually agreed upon rates.

 

**Stock-Based Compensation**

 

The Company has adopted the footnote disclosure provisions of Statementof Financial Accounting Standards 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 entity to continuemeasuring compensation cost for stock-based compensation using the intrinsic-valuemethod of accounting prescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (APB 25).  The Company has elected to continue to applythe provisions of APB 25 and provide pro forma footnote disclosures required bySFAS 123, which has been determined as if the Company had accounted for itsemployee stock options under the fair value method.

 

F-7

----

 

The fair value of each option grant is estimated on the date of grantusing the Black Scholes option-pricing model. The Company’s valuation assumptions and pro forma information is asfollows:

 
| ** **                                | ** ** | ** **  | ** ** | **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 of calculating compensation cost for stock optionsunder SFAS 123 may not be representative of the effects on reported net income(loss) for future years.

 

F-8

----

 

**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 Common Share**

 

Basic income (loss) per share is computed in accordance with FinancialAccounting Standards Board Standards No. 128, *Earnings Per Share*. Basic net income (loss) per share is computed as net income or lossdivided by the weighted average number of common shares outstanding for theperiod.  Diluted net income (loss) per sharereflects the potential dilution that could occur from common shares issueablethrough stock options, warrants, and other convertible securities, ifdilutive.  The computation of diluted netincome (loss) per share does not assume exercise or conversion of securitiesthat would have an antidilutive effect on net income (loss) per common share.During the years ended March 31, 2004 and 2003, stock options and warrantsfor the purchase of 646,101 and 4,420 shares of common stock, 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 othercomprehensive income (loss).  Othercomprehensive income (loss) in 2003 includes certain changes in equity of theCompany that are excluded from net income (loss).  There were no items of other comprehensiveloss 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.

 

**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.

 

F-9

----

 

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

 

Property and equipment consisted of the following:

 
| ** **                                  | ** ** | **March 31,  2004** | ** **    | **March 31,  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 |   |

 

Depreciation for the fiscal 2004 and fiscal2003 years was $1,478,989 and $1,701,336, respectively.  Depreciation expense includes amortization ofassets acquired under capital leases.

 

**4. Notes Payable and Capital Leases**

 

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 greaterof 4.25% or the bank’s prime rate (6.25% as of March 31, 2004) and matureson April 15, 2004.  There were noamounts drawn on this line of credit at March 31, 2004.

 

In April 2003, the Company also refinanced the Company’s existingequipment financing term debt with the bank. The loan was limited to the remaining principal balance on existing termloans with the bank in the amount of $513,983. The loan calls for monthly principal and interest payments over 18months and accrues interest at 8%.  Asecond term loan was extended to refinance a portion of the Company’s existingconvertible debt.  The second term loanis in the amount of $300,000, calls for monthly principal and interest paymentsover three years, and accrues interest at 8%. A third term loan was entered into with the bank in the amount of$81,563 for the purchase of equipment, which calls for monthly principal andinterest payments over 30 months, and accrued interest at 10%.  Substantiallyall of the assets of the Company serve as collateral for the above line ofcredit and loans.

 

The foregoing loan agreements call for the Company to maintain certainprofitability and net worth covenants. The Company was in compliance with all debt covenants at March 31,2004.

 

The Company also issued a warrant to the bank, in connection withobtaining the above credit facilities, to purchase 60,000 shares of CommonStock at $1.79 per share.  During 2004,the bank exercised the above warrant utilizing cashless exercise provisions bytendering all 60,000 warrants for a net 47,655 shares of common stock.

 

Subsequent to March 31, 2004, the Company renewed its line ofcredit with the bank, refinanced its term loans, and obtained a commitment foran additional term loan for future equipment purchases  (see note 11).

 

Long-term debt classifications at March 31, 2004 and 2003 includedin the accompanying financial statements reflect these refinancings.

 

 

F-10

----

 

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

 
| ** **                                                                                                          | ** ** | **March 31,  2004** | ** **  | **March 31,  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 |   |

 

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    |               |       |   |

 

F-11

----

 

**5. Convertible Debentures**

 

In February 2000, the Company issued $1,287,000 of 7% convertiblesubordinated debentures in $1,000 units consisting of one $990 debenture andwarrants to purchase 100 shares of common stock.  Pursuant to the original terms of thedebenture, in January 2001, the interest rate on the debentures increasedto 8%.  In February 2003, thedebentures became due and payable, and the associated warrants expired.

 

On April 15, 2003, the Company completed a refinancing of itsconvertible subordinated debentures which included a new $300,000, 8% term loanwith a bank (note 4) that was used to pay down a portion of the Company’sexisting debentures and the issuance of new debentures whereby all of theFebruary 2000 debentures were repaid or exchanged for new convertiblesubordinated debentures.  Theclassification of convertible debt in the accompanying financial statements asof and for the year ended March 31, 2003, was presented to reflect theeffect of the refinancing.  In total, theCompany issued 1,002 units at $1,000 each, consisting of one $990 debenture andwarrants to purchase 250 shares of the Company’s common stock at $2.25 pershare.  The debentures were convertibleat any time into 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).

 

The Company also issued warrants for the purchase of 50,000 shares ofcommon stock to a placement agent for services rendered in conjunction with therefinancing.  The warrants expireApril 15, 2006, of which, warrants for 37,500 shares of common stock areexercisable at $1.60 per share, and warrants for 12,500 shares common stock areexercisable at $2.25 per share.

 

**6. Income Taxes**

 

As of March 31,2004 and 2003, the Company had federal and state net operating losscarryforwards of approximately $8,255,000 and $7,465,000 respectively.  The net operating loss and creditcarryforwards will expire at various dates beginning in 2020 through 2024, ifnot 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 expense differs from the “expected” tax expense(computed by applying the U.S. federal corporate income tax rate of 34% toincome before income taxes) as follows:

 
| ** **                                             | ** ** | **Year Ended**          | ** **   |
|--------------------------------------------------------|------------|-------------------------|--------------|
| ** **                                             | ** ** | **March 31  2004** | ** **   | **March 31  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 of the Company’s deferred tax assets andliabilities for federal and state income taxes are as follows:

 
| ** **                        | ** ** | **March 31,  2004** | ** **    | **March 31,  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 the Company’s net operating loss carryforwards islimited to the future taxable income of the Company. Under the “change ofownership” provisions of the Internal Revenue Code, utilization of the netoperating loss carryforwards may be subject to an annual limitation.

 

The net valuation allowance increased by $759,000 and $838,000 duringthe years ended March 31, 2004 and 2003, respectively.

 

The valuation allowance increased by $6,000 and $0 in the years endedMarch 31, 2004 and 2003, respectively, related to excess tax benefitsresulting from stock option exercises. If and when the Company is able toutilize these excess tax benefits in future periods, the reduction in thevaluation allowance will be credited directly to additional paid-in capital.

 

**7. Operating Leases**

 

The Company has non-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**

 

**Issuance of Common Stock**

 

InMarch 2004, the Company completed a private placement for the sale of634,962 shares of common stock at a price of $10.56 per share, resulting in netproceeds of $6,042,834.  The terms of theprivate placement require the Company to file a registration statement coveringsuch shares of common stock before May 31, 2004.  Failure to file such registration statementand to meet other related terms by certain deadlines will subject the Companyto periodic liquidated damage payments of 1.0 percent of the offering price tothe private placement stockholders.

 

In conjunction with the private placement, the Company issued warrantsfor the purchase of 126,993 shares of common stock.  The warrants are exercisable beginning inSeptember 2004, have a term of three and one-half years, and an exerciseprice of $12.67.  In certaincircumstances, the Company may have the right to call the warrants.  The Company also issued warrants to purchase30,000 shares of common stock, with the same terms, to a placement agent forservices rendered in conjunction with the private placement.

 

**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 authorizesgrants of options to purchase up to 875,000 shares of authorized but unissuedcommon stock.  Stock options are grantedwith an exercise price not less than the stock’s fair market value at the dateof grant.  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, there were 266,095 additional shares available for futuregrant 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 table summarizes information about stock optionsoutstanding 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 in excessof $2.00 per share.  The new optionsissued under the Exchange Program are subject to variable plan accounting inaccordance with FASB Interpretation No. 44 “Accounting for Certain TransactionsInvolving 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 stockabove $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 Programare exercised, 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 ended March 31, 2004 and2003, the Company recognized stock based compensation expense of $1,562,108 and$0, respectively, to reflect adjustments to the value of the options due to theincrease in market price of the Company’s common stock above the exercise priceof $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.

 

F-16

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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, the Company entered into a two–year consultingagreement for services with terms that require the Company to issue theconsultant warrants to purchase 5,000 shares of common stock each month.  As of March 31, 2004, warrants topurchase 15,000 shares of common stock had been issued to the consultant underthis agreement.  The warrants vest 25percent every three months from date of issuance, have a term of three andone-half years, and have an exercise price of $3.00 per share.  The consultant agreement can be terminatedupon 60 days written notice, subject to various cancellation provisions.  Unless terminated earlier, the Company isobligated under this agreement to issue additional warrants for the purchase of105,000 shares of common stock over the next 21 months.

 

Outstanding warrants to purchase shares of the Company’s common stock,as of March 31, 2004, are as 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).

 

F-18

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**10. Related Party Transactions**

 

In March of 1999, Sento entered into a consulting agreement withGT Investments, a company that is wholly owned by Gary B. Filler, Sento’sChairman.  Under the agreement, Sentopays GT Investments 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**

 

On April 21, 2004, the Board of Directorsapproved an extension of three months to the term for warrants to purchase94,688 shares of common stock issued in conjunction with a private placement ofcommon stock in 1999.  The warrants thatwere to expire in May of 2004, now terminate onAugust 31, 2004.

 

Subsequent to March 31, 2004, stockoptions for 33,234 shares of common stock were exercised at $1.60 per share forproceeds of $53,174.  Additionally,warrants issued to purchasers of convertible debentures were exercisedutilizing cashless exercise provisions by tendering 183,000 warrants for a net150,709 shares of common stock.

 

On May 11, 2004, the Company refinanced itsexpired line of credit and existing term loans with a bank, wherein the line ofcredit was renewed and the existing three terms loans were combined into oneterm loan.  The agreement also allows theCompany to draw on an additional term loan for up to $1,500,000 of equipmentfinancing.  The line of credit wasincreased from a maximum of $2,500,000 to $3,000,000 (subject to a limit of 80%of eligible accounts receivable), has an interest rate of the bank’s prime rateplus 1% and has 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. 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 associated with all of the financing arrangements withthe bank include minimum debt service coverage of 1.5-to-1.0 and an adjustedquick ratio of 2.0-to-1.0.  Substantially all of the assets of the Companyserve as collateral for the above line of credit and term loans.

 

**12. Recently Issued Accounting Pronouncements**

 

The Company has reviewed all recently issued accounting standards,which have not yet been adopted, in order to determine their potential effect,if any, on the results of operations and financial position of theCompany.  Based on that review, theCompany does not currently believe that any of these recent accountingpronouncements will have a significant effect on its current or futurefinancial position, results of operations, cash flows or disclosures.

 

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