**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-K**

**x****                             ****Annual reportunder Section 13 or 15(d) of the Securities Exchange Act of 1934 forthe fiscal year ended March 31, 2006 or**

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

 

**SentoCorporation**(Exact name of registrant as specified in itscharter)

 
| **Utah**                                           | **000-06425**         | **87-0284979**                   |
|----------------------------------------------------|-----------------------|----------------------------------|
| (State or other jurisdictionof incorporation) | (Commission File No.) | (IRS EmployerIdentification No.) |

 

**420 East South Temple, Suite 400Salt Lake City, Utah 84111**(Addressof principal executive offices, including zip code)

Issuer’stelephone number, including area code:  **(801) 431-9200**

Securitiesregistered under Section 12(b) of the Exchange Act:**None**

Securitiesregistered under Section 12(g) of the Exchange Act:**Common Stock, $0.25 par value**

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.   Yes o   No x

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of this Act.   Yes o   No x

Indicateby check mark whether the registrant (1) has filed all documents andreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or such shorter periodthat the Registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.   Yes x   No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in the definitive proxy statement incorporated byreference in Part III of this Form 10-K, or any amendment tothis Form 10-K.  x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

| Large accelerated filer o | Accelerated  filer o | Non-accelerated  filer x |
|---------------------------|---------------------------|-------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   Yes o   No x

The aggregate market value of the Common Stock held by non-affiliates ofthe issuer, based upon the closing sale price of the Common Stock reported bythe NASDAQ SmallCap Market on September 30, 2005, was approximately $8,651,208.

The number of shares of Common Stock outstanding as of May 31, 2006was 3,953,036.

**DOCUMENTS INCORPORATED BY REFERENCE**

None

 

 

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Our internet address is www.sento.com. Available there, free of charge, investors will find our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Our reports can be accessed through the investor relation’s section of our web site. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F St. NE, Washington, DC 20549. The public may obtain information on the operations of the Public Reference Room by calling the SEC at 800.SEC.0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding our electronically filed reports.  Interested parties may request a copy of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, or other documents filed with the SEC at www.sento.com. The information found on our web site is not part of this or any report we file with or furnish to the SEC.

**TABLE OF CONTENTS**
|                                                   | ** ** | ** **                                                                                                         | ** ** | **Page** |
|---------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS |       | 1                                                                                                                  |
|                                              |       |                                                                                                               |       |     |
| PART I                                       |       |                                                                                                               |
|                                              |       |                                                                                                               |       |     |
| Item 1.                                           |       | Business                                                                                                           |       | 1        |
| Item  1A.                                         |       | Risk Factors                                                                                                       |       | 9        |
| Item 1B.                                          |       | Unresolved Staff Comments                                                                                          |       | 14       |
| Item 2.                                           |       | Properties                                                                                                         |       | 14       |
| Item  3.                                          |       | Legal  Proceedings                                                                                                 |       | 15       |
| Item 4.                                           |       | Submission of Matters to a Vote of Security Holders                                                                |       | 15       |
|                                              |       |                                                                                                               |       |     |
| PART II                                      |       |                                                                                                               |
|                                              |       |                                                                                                               |       |     |
| Item 5.                                           |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       | 16       |
| Item 6.                                           |       | Selected Financial Data                                                                                            |       | 21       |
| Item 7.                                           |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |       | 22       |
| Item 7A.                                          |       | Quantitative and Qualitative Disclosures About Market  Risk                                                        |       | 33       |
| Item 8.                                           |       | Financial Statements and Supplementary Data                                                                        |       | 34       |
| Item 9.                                           |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              |       | 34       |
| Item 9A.                                     |       | Controls and Procedures                                                                                            |       | 34       |
| Item  9B.                                    |       | Other  Information                                                                                                 |       | 35       |
|                                              |       |                                                                                                               |       |     |
| PART III                                     |       |                                                                                                               |
|                                              |       |                                                                                                               |       |     |
| Item 10.                                          |       | Directors and Executive Officers of the Registrant                                                                 |       | 35       |
| Item 11.                                          |       | Executive Compensation                                                                                             |       | 41       |
| Item 12.                                          |       | Security Ownership of Certain Beneficial Owners and  Management and Related Shareholder Matters                    |       | 44       |
| Item 13.                                          |       | Certain Relationships and Related Transactions                                                                     |       | 46       |
| Item 14.                                          |       | Principal Accountant Fees and Services                                                                             |       | 46       |
|                                              |       |                                                                                                               |       |     |
| PART IV                                      |       |                                                                                                               |
|                                              |       |                                                                                                               |       |     |
| Item 15.                                          |       | Exhibits and Financial Statement Schedules                                                                         |       | 47       |
|                                              |       |                                                                                                               |       |     |
| SIGNATURES                                        |       | 50                                                                                                                 |

 

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**SpecialNote Regarding Forward-Looking Statements**

*ThisAnnual Report on Form 10-K (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”**). Suchstatements can be identified by the use of forward-looking words such as “anticipate,”“estimate,” “project,” “likely,” “believe,” “intend,”  “expect” or similar words. These statementsrelate to our, and, in some cases, our clients’ or business partners’, futureplans, objectives, expectations, intentions and financial performance and theassumptions that underlie these statements. All forward-looking statementsincluded in this Report are made as of the date hereof, based on informationavailable to us as of such date, and we assume no obligation to update anyforward-looking statement. It is important to note that such statements may notprove to be accurate and that our actual results and future events will differ,and could differ materially, from those anticipated in such statements. Amongthe factors that could cause actual results to differ materially from ourexpectations are those described under Item 1A. “Risk Factors.” Readers arealso encouraged to review our other filings with the Securities and ExchangeCommission (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 this sectionand other factors included elsewhere in this Report.*

# **PART I**

## ***Item 1.   Business.***

### General Overview

Sento Corporation(**“Sento,”** the **“Company”** or **“we”**) specializes in Right ChannelingSM, a proven methodology designed to optimize customercontact solutions and ensure that companies make informed choices formulti-channel communication that support their business goals and customerexpectations. We offer outsourced customer contact services designed tooptimize the way companies interact with their customers to enhance brandloyalty, improve customer satisfaction, drive business initiatives and reduceservice costs. Through our proprietary Customer Choice Platform**SM** (the **“CustomerChoice Platform****SM****”**or**“CCP”**),we offer comprehensive professional services and customer interaction tools forcustomer acquisition, customer service and technical support. Companies canselect communication channels from a range of integrated live support andweb-enabled self-help applications that combine voice, chat, email and webforums.

The Customer Choice PlatformSM ismade up of multiple components. Each of these components integrates diversetools, technologies and services such that both client data and clientinterfaces are rolled up into a single customer view. Through these CCPcomponents, clients are afforded toolset choices, customers are providedinteraction channel choices, and agents are afforded a single view for both theclient and customer.

Our proprietarycustomer relationship management (**“CRM”**)software, known as **“Recite****SM****”**and other reporting and management tools,when integrated with communications points such as telephone, internet, chat,email, call-back, and self-help, provide solutions designed to help our clientsreduce costs and improve customer satisfaction.

By outsourcingcustomer care, customer acquisition, technical support or help-desk solutionsto us, our clients can focus on their core businesses and thereby improveoverall customer satisfaction. The staffing, operation and management ofefficient and cost-effective customer contact solution centers and the relatedtechnology are becoming more and more specialized, a business unto itself, andvery different from the core business of most of our clients. The engagement ofan 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. Webelieve that the 

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factors motivatingorganizations to outsource customer contact services include the desires toprovide better customer satisfaction, reduce costs, lower headcount and focusthese human and financial resources on core business functions. Organizationsare finding it increasingly difficult and expensive to service their non-coreneeds internally. As a result, outsourcing continues to gain favor across thebusiness spectrum. Many business analysts****believe thistrend will continue to grow as technology becomes more complex and expensiveand clients allocate their resources in the most cost-effective mannerpossible.

We distinguishourselves from our competition through our unique services and the fact that weare one of only a few companies to offer **both** technologysolutions **and** outsourced customer support contactsolution center infrastructure. This unique positioning has allowed us tomarket ourselves worldwide as a comprehensive solutions provider, one that iswilling to work with clients to solve their particular needs. Our solutions canbe integrated into existing, legacy systems, affording clients maximumflexibility in choosing the right solutions.

### Background

Sento was formedin 1986 as a value-added reseller, formerly known as Spire Technologies, Inc.In 1996, we executed a share exchange with an existing public company. Sento isincorporated under the laws of the State of Utah. Our common stock is traded onthe 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 our efforts on customer contactsolutions. We designed and engaged a third party to construct a new generationcustomer contact facility (**“Customer ContactSolutions Center”** or **“CCSC”)**inAmerican Fork, Utah. Subsequently, we designed and engaged a third party toconstruct four additional Customer Contact Solutions Centers, two of which werein Utah and two of which were in Wyoming. One of our Wyoming CCSC is notcurrently in use and is available for subletting.  In fiscal 2006, we consolidated the Utahfacilities into one supercenter. Also during fiscal 2006, we opened anadditional facility in Albuquerque, New Mexico. In addition, throughcontractual relationships, we have arranged for the use of contact solutioncenter resources in India, Brazil and Sweden.

Effective October 1,2004, we acquired substantially all of the assets of Xtrasource, Inc. (**“Xtrasource”**), a non-affiliated, privately-held Delawarecorporation. The acquired assets consist of call center operations withfacilities in the United States, the Netherlands and France that offerintegrated customer solutions, including help desk, technical assistance, andlive web chat.

### IndustryOverview

The customercontact services industry encompasses a broad spectrum of services andtechnology used to build long-term relations between clients and theircustomers. Effective outsourcers provide cost-effective, high-quality customersupport solutions using technology and people that enable clients to reducecosts and increase focus on core competencies.

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

Many seniorexecutives and managers recognize the importance of information technology intheir organizations and the potential benefits of improved customer service. Atthe same time, technological changes and the costs and time associated with implementingand using current solutions create tremendous pressure on organizations andtheir management. As the pace of technological advancement accelerates, an 

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organization’s ability toevaluate, design, integrate, deploy, and leverage new technology becomes acritical competitive issue.

Staying abreast ofrapid technological change, while maintaining the required operationalefficiency of customer contact solution centers, is also becoming increasinglymore difficult and expensive for companies. Running a contact solution centeron a day-to-day basis requires a skill set and a level of expertise thatdiffers from the core business of most clients. Understanding theinter-relationship of the various technological requirements as they relate tothe needs of the various internal divisions of a client company requiressignificant time, as well as careful attention to the client’s business needs. Anoutsourcer has the benefit of seeing many companies and how they operate, thenapplying that knowledge to the issues at hand with other client businesses.

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

### BusinessStrategy

Our businessstrategy is to design, develop, implement, and manage customer contactsolutions that enable our clients to effectively use leading-edge technologyand diversified workforce management processes and tools. By doing so, we positionour clients to improve business operations, reduce operating expenses andincrease overall customer satisfaction.

Ourbusiness strategy is based on the following strategic initiatives:

*CustomerChoice Platform**SM Technology**Suite.* Ourproprietary CCP software suite allows customers to choose between self-help,chat, email, phone and fee-based phone services to solve their issues and isdesigned to enable our clients, partners, and other service providers servingthe same client to work from a proven unified software platform regardless ofwhether they are in the U.S. or in an offshore location. This technology suite,developed and hosted by us, provides a single repository for data entered fromdisparate locations and systems. Our technology suite facilitates seamlesstracking of customer interactions throughout all touch points. Our integratedcustomer 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 toward decreasingcosts and improving efficiencies and customer satisfaction is the utilizationof our consulting services, which we offer to our clients to better design andimplement solutions to meet their needs. This service is typically offered aspart of the ongoing customer contract services we provide. We focus on bothmacro and micro level processes and methodology. On the macro level, we workclosely with clients to understand business needs and goals. We then developappropriate strategies and processes, often by implementing our Customer ChoicePlatformSM, whichincorporates self-help, chat, email, phone, and fee-based phone services. Onthe micro level, we incorporate contact blue printing that analyzes all aspectsof customer contacts, including system interactions, as well as developingappropriate customer satisfaction/feedback methods.

*Design,Develop, Implement, and Manage Leading Edge Customer Relationship Managementand Contact Center Solutions and Methodologies.*We developstrategies and methodologies designed to help our clients significantly reduceservice costs, while increasing customer choices and satisfaction. Our businessstrategy utilizes a suite of options to allow our clients’ customers to accessa variety of contact points depending upon the customer’s desire and choice atthe time.

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We have assistedmany of our clients in deflecting expensive phone interactions to morecost-effective Web solutions while maintaining the same or higher levels ofservice and quality. In all cases, we do not eliminate any single form ofcontact with the customer, but introduce more cost-effective alternatives andreallocate solutions according to the needs and desires of our clients andtheir customers. This consultative function is designed to assist our clientsin determining the best solution for their customer base. In situations whenour clients desire continuing or an increased level of telephone contact with theircustomers, we provide highly skilled and very personable phone agents toenhance both fee-based and free-phone interactions. In consultation with ourclients, we strive to deliver the preferred solution and methodology using acombination of telephone and Web solutions.

*ServiceIntervention**SM* — Service InterventionSM isa program that allows clients to avoid costly no-fault found service claims andproduct returns. Our expertise is based on the troubleshooting experience wehave gained in handling tens of millions of calls over the past 18 years. Manyof our service intervention clients have had extensive no-fault found serviceclaims issues and product returns prior to utilizing our services. We have beenable to intervene on their behalf and phone-fix these problems, thus savingmillions of dollars annually.

*CentralizedRetail Support —*During fiscal 2006 we were chosen byLensCrafters to provide customer service for their brick & mortarretail optical stores by fielding phone queries. This program permits thein-store sales people to focus on the customer who is visiting the store for anexam and/or eyewear purchase. At the same time callers receive the full andundivided attention of the customer service representative who are answeringquestions such as store location, hours, or scheduling an eye exam. This uniqueprogram enables LensCrafters to respond to multiple customers at the same timeand increases in-store sales while also improving customer satisfaction. LensCraftershas noted that sales staff interruptions (which averaged six per customer) havebeen dramatically reduced, and direct contact with phone customers/potentialcustomers has been significantly improved. We handle in-bound customer andsupport calls requesting location and business hours, appointment scheduling,insurance inquiries and information on lenses and contact lenses. Currently, weare providing this service to 168 of 888 (almost 20%) of total U.S.LensCrafters’ stores. This type of technological support for brick &mortar retail is a rapidly growing segment of U.S. business, and we believe weare poised to take advantage of this trend and expand this offering to otherclients, including a retail chain that is managed by LensCrafters.

*SentoBusiness Intelligence**SM(SBI*)****— SBI incorporates reporting and analytic tools that enableour clients to view multiple interaction channels with their customers. SBIalso allows for data to be fed back into its Right Channeling (described below)workflows to better optimize these flows for each client based on businessneeds and initiatives.

*IntensiveKnowledgebase Architecture, Management and Scoring.* Wedeliver innovative Web solutions through our proprietary “Customer ChoicePlatformSM.”  This platform provides customers access tohighly-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 helpis simply an extension of the customer’s Customer Choice Platform*SM* experience. Our ReciteSM software recordsand delivers the customer’s Web experience (i.e. the “click stream,” operatingsystem, browser version, and other important information) to the live agent. Thisinformation transfer allows the agent to know immediately which features of theCustomer Choice Platform*SM* the customer has accessed, and reduces thetime to resolution. By monitoring customer activity and analyzing positive behavior,our tools are designed to report and improve the overall customer experience. Ourskill and experience in knowledgebase architecture and management allow ourclients to deliver information to customers in a timely and cost-efficientfashion. These tools are available to companies for a licensing fee using anapplication software provider model, even when we are not providing domestic oroffshore labor. We currently support 19 languages.

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*Capitalizeon Technology.* Our Customer Contact Solutions Centers, whichincorporate scientific workforce management processes and tools, proven callcenter infrastructure and leading-edge solutions, are designed to enableclients to rapidly deploy and quickly capitalize on trends within theircustomer base. In addition, we use contact solution center resources in India,on a contract basis.

Our systemsincorporate newer technologies such as Voice over IP and hosted portal services.The integration of these systems provided by companies such as Nortel Networks,Cisco Systems, and AT&T promote high levels of economy and efficiency. Ourtechnology policy requires that infrastructure be fully scalable, meet orexceed customer needs, and provide adequate redundancy and security.

Our CustomerContact Solutions Centers go beyond a traditional telephone-centric customersupport facility. We have acquired or developed systems that increase customercontact points through focusing on Internet interactions such as email, Webtext chat, Internet calls, Web collaboration, Web callback interactions, andco-browsing, as well as using voice and fax communication. Our systems providebetter efficiency than conventional telephone interactions. The increasing useof the Internet, 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. We believe our Customer Choice Platform*SM* and Customer Contact Solutions Centersposition us to take advantage of these emerging opportunities.

*UtilizeGlobal Labor Pools.*We currently own and operate US CustomerContact solution centers in Utah, Wyoming, New Mexico and North Carolina alongwith centers in the Netherlands and France. In addition, we currently usecontact solution center resources in India, Sweden and Brazil on a contractbasis. In the past we have operated and/or utilized centers in Scotland,Ireland and South Africa. We have determined that we can, in some instances,gain significant cost savings and/or language capabilities by utilizingnon-U.S. labor. We currently contract services from India to handle chat andemail transactions. To date, we have generally found the Indian workforce to behighly-educated and possessing above-average writing capabilities.

### Services

Our integratedCustomer 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 ChoicePlatform*SM* methodologies, and customer contact solutionsto reduce costs associated with product/services support, while increasingcustomer satisfaction and brand loyalty.

We strive toachieve these goals by offering two core solutions: Right Channeling*SM* for customer acquisition, customer service andtechnical support and Service InterventionSM. We also offer standard outsourced contact solutioncenter services, and professional services. Each of these offerings isdescribed below.

*RightChanneling**SM.*Our Right Channeling*SM* offeringis a multi-channel strategic mix of communications channels, customized foreach client based on their needs and industry. The client can “right channel”its customers to particular communications channels, or give the customer the optionto choose.  The channels include freephone, fee phone, voice self-service, web self-service, chat (proactive andservice/support), forums and email.

We provide clientsa robust inventory of tools through web interfaces. Through our Customer ChoicePlatform*SM*,customer specific information is made available to customers. This informationprovides customers with the option of answering questions and resolvingproblems without ever going to a live person for assistance. If live assistanceis necessary, however, the Customer Choice Platform*SM* presents customers with alternatives for livecontact options (voice, chat, email or forums). The customer then can make aninformed choice as to the best possible live contact option for him or her. Forour clients, 

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we track customerbehavior while on the Customer Choice Platform*SM*, which promotesquicker resolution to issues and increases customer satisfaction. The directresult is increased efficiency and overall cost reduction.

We provide clientswith 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 customers the added ability to move to the frontof the queue at those times when waiting for a free contact is not acceptable. Whilecurrently used in the telephone environment, fee-based services can apply toany type of contact, whether delivered by telephone, chat, email, self-help, ora combination of these. Fee-based services can be used to route and prioritizeinteractions, enabling clients to offer multi-tiered service plans (e.g.silver, gold, platinum, etc.).

In the case offee-based solutions, we currently invoice our clients’ customers directly usinga credit card or 900-number billing system (customers receive an invoiceon their telephone bills). In the case of credit card billing, funds aredeposited directly into the clients’ merchant accounts. In some cases therevenue generated from these fee-based calls pays for a significant portion ofthe total cost of providing support. We believe that this option will achievegreater acceptance as clients recognize that significant revenues to offsetsupport costs can be generated from a very small number of transactions andthat the customer has made an informed decision to choose this option.

*ServiceIntervention*SM*.*Unnecessary service claims and productreturns can cost our clients millions of dollars per year. Our ServiceInterventionSM offering reduces unnecessary service claimsand product returns and stems from the unique and deep expertise that we haveaccumulated over 18 years of experience in consumer electronics (**“CE”**). Among other capabilities, we possess valuableexpertise supporting the installation and operation of universal remotecontrols.

*CentralizedRetail Support*. The centralized retail support arrangement wehave developed with LensCrafters has the potential of positively affecting theretail environment when store personnel can be freed up from constantly beinginterrupted by incoming customer phone calls. Such interruptions annoycustomers who are attempting to purchase products or services in the store andturn off customers who call in for information and are often left on hold forlong periods of time. Our innovative technology and process helps retailersavoid these problems and has demonstrated an increase of overall sales in thebrick & mortar stores by as much as 9%. We have implemented thisunique offering with LensCrafters and are now seeking to leverage this successwith potential clients all over the U.S. and Europe.

*ContactCenter Solutions*. We offer onshore and offshore contactsolution center facilities for outsourced customer care, including fourdomestic locations (1,450 seats total), and two European locations (400 seatstotal). We also have a contractual relationship in India (110 seats total) andsmall sub-contracting arrangements in Brazil and Sweden. We offer customersupport in 19 languages.

We offer a broadrange of customer contact outsourcing services, consisting principally ofcustomer acquisition, sales, customer care, helpdesk, technical support, andthe development and implementation of Web strategies to induce customers to useWeb services. We use advanced systems, including web-enabled databases andreporting systems, Internet, local area networks, multi-user systems, Computer-TelephonyIntegration, CRM, and Integrated Voice Response (**“IVR”**) technologies, to provide prompt and accurate supportwhile reducing the technology, personnel, and management expenses incurred byour clients.

IVR is anautomated self-help telephony system that responds with a voice menu thatallows the user to make choices and enter information via the user’s telephonekeypad or by voice to receive information and accurately route the call to aservice representative. IVR systems are used in our Customer Contact SolutionsCenters to enhance the customer experience by assisting in routing the callerto the 

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appropriate resource asquickly as possible and by limiting the amount of time required by a live agentto complete the interaction.

Most importantly,our CRM tools allow our clients to view the activities and behavior of theircustomers in regard to the transactions we handle. We believe these tools areeasier and less expensive to deploy than more cumbersome enterprise CRM systems.They also can be integrated into enterprise CRM 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 a variety of client specific services.These services may include billing and post-sale customer inquiries, trackingorder status, credit-related transactions, providing product information, andgenerating resources for problem resolution, mining customer data, or compilingand creating reports of customer records for client-specific use.

CustomerAcquisitions.      Ourtrained representatives are able to perform a variety of sales and customer-acquisition-related tasks. Among the services offered are cross-sell andup-sell, payment processing, billing information, pricing information, generalinquiries, and customer assistance for common product questions. We are alsoable to capture customer profile information and interaction history andprovide such information and history to our clients for future sales andmarketing efforts.

Helpdesk.We can provide client-certified professionals acting on behalf of our clientsfor helpdesk services to end-users and IT staffs. This is a powerful resourceto address questions and problems involving applications, integrated desktopproducts, network support or other specialized areas of need. Utilizing ourpersonnel, clients may develop programs to meet very specific requirements, andthen implement those programs as a customer contact solution or as a supplementto the customer’s in-house facility.

Technical Support.Product support services are targeted towards OEMs, software publishers,hardware system manufacturers, and other entities requiring mid-level tohigh-end technical services. These services, which are more technical in naturethan helpdesk or customer support services, are designed to provide customerswith immediate and efficient access to “best-of-class” product support. We alsodeliver comprehensive first-level support (support related to productinstallation, features and configuration) to end users and manufacturers,combining hardware and network support with application support for proprietaryand off-the-shelf programs. We have a history of delivering these services atsignificantly lower average handle times than industry norms. Ourcost-effective tools and methodology enable us to deliver these servicesthrough self-service, free and fee-based phone, chat, and email.

*ProfessionalServices*. As part of extending our Right Channeling*SM* expertise, we provide upfront and ongoingconsulting and professional services. These services span a number of areas ofthe organization, including operations, project management, development and webcontent management.

*InternationalOperations*. Our clients and Sento both benefit bydistributing some or all customer contacts to offshore locations. Through ouracquisition of the Xtrasource assets, we are providing our services in theNetherlands and France. We also have contracted with a third-party serviceprovider in India, Brazil and Sweden to deliver some of our services, and havepreviously conducted operations through alliances in other offshore locations. Theseoffshore locations can successfully handle a mix of voice, chat, and emailtransactions. We are currently evaluating the possibility of utilizing otheroffshore locations. These international operations provide our clients withmore choices and greater control of their customer 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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### SignificantClients

Four clientsaccounted for approximately 63% of our revenues with 24%, 15%, 14% and 10% ofrevenues for fiscal 2006. Two clients accounted for approximately 46% of ourrevenues with 28% and 18% of revenues for fiscal 2005. Two clients accountedfor approximately 47% of our revenues with 29% and 18% of revenues for fiscal2004.

Consistent withindustry standards, our contracts are generally cancelable by the client onshort-term notice. Our loss of a significant amount of business with any of ourkey clients could have, and the loss of a substantial amount of business withany of our larger existing technical support clients would have, a materialadverse effect on our business, financial condition, and results of operations.In addition, our future revenue growth is dependent upon our ability to attractand retain new clients and to generate additional business from existingclients.

### Competition

The contact centerindustry is highly competitive, global in scope, and comprised of myriadenterprises 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. Weanticipate that present and potential competition in the various markets we servewill come from enterprises and individuals of various types, many of which willlikely be larger and will have greater resources. Companies not in directcompetition with us today may introduce competing products in the future. It ispossible for companies to be at various times competitors, customers, andcollaborators 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 for higher marginbusiness**.**

We face significant anddiverse competition in the customer contact solutions industry from a broadspectrum of international, national, regional and local enterprises. Ourability to compete will be driven by our niche approach, our competencies inleading-edge technologies, our deployment of Web solutions, our strategic andbusiness alliances, and our efforts to aggressively establish a presence inother vertical markets such as the health care and the financial sectors.

Given theextensive market opportunity in the customer contact center space, we believethat our strategy of providing the “best-of-breed” services, powered by theWeb, will provide us with a competitive advantage in achieving growth and incapturing market share while reaching profitability objectives.

### Patents andProprietary Technology

In January 2006,we submitted a provisional patent filing that identifies four unique inventionswhich we believe will lead to the next generation of our Right Channeling technologies.We expect to submit our formal patent applications with respect to the fourinventions during the fourth quarter of fiscal 2007.

We also have alimited number of copyrights and have obtained licenses to create derivativeworks relative to copyrights owned by third parties. The ownership of suchderivative works vests in the licensor**,**however, wepossess the rights to use the derivative works. We claim trade name andtrademark protection for our proprietary names and marks, and are seekingformal registration of certain of our trademarks. We do not believe, however,that any particular patent or group of patents, copyrights, trademarks, ortrade names is of material importance to our financial condition or operatingresults.

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### Research andDevelopment

We compete in anindustry that is characterized by rapid technological change. As our clients’needs change and evolve, and as Internet and Web technologies proliferate, weexpect to incur additional expense in the development and improvement of our CustomerChoice Platform*SM*, customer contact solutions tools andofferings, and in the integration of our technology with third party platformsand software. To maintain our competitive edge in technology, we also intend toselectively utilize the research and development efforts of third-partytechnology providers and partners. During the fiscal years ended March 31,2006, 2005 and 2004, we incurred $164,915, $292,303 and $0, respectively, ofproduct development expense.

### Employees

We maintain astaff of trained personnel to provide support to our clients. We have atechnically-competent employee base, which we enjoy from being geographicallysituated close to major universities and/or junior colleges in each of ourcontact solution centers. We enhance employees’ proficiency through oursophisticated performance management system. Employees receive constructiveperformance feedback on a daily basis and are given access to training programsthat provide both job related training as well as technical certification andmanagerial training. We also maintain a highly-proficient performancemanagement team responsible for training and monitoring employees. Additionally,our software engineering and web development groups continue to be a majorfocus within the organization.

As of May 31,2006, we had approximately 1,840 total employees, of which approximately 1,603were full-time employees and approximately 237 were part-time employees. Competitionfor qualified personnel in our industry is intense. Our future success andgrowth will depend in large measure, upon our ability to attract and retainqualified management and technical personnel. There can be no assurance we willbe able to attract and maintain personnel necessary for the development andoperation of our business, or that we will be able to train our currentemployees on new developments in technology. If we fail to attract and retainkey management and technical personnel, our operations may be adverselyaffected. None of our US employees are represented by a labor organization withrespect to their employment. Our European employees are represented by a workscouncil in their respective locations as required by local law. We have neverhad a work stoppage, and we consider our employee relations to be satisfactory.

### ProprietaryMarks

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

## ***Item 1A.                  Risk Factors.***

*Thereare a number of factors that may affect our operating results, including therisks and uncertainties identified in the following paragraphs. If any of therisks we describe below occur, or if any unforeseen risk develops, ouroperating results may suffer, our financial condition may deteriorate, themarket price of our common stock may decline and investors could lose all orpart of their investment in us. In addition to other information set forth inthis Report, readers should review and carefully consider the followingfactors.*

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***We are experiencing revenue growth and our future operationswill require skilled management of growth******.***

Our current andfuture revenue growth must be considered in light of the risks, expenses,delays, problems and difficulties frequently encountered in the establishmentof a new business concept, the development and commercialization of productsbased on new technologies, and the competitive environment in which we operate.As our operations expand, our success will depend on our ability to managecontinued growth, including integration of our executive officers, directorsand consultants into an effective management and technical team; to formulatestrategic alliances, joint ventures, or other collaborative arrangements withthird parties; to commercialize and market our proposed products and services;and to monitor and manage these relationships on a long-term basis. If ourmanagement is unable to integrate these resources and manage growtheffectively, the quality of our products and services, our ability to retainkey personnel, and the results of our operations could be materially andadversely affected.

***Inflation and wage pressure have caused, and willlikely continue to cause, our labor costs to increase which can negativelyimpact our margins.***

* *Our operations were impactedduring fiscal 2006 by rising personnel costs. The increasing personnel costsrelate primarily to short supplies of qualified personnel in some of ourcustomer contact solutions centers. We have been able to pass on some, but notall, of the increased personnel costs to our clients. It is not possible topredict the future trend of supplies of qualified personnel at reasonablerates, or our ability to pass on future price increases to clients.

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

Our businessstrategy requires us to efficiently utilize personnel and physical facilitiesin an effort to increase our profitability. As we expand our operations, we maynot always be able to manage the level of personnel and facilities to reach ourdesired levels of utilization, which may affect our profitability. Also, if welose existing clients, we may have excess personnel and physical facilitiesthat would have an adverse effect on our business operations and ourprofitability.

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

Volatile economicconditions have adversely affected our operations and financial results. Incertain sectors serviced by us in recent years, economic slowdowns have causedus to lose some clients and also resulted in increased pricing pressures andlower call volumes from some existing clients. Slower economic conditions maylimit our ability to attract new clients or retain existing clients. The slowereconomy also resulted in excess capacity to service call volumes. A substantialpercentage of our expenses is attributable to labor costs associated withstaffing customer contact solutions centers, which we may not be able tosignificantly reduce on short notice in order to compensate for unexpectedshortfalls in call volumes. We cannot forecast future fluctuations in economicconditions, and our operations and financial results may be materially andadversely affected by economic volatility.

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

Thecustomer contact service industry is characterized by rapid technologicalchange, alterations in customer requirements and preferences, and the emergenceof new industry standards and practices. Our operating results and financialcondition will depend, in part, on our ability to develop solutions that keeppace with continuing changes in information technology, evolving industrystandards, and changing client requirements. There can be no assurance that wewill be successful in adequately addressing these developments on a timelybasis or that, if these developments are addressed, we will be successful inthe marketplace. In addition, products or technologies developed by otherscould render our services non-

 

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competitive orobsolete. Our failure to address these developments could have a materialnegative effect on our business and financial condition.

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

Our success willdepend, in large part, on our ability to attract, retain and train highlyqualified technical, managerial and marketing personnel with the expertiserequired to successfully conduct our operations. We have entered intoemployment agreements with certain of our key managerial personnel; however,those agreements are subject to termination under various circumstances and wehave not entered into employment agreements with any of our key technical****personnel other than our Chief Technology Officer. If we loseany key personnel or are unable to attract, retain, train or motivate qualifiedpersonnel, our business operations and financial condition may be materiallyand adversely affected.

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

Four clientsaccounted for approximately 63% of our revenues with 24%, 15%, 14% and 10% ofrevenues for fiscal 2006. A key client, who accounted for 28% of our revenuesin fiscal 2002, cancelled their contract with us early in fiscal 2003. The lossof this client had a significant negative impact on our revenue andprofitability in fiscal 2003 and for the first nine months of fiscal 2004,until we generated replacement business.

Many of ourclients can cancel their contracts on short notice. It can take a significantamount of time to develop and obtain new clients and retrain employees toreplace revenue from a lost client. Thus, the loss of any of our key clientscould have a significant effect on our revenues and profitability. In addition,our future revenue growth is dependent upon our ability to attract and retainnew clients and to generate additional business from existing clients.

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

We havehistorically experienced net losses in several quarters prior to our secondquarter in fiscal 2006. In the fiscal years ended March 31, 2006 and 2005,we had net losses of $(154,090) and $(1,836,160), respectively, and we had anaccumulated deficit of $(12,432,253) as of March 31, 2006. We may continueto incur net losses if we lose clients, are unable to attract and retain newclients or do not properly utilize our resources. We cannot ensure that we willbe able to achieve or maintain consistent profitable operations.

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

Our growth plansare dependent upon our ability to attract and retain new clients and togenerate additional business from existing clients. Our efforts to market andsell our services will be affected by fluctuations in technology and industrystandards, changes in customer requirements and preferences, and generaleconomic conditions, among other factors. Many of these factors are beyond ourcontrol. If we are incorrect in our assessment of the feasibility of our growthplans, if we are not effective in our efforts to market and sell our servicesor if circumstances change in a way that we did not foresee or anticipate, wemay not grow as planned or our growth strategy may have an adverse effect onbusiness operations and our profitability.

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

Individual client revenue transactions can constitute asubstantial percentage of our quarterly revenue, and some revenue transactionsmay generate a substantial portion of the operating profits for a quarter. Ourrevenues also are a function of the number of support requests we receive, andthe time we 

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spend on such requests. Thus, if we receive fewer supportrequests than anticipated or the time spent in resolving inquiries is greaterthan anticipated, our revenues may fluctuate. Further, delays in the receipt ofcustomer orders can cause significant fluctuation in revenues from quarter toquarter.

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

For the reasons identified above, we believe that period-to-periodcomparisons of our revenues and operating results may not be meaningful andshould not be considered an indication of future performance.

***We are subject to credit risks and may be unable to collectour accounts receivable balances.***

We provideunsecured credit terms to our clients. Based on credit evaluations and otherinformation gathered by our employees, we establish credit terms for eachclient; however, there can be no assurance that our future credit losses willbe consistent with our expectations. A significant change in the liquidity orfinancial condition of one or more key clients, or a larger number of smallerclients, or further deterioration in the economic environment, in general,could have an adverse impact on the collectability of our accounts receivableand our future operating results.

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

The market price of our common stock has historically been,and we expect it to continue to be, volatile. This price has ranged between$1.41 and $17.89 in the three year period ended May 31, 2006. The marketfor our common stock has, from time-to-time, experienced extreme price andvolume fluctuations, which have often appeared to be unrelated to our operatingperformance. Our stock price also has been affected by our own publicannouncements regarding such things as quarterly earnings, changes in clients,obtaining financing and corporate partnerships. Consequently, events bothwithin and beyond our control may cause shares of our common stock to losetheir value rapidly.

***We are susceptible tobusiness and political risks from international operations that could result inreduced revenues or earnings.***

We operate businesses or have contractual relationships inthe Netherlands, France, India, Sweden and Brazil and are looking to expand inother countries. Additionally, there is increasing demand for offshore customercare outsourcing capacity from North American companies. Expansion of ourexisting international operations and entry into additional countries willrequire management attention and financial resources. In addition, there arecertain risks inherent in conducting business internationally including:exposure to currency fluctuations, longer payment cycles, greater difficultiesin accounts receivable collection, difficulties in complying with a variety offoreign laws, unexpected changes in legal or regulatory requirements, difficultiesin staffing and managing foreign operations, political instability andpotentially adverse tax consequences. To the extent we do not manage ourinternational operations successfully, our business could be adversely affectedand our revenues and/or earnings could be reduced.

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

Our businessdepends in large part on the trend within the several industries we serve tooutsource certain services. We cannot provide any assurance that this trendwill continue or that, if the trend 

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continues, it willcontinue at the same rate of growth. The failure of this trend to continuecould have a material adverse effect on our business, financial condition, andresults of operations.

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

The market forcustomer contact services is highly fragmented and very competitive. In certainsegments of the market, however, the customer contact services industry hasbegun to experience a degree of consolidation, and the development of majorcustomer contact center companies has resulted in an additional level ofcompetition from service providers that have greater name recognition, largerinstalled customer bases, and significantly greater financial, technical, andmarketing resources than we have. Large established enterprise softwarecompanies may leverage their existing relationships and capabilities to offercustomer service applications. In other instances, many large companies providetheir own in-house customer care support and customer training. Also, a numberof existing companies have experienced rapid internal growth, and several ofthese companies have been active in acquiring smaller regional customer contactservices companies and are becoming major competitors with a measurable shareof this rapidly expanding market. If our competitors provide more efficient orless expensive services, we may lose market share and revenues.

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

Our businessdepends to a large extent on computers, telecommunications equipment andsoftware systems (both equipment and systems maintained by us and equipment andsystems maintained by third parties). A natural disaster, human error,equipment malfunction or inadequacy, or multiple other events could result in aprolonged interruption in our ability to provide support services to clients ortheir customers. The temporary or permanent loss of computer or telephoneequipment or software systems, through casualty, operating malfunctions orotherwise, could have a material adverse effect on our operations, property orfinancial condition, and business interruption insurance may not be adequate tocompensate for all losses that may be incurred.

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

We contract with athird-party software company to provide chat and email tools used with our CRMsoftware, reporting and management services. If this software company fails inits business efforts, we may lose our access to these software tools. Ourfailure to obtain adequate replacement software tools would cause us to experienceservice delays, interruptions or cancellations.

***Provisions of ourArticles of Incorporation, Bylaws and Shareholder Rights Plan could impair ordelay shareholders’ ability to replace or remove our management and coulddiscourage takeover transactions that shareholders might consider to be intheir best interests.***

Our Articles of Incorporation and Bylaws, the Utah RevisedBusiness Corporation Act, and the Utah Control Shares Acquisition Act eachcontain certain provisions that may have the effect of inhibiting anon-negotiated merger or other business combination. Our Articles ofIncorporation grant to our Board of Directors the authority, without furtheraction by our shareholders, to fix the rights and preferences of, and issueshares of preferred stock. Our recently adopted Bylaws provide advancenotice requirements that may limit the opportunity for our shareholders toadvance nominees for election to our Board of Directors or submit matters fromthe floor at the meetings of our shareholders. In addition, the Board hasadopted a Shareholder Rights Plan which imposes constraints on transactionswhich could result in a change of management control over Sento. These provisions may deterhostile takeovers or delay or prevent changes in control of Sento or changes inour management, including transactions in which shareholders might otherwisereceive a premium for their shares over the then-current market prices. Inaddition, these provisions may limit the ability of our shareholders to approvetransactions that they may deem to be in their best interest.

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

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

## ***Item 1B.                UnresolvedStaff Comments.***

Not applicable.

## ***Item 2.   Properties.***

Our principal executive offices are located in Salt LakeCity, Utah. This facility serves as our executive and administrative officesfor our senior management along with parts of our finance, sales, marketing anddevelopment groups. We conduct our core service offerings in customer contactsolution centers in Orem, Utah, Albuquerque, New Mexico, Raleigh, NorthCarolina, Evanston, Wyoming, Enschede, the Netherlands and Metz, France andhave engaged a third-party provider to deliver contract services from NewDelhi, India, Sweden and Brazil. During most of fiscal 2005, we also operated contactcenters in American Fork, Utah. In June 2005 we completed a consolidationof the customer contact solution centers located in Utah into one “super center”in Orem, Utah. As part of this consolidation, we relocated our executive andadministrative offices to Salt Lake City, Utah. We believe this consolidationimproved utilization of facilities and partially contributed to our improvedprofitability during fiscal 2006. We believe our current facilities areadequate to meet current requirements and immediate growth plans. All of ourfacilities are leased and, in the opinion of management, adequately covered byinsurance. The following table sets forth additional information concerning ourfacilities:
| **Location**            | ** ** | **General Usage**                                      | ** ** | **Approximate  Square Feet** | ** ** | **Monthly  Rent** | ** ** | **Lease  Expiration** |
|-------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|-----------------------|
| Salt Lake City, Utah    |       | Executive Offices                                           |       | 12,844                            |       | $16,857           | (1)(5)     | June 2011        |
|                    | ** ** | ** **                                                  | ** ** | ** **                        | ** ** | ** **        |       | ** **            |
| Orem, Utah              |       | Customer Contact Solutions Center                           |       | 45,780                            |       | $58,211           | (1)(6)     | December 2009    |
|                    | ** ** | ** **                                                  | ** ** | ** **                        | ** ** | ** **        | ** ** | ** **            |
| Orem, Utah              |       | Customer Contact Solutions Center                           |       | 6,424                             |       | $8,822            | (1)        | May 2007         |
|                    | ** ** | ** **                                                  | ** ** | ** **                        | ** ** | ** **        | ** ** | ** **            |
| Albuquerque, New Mexico |       | Customer Contact Solution Center                            |       | 45,162                            |       | $73,906           | (1)(2)     | December 2010    |
|                    | ** ** | ** **                                                  | ** ** | ** **                        | ** ** | ** **        | ** ** | ** **            |
| Raleigh, North Carolina |       | Customer Contact Solution Center                            |       | 30,973                            |       | $24,462           | (1)        | March 2013       |
|                    |       |                                                        |       |                              |       |              |       |                  |
| Evanston, Wyoming       |       | Customer Contact Solutions Center                           |       | 33,000                            |       | $8,325            | (1)        | June 2010        |
|                    |       |                                                        |       |                              |       |              |       |                  |
| Green River, Wyoming    |       | Currently Not in Use                                        |       | 8,500                             |       | $8,024            | (1)(3)     | July 2008        |
|                    |       |                                                        |       |                              |       |              |       |                  |
| Enschede, Netherlands   |       | European Headquarters and Customer Contact Solution  Center |       | 25,571                            |       | $33,239           | (1)(4)     | December 2010    |
|                    |       |                                                        |       |                              |       |              |       |                  |
| Metz, France            |       | Customer Contact Solutions Center                           |       | 7,240                             |       | $8,935            | (1)        | August  2006     |

 

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(1)                             Monthly rent includes realestate taxes, casualty insurance, facility and property maintenance costs,security services and utilities.

(2)                             The monthly lease amountincludes amortization of certain tenant improvements.

(3)                             The monthly lease amount doesnot include 5,500 square feet of this facility which we have subleased to anunrelated third party. The sublease agreement provides for payment to us ofrental income of $3,896 per month through July 2008.

(4)                             Monthly rent is based on27,699 Euros at an assumed exchange rate of $1.20 per Euro. We received apayment of 50,000 Euros as a credit towards these rental rates in March 2006.Our lease agreement provides for payment to us of an additional 25,000 Eurosrelated to this lease in the fourth quarter fiscal 2007. These paymentshave been recorded as a deferred lease incentive on our consolidated balancesheet, which will be amortized over the life of the lease as a reduction ofrent expense.

(5)                             Monthly rent does notinclude landlord funded leasehold improvements made to the facility during the fiscal2006 totaling $306,552. These leasehold improvements have been capitalized as afixed asset and are being amortized over the remaining term of the lease. Theseimprovements have also been recorded as a deferred lease incentive on ourconsolidated balance sheet, which will be amortized over the life of the leaseas a reduction of rent expense.

(6)                            Monthly rent excludes a$450,000 option forbearance payment which is due in the 60th month of the lease if we do not extend thelease term an additional five years.

The lease agreements for each of these locations haveoptions to renew for additional time periods at the conclusion of the currentlease period. In addition to the above space, we currently have options tolease additional space in our Salt Lake and Albuquerque facilities undersimilar terms and conditions of these current leases.

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

From time to time, we are involved in litigation, most ofwhich is incidental to our business. In our opinion, no litigation to which wecurrently are a party is likely to have a material adverse effect on ourresults of operations or financial condition.

## ***Item 4.   Submission of Matters to a Vote of SecurityHolders.***

We held anannual meeting of shareholders on February 16, 2006 at which ourshareholders considered and voted as follows:

1.               The shareholders consideredwhether to elect the following persons as directors, each to serve until thenext annual meeting of shareholders and until his respective successor shallhave been duly elected and qualified:

| Name of Nominee     | ** ** | **Votes For** | ** ** | **Votes Withheld/  Abstentions** | ** ** | **Broker   Non-Votes** | ** ** |
|-------------------------------|------------|--------------------|------------|---------------------------------------|------------|-----------------------------|------------|
| C. Lloyd  Mahaffey            |       | 3,236,860          |       | 168,907                               |       | -0-                         |       |
| Patrick F.  O’Neal       |       | 3,383,837          |       | 21,930                                |       | -0-                         |       |
| Kim A. Cooper                 |       | 3,250,584          |       | 155,183                               |       | -0-                         |       |
| Richard E. Dyer               |       | 3,394,087          |       | 11,680                                |       | -0-                         |       |
| Donald H.  Livingstone        |       | 3,393,087          |       | 12,680                                |       | -0-                         |       |
| Eric Olafson                  |       | 3,344,651          |       | 61,116                                |       | -0-                         |       |
| Phillip J.  Windley, PhD |       | 3,386,463          |       | 19,304                                |       | -0-                         |       |

 

The votetally was sufficient for election of the afore-mentioned directors.

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2.               The shareholders consideredwhether to appoint Ernst & Young, LLP as our independent publicaccountants and authorize our Board of Directors to fix their remuneration. Therewere 3,392,769 votes cast in favor, 3,315 votes cast against, 9,683 voteswithheld, and no broker non-votes, which vote tally was sufficient forapproval.

3.               The shareholders considereda proposal to approve an amendment to our 1999 Omnibus Stock IncentivePlan to increase the number of shares of common stock available for issuanceunder the plan from 1,025,000 to 1,525,000. There were 605,583 votes cast in favor, 531,139 votescast against, 5,689 votes withheld, and 2,263,356 broker non-votes, which vote tallywas sufficient for approval.

4.               The shareholders considereda proposal to approve an amendment to our Amended 1996 Employee StockPurchase Plan to increase the number of shares of common stock available forissuance under the plan from 175,000 to 250,000. There were 993,560 votes cast in favor, 138,751 votescast against, 10,100 votes withheld, and 2,263,356 broker non-votes, which votetally was sufficient for approval.

# **PART II**

## ***Item 5.   Market for Registrant’s Common Equity andRelated Stockholder Matters and Issuer Purchases of Equity Securities.***

Our common stock, par value $0.25, is quoted under thesymbol “SNTO” on the NASDAQ Capital Market maintained by the NationalAssociation of Securities Dealers (the “**NASD**”).The following table sets forth the range of high and low closing prices for ourcommon stock for the periods indicated, as reported by the NASD. The quotationsrepresent prices in the market between dealers in securities; they do notinclude retail markup, markdown or commissions, and do not necessarilyrepresent actual transactions.

 

| Quarter Ended      | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------|------------|----------|------------|---------|------------|
| March 31, 2006     | ** ** | $        | 10.02      |    | $          | 7.25 |   |
| December 31, 2005  | ** ** | $        | 8.00       |    | $          | 2.57 |   |
| September 30, 2005 |       | $        | 3.10       |    | $          | 2.32 |   |
| June 30, 2005      |       | $        | 3.49       |    | $          | 2.24 |   |
|                    |       |     |       |    |       |
| March 31, 2005     | ** ** | $        | 4.81       |    | $          | 3.18 |   |
| December 31, 2004  | ** ** | $        | 6.83       |    | $          | 4.35 |   |
| September 30, 2004 |       | $        | 8.70       |    | $          | 5.05 |   |
| June 30, 2004      |       | $        | 16.90      |    | $          | 6.75 |   |
|                    |       |     |       |    |       |
| 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 |   |

 

We did not pay or declare dividends on our common stockduring the fiscal years ended March 31, 2006, 2005 or 2004. We currentlyanticipate that we will retain all available funds to finance our future growthand business expansion. We do not presently intend to pay cash dividends in theforeseeable future.

As of May 31, 2006, we had 3,953,036 shares of commonstock outstanding, held by 83 shareholders of record and 2,167 additionalgroups holding shares for the benefit of other shareholders.

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### ** **

### **Description of Capital Stock**

**General**

This section describes the general terms and provisions ofthe shares of our common stock and preferred stock. This summary is notcomplete, and is qualified in its entirety by reference to our Amended andRestated Articles of Incorporation (the “Articles”) which are identified as anexhibit to this Report and our Bylaws. You should read our Articles, as well asour Bylaws, for additional information regarding our capital stock.

**Common Stock**

Our Articles authorize the issuance of 50,000,000 shares ofcommon stock. As of May 31, 2006, there were 3,953,036 shares of ourcommon stock issued and outstanding, held by 83 shareholders of record and2,167 additional groups holding shares for the benefit of other shareholders. Exceptas otherwise required by law, each share of our common stock entitles theholder to one vote on each matter which shareholders may vote on at allmeetings of our shareholders. Holders of our common stock are not entitled tocumulative voting in the election of directors. Holders of our common stock donot have preemptive, subscription or conversion rights, and there are noredemption or sinking fund provisions applicable thereto. Shares of commonstock are entitled to share equally and ratably in dividends paid from thefunds legally available for the payment thereof, when, as and if declared byour Board of Directors. The declaration of dividends, however, is subject tothe discretion of our Board of Directors. Holders of our common stock are alsoentitled to share ratably in any of our assets available for distribution toholders of our common stock after payment of liabilities upon liquidation ordissolution of Sento, whether voluntary or involuntary. All the outstandingshares of our common stock are fully paid and non-assessable.

We have no present intention of paying any cash dividendson our common stock and plan to retain any earnings to finance the developmentand expansion of our operations. The payment of cash dividends also may berestricted by a number of other factors, including our future earnings, capitalrequirements and financial condition, covenants with lenders, lessors or otherparties, as well as restrictions on the payment of dividends imposed under Utahlaw.

**Preferred Stock**

As of May 31, 2006, our authorized preferred stock was5,000,000 shares, of which none were issued and outstanding.

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

·                  the distinctive designationof 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 theshares of the series, the dates on which dividends are payable, anyrestriction, limitation or condition upon the payment of dividends, whetherdividends will be cumulative and the dates from and after which dividends shallaccumulate;

·                  the prices at which, and theterms and conditions on which, the shares of the series may be redeemed, ifsuch shares are redeemable;

·                  the terms and conditions ofa sinking or purchase fund for the purchase or redemption of shares of theseries, if such a fund is provided;

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·                  any preferential amountpayable upon shares of the series in the event of the liquidation, dissolutionor winding up of, or upon the distribution of any of our assets; and

·                  the prices or rates ofconversion or exchange at which, and the terms and conditions on which, theshares of such series may be converted or exchanged into other securities, ifsuch shares are convertible or exchangeable.

On May 28, 2005, in accordance withour Articles and the laws of the State of Utah, our Board of Directorsauthorized an amendment to our Articles designating rights, privileges, andpreferences for a Series A Preferred Stock (the “Series A PreferredStock”) consisting of 200,000 shares, no par value (the **“Designation”**)with powers, preferences, rights, qualifications, limitations, and restrictionsincluding: (i) in the event of any voluntary or involuntary liquidation(whether complete or partial), dissolution, or winding up of the Company, theholders of the Series “A” Preferred Stock shall be entitled to be paid outof the assets of the Company available for distribution to its shareholders,whether from capital, surplus, or earnings, an amount in cash equal to allunpaid dividends, whether or not previously declared, accrued thereon to thedate of final distribution subject to the priority distribution requiredrespecting any issued and outstanding shares of any series of preferred stockauthorized prior to the date of the Designation plus an amount per share equalto 100 times the aggregate amount to be distributed per share to the holders ofshares of our common stock; (ii) the right to vote with the common stockas a single class (but not separately, except to the extent required by Utahlaw) with each holder entitled to 100 votes per share on all matters submittedto a vote of the shareholders of the Company; (iii) the right to dividendsin preference to the holders of our common stock; and (iv) no right of theCompany to redeem shares of Series A Preferred Stock.

**Rights Agreement**

Effective June 3,2005, our Board of Directors approved a Rights Agreement with our stocktransfer agent, pursuant to which our Board of Directors declared a dividend ofone right (a **“Right”**) to purchase oneone-hundredth (1/100) share of our Series A Preferred Stock for eachoutstanding share of our common stock (par value $0.25 per share) (the **“Rights Agreement”**). Each Right, when exercisable, willentitle the holder to purchase from us one one-hundredth (1/100) share of our Series APreferred Stock at an exercise price of $100 (the **“ExercisePrice”**) subject to adjustment. The Rights will expire upon theearliest of the redemption or exchange of the Rights or June 3, 2008 (the **“Expiration Date”**).

The Rights willseparate from the shares of our common stock. Certificates for Rights will beissued and the Rights will become exercisable upon the earlier of (i) thetenth day after the first public announcement or filing indicating that anyperson or group of affiliated or associated persons (the **“AcquiringPerson”**) has become the beneficial owner of twenty percent (20%) ormore of our common stock or (ii) the tenth day after the date of thecommencement of, or first public announcement of, the intent of any person tocommence a tender or exchange offer or take-over bid to acquire beneficialownership of twenty percent (20%) or more of our common stock.

Unless the Rightsare redeemed earlier, in the event that an Acquiring Person obtains 20% or moreof our then-outstanding common stock, then each holder of a Right that has notpreviously been exercised (other than the Rights beneficially owned by theAcquiring Person, which will thereafter be void) will thereafter have the rightto receive, on exercise, shares of our common stock having a value equal to twotimes the Exercise Price.

At any time priorto or within ten days after an Acquiring Person acquires 20% or more of ourcommon stock, the Rights may be redeemed for $0.001 each at the option of ourBoard of Directors, which would automatically terminate the right to exercisethe Rights.

The ExercisePrice, the number of Rights, and the number of shares of Series APreferred Stock or common stock or other securities or property issuableupon the exercise of the Rights are subject to 

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adjustment fromtime to time in connection with certain dilutive issuances of our capital stockas set forth in the Rights Agreement.

Our Board ofDirectors adopted the Rights Agreement to ensure, to the extent possible, thatall our shareholders are treated fairly in connection with any takeover bid andto provide sufficient time for our shareholders to consider any suchtransaction. The Rights may have the effect of discouraging an acquisition of Sentodeemed undesirable by the Board of Directors or rendering an acquisition moredifficult. The Rights may cause substantial dilution to a person or group thatattempts to acquire Sento on terms or in a manner not approved by our Board ofDirectors, except an offer conditioned on the negation, purchase or redemptionof the Rights. We may redeem the Rights at $0.001 per Right at any time priorto the acquisition of 20% or more of our then outstanding common stock by anAcquiring Person. Accordingly, we do not anticipate that the Rights willinterfere with any merger or business combination approved by our Board ofDirectors.

**Registration Rights**

We have granted registration rights to the holdersof shares of common stock we sold in private offering transactionscompleted during 2003 and 2004. We have also agreed to register shares ofcommon stock issuable upon the exercise of warrants sold in such privateoffering transactions or issued to consultants in exchange for consultingand shareholder relations services performed for Sento. The total number ofshares of common stock which we are obligated to register under the SecuritiesAct is approximately 1,022,343, subject to adjustment for stocksplits, stock dividends recapitalizations or similar transactions. Of the totalnumber of shares of common stock subject to such registration rights, 634,962shares, together with warrants to purchase 126,992 shares, were issued ina private offering transaction completed on March 30, 2004 (the **“2004 Private Placement”**). Pursuant to the registrationrights agreement executed in connection with the 2004 Private Placement, wewere obligated to file, and did file, a registration statement covering suchshares (including the shares issuable upon conversion of the associated warrants)on or before August 10, 2004 and such was timely 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 Acquisition Act (the **“Control Shares Act”**) provides that any person or entitythat acquires “control shares” of a publicly-held Utah corporation in a “controlshare acquisition” is denied voting rights with respect to the acquired shares,unless a majority of the disinterested shareholders 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 of 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 definedas the direct or indirect acquisition of either ownership or voting powerassociated with issued and outstanding control shares. The directors orshareholders of a corporation may elect to exempt the stock of the corporationfrom the provisions of the Control Shares Act through adoption of a provisionto that effect 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 shareholders of a corporation must consider the statusof the voting rights of control shares of the corporation acquired in a controlshare acquisition at the next annual or special meeting of shareholders heldfollowing such acquisition. The acquiror may accelerate the decision andrequire the corporation to hold a special meeting of shareholders for thepurpose of considering the status of those rights if the acquiror (i) filesan “acquiring person statement” with the corporation, and (ii) agrees topay all expenses of the meeting. If the shareholders do not vote to restorevoting rights to the control shares, the corporation may, if its articles of incorporationor bylaws so provide, redeem the control shares from the acquiror at fair 

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market value. If the acquiror fails to file an acquiringperson statement, the corporation may, if its articles of incorporation orbylaws so provide, redeem the control shares at any time within 60 days of theacquiror’s last acquisition of control shares, regardless of the decision ofthe shareholders to restore voting rights. Our Articles and Bylaws do notprovide for such redemption. Unless otherwise provided in the articles ofincorporation or bylaws of a corporation, shareholders are entitled todissenters’ 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 shareholders. The provisionsof the Control Shares Act may discourage companies interested in acquiring asignificant interest in or control of Sento.

**CertainIndemnification and Limited Liability Provisions**

Our Articles provide that we shall indemnify any person whois or was a director, officer, employee or agent of our company, or who wasserving at our request as a director, officer, employee or agent of anotherentity, trust or plan to the fullest extent permitted by the Utah RevisedBusiness Corporation Act. Our Bylaws also include discretionary indemnificationprovisions with respect to officers, employees and agents, each subject tolimitations generally reflecting the limitations on indemnification set forthin the Utah Revised Business Corporation Act.

The Utah Revised Business Corporation Act provides that wemay purchase and maintain insurance on behalf of any person who is or was oneof our directors, officers, employees or agents, or is or was serving at ourrequest as a director, officer, employee or agent of another corporation,partnership, joint venture, trust or other enterprise against any liabilityasserted against him or her or incurred by him or her in such capacity orarising out of his or her status in such capacity, whether or not we would havethe power to indemnify him or her against such liability under theindemnification provisions of our bylaws or the laws of the State of Utah, asthe same are amended or modified. We maintain insurance from commercialcarriers against certain liabilities that may be incurred by our directors andofficers. As a result of the indemnification provisions described above andcontained in the Utah Revised Business Corporations Act, subject to certainlimitations in the Utah Revised Business Corporation Act, we may be permittedor compelled to provide indemnification and advancement of expenses to ourdirectors, officers, agents, and employees when they are made parties to aninvestigation or legal action in connection with services performed at ourrequest, including when such persons are alleged to have violated theSecurities Act. Insurance purchased with respect to such persons may also coverexpenses or other liabilities associated with an allegation of violations of theSecurities Act.

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

 **Change in ControlArrangements**

See the description above under the heading, “RightsAgreement.”

During the 2002 fiscal year, our Board of Directorsreviewed the time and insight provided by our directors, as well as our limitedability to provide additional cash payments to our directors as compensationfor their services to Sento. Based upon this review, as well as an assessmentthat the directors would likely be required to devote increased time andattention during the 2002 fiscal year several strategic initiatives, includingreview and negotiation of prospective transactions intended to promote shareholdervalue and liquidity, our Board of Directors adopted resolutions intended tocompensate our directors if Sento completes such a transaction. Pursuant toresolutions adopted in April 2001 and March 2002, our Board approveda contingent issuance of shares of common stock to each of our directors(18,750 shares to Gary Filler, then Chairman of the Board, and 12,500 shares toeach other director then serving). The shares of common stock are issuable onlyupon the completion of certain

 

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merger, consolidation, acquisition, sale and liquidationtransactions constituting a “change of control” under our 1999 Omnibus StockIncentive Plan. Because none of the conditions has been satisfied as ofthe date of this Report, there have been no shares or other rights issuedor granted to the directors as of this date. The resolutions remain effectiveand could result in future issuances of shares of common stock if theresolutions are not rescinded and one or more of the stated conditions occurs.

Our recently adopted Bylaws provide advance noticerequirements for proposed shareholder nominations for election to the Board ofDirectors and for business proposed by shareholders from the floor at ourannual meeting of shareholders.

**Transfer Agent andRegistrar**

The transfer agent andregistrar for our common stock is American Stock Transfer & TrustCompany.

**Company Purchasesof Equity Securities**

During the fourth quarter offiscal 2005 and first quarter of fiscal 2006, we purchased and retired thefollowing shares of our common stock under a board approved purchase plan:

 

| Period              | ** ** | **Total number  of shares  purchased** | ** ** | **Average  price paid  per share** | ** ** |
|---------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|
| Month ended 3/31/05 |       | 59,799                                           |       | $                                            | 3.41       |   |
| Month ended 4/30/05 |       | 16,938                                           |       | $                                            | 3.30       |   |
| Total               |       | 76,737                                           |       | $                                            | 3.38       |   |

 

The total maximum number of shares available for purchaseunder the plan was 385,862. The stock purchase plan expired on February 28, 2006.

***Item 6.   SelectedFinancial Data.***
| ** **                                           | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**   | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|------------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|-----------|------------|-----------|------------|
| **Statements of Operations:**                        |       |      |       |      |       |       |       |      |       |      |       |
| Net Sales                                            |       | $         | 51,129,319 |      | $          | 31,785,561 |       | $         | 21,396,118 |      | $          | 17,495,882 |   | $ | 23,047,337 |   |
| Gross profit                                         |       | $         | 9,129,331  |      | $          | 4,533,182  |       | $         | 3,324,331  |      | $          | 796,647 |   | $ | 2,717,776 |   |
| Percentage of net sales                              |       | 17.86     | %          | 14.26     | %          | 15.54      | %          | 4.55      | %          | 11.79     | %          |
| Operating expenses                                   |       | $         | 9,226,321  |      | $          | 6,108,094  |       | $         | 4,227,831  |      | $          | 2,430,973 |   | $ | 1,938,999 |   |
| Percentage of net sales                              |       | 18.05     | %          | 19.22     | %          | 19.76      | %          | 13.89     | %          | 8.41      | %          |
| Operating profit (loss)                              |       | $         | (96,990    | )         | $          | (1,574,912 | )          | $         | (903,500   | )         | $          | (1,634,326 | ) | $ | 778,777 |   |
| Net Income (loss)                                    |       | $         | (154,090   | )         | $          | (1,836,160 | )          | $         | (1,465,230 | )         | $          | (2,111,348 | ) | $ | 560,756 |   |
| Earnings (loss) per common share - basic             |       | $         | (0.04      | )         | $          | (0.49      | )          | $         | (0.63      | )         | $          | (1.01 | ) | $ | 0.27 |   |
| Earnings (loss) per common share - diluted           |       | $         | (0.04      | )         | $          | (0.49      | )          | $         | (0.63      | )         | $          | (1.01 | ) | $ | 0.27 |   |
| Weighted average common shares outstanding - basic   |       | 3,819,143 |       | 3,754,627 |       | 2,317,516  |       | 2,099,397 |       | 2,098,505 |       |
| Weighted average common shares outstanding - diluted |       | 3,819,143 |       | 3,754,627 |       | 2,317,516  |       | 2,099,397 |       | 2,109,268 |       |
|                                                 |       |      |       |      |       |       |       |      |       |      |       |
| **Balance Sheets:**                                  |       |      |       |      |       |       |       |      |       |      |       |
| Cash and marketable securities - unrestricted        |       | $         | 4,498,707  |      | $          | 5,698,195  |       | $         | 6,567,811  |      | $          | 2,583,337 |   | $ | 1,047,731 |   |
| Total assets                                         |       | $         | 23,314,914 |      | $          | 16,225,583 |       | $         | 16,009,560 |      | $          | 10,104,733 |   | $ | 11,632,042 |   |
| Long-term obligations                                |       | $         | 3,814,393  |      | $          | 1,867,157  |       | $         | 656,324    |      | $          | 2,091,646 |   | $ | 1,504,839 |   |
| Total liabilities                                    |       | $         | 14,267,984 |      | $          | 7,037,172  |       | $         | 5,113,294  |      | $          | 6,674,775 |   | $ | 6,148,187 |   |
| Shareholders' equity                                 |       | $         | 9,046,930  |      | $          | 9,188,411  |       | $         | 10,896,266 |      | $          | 3,429,958 |   | $ | 5,483,855 |   |

 

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| **Unaudited Quarterly Results of Operations** | ** ** | **First**  | ** ** | **Second** | ** ** | **Third**  | ** ** | **Fourth** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **2006**                                                          |       |       |       |       |       |       |       |       |       |
| Net sales                                                         |       | $          | 8,760,585  |       | $          | 9,862,546  |       | $          | 15,154,851 |   | $ | 17,351,337 |   |
| Cost of sales                                                     |       | 7,997,053  |       | 7,901,150  |       | 12,089,385 |       | 14,012,400 |       |
|                                                              |       |       |       |       |       |       |       |       |       |
| Gross profit                                                      |       | 763,532    |       | 1,961,396  |       | 3,065,466  |       | 3,338,937  |       |
| Operating expenses                                                |       | 2,377,821  |       | 1,628,950  |       | 2,368,183  |       | 2,851,367  |       |
|                                                              |       |       |       |       |       |       |       |       |       |
| Operating loss                                                    |       | (1,614,289 | )          | 332,446    |       | 697,283    |       | 487,570    |       |
| Other income (expense), net                                       |       | (39,546    | )          | (15,954    | )          | 8,843      |       | (45,602    | )          |
|                                                              |       |       |       |       |       |       |       |       |       |
| Income (loss) before income taxes                                 |       | (1,653,835 | )          | 316,492    |       | 706,126    |       | 441,968    |       |
| Income tax (provision) benefit                                    |       | (11,230    | )          | (6,431     | )          | 2,455      |       | 50,365     |       |
|                                                              |       |       |       |       |       |       |       |       |       |
| Net income (loss)                                                 |       | $          | (1,665,065 | )          | $          | 310,061    |       | $          | 708,581    |   | $ | 492,333 |   |
|                                                              |       |       |       |       |       |       |       |       |       |
| Earnings (loss) per common share-basic                            |       | $          | (0.44      | )          | $          | 0.08       |       | $          | 0.19       |   | $ | 0.13 |   |
| Earnings (loss) per common share-diluted                          |       | $          | (0.44      | )          | $          | 0.08       |       | $          | 0.17       |   | $ | 0.12 |   |
| Weighted average common shares outstanding-basic                  |       | 3,785,264  |       | 3,800,343  |       | 3,827,068  |       | 3,858,704  |       |
| Weighted average common shares outstanding-diluted                |       | 3,785,264  |       | 3,870,079  |       | 4,117,669  |       | 4,148,802  |       |
|                                                              |       |       |       |       |       |       |       |       |       |
| **2005**                                                          |       |       |       |       |       |       |       |       |       |
| Net sales                                                         |       | $          | 6,566,748  |       | $          | 6,168,960  |       | $          | 10,047,153 |   | $ | 9,007,895 |   |
| Cost of sales                                                     |       | 5,775,952  |       | 5,639,975  |       | 8,025,613  |       | 7,809,756  |       |
|                                                              |       |       |       |       |       |       |       |       |       |
| Gross profit                                                      |       | 790,796    |       | 528,985    |       | 2,021,540  |       | 1,198,139  |       |
| Operating expenses                                                |       | 906,337    |       | 1,085,836  |       | 2,204,514  |       | 1,915,931  |       |
|                                                              |       |       |       |       |       |       |       |       |       |
| Operating income (loss)                                           |       | (115,541   | )          | (556,851   | )          | (182,974   | )          | (717,792   | )          |
| Other income (expense), net                                       |       | (39,129    | )          | 1,962      |       | (36,719    | )          | (11,405    | )          |
|                                                              |       |       |       |       |       |       |       |       |       |
| Income (loss) before income taxes                                 |       | (154,670   | )          | (554,889   | )          | (219,693   | )          | (729,197   | )          |
| Income tax (provision) benefit                                    |       | —     |       | —     |       | (78,707    | )          | (61,130    | )          |
|                                                              |       |       |       |       |       |       |       |       |       |
| Net income (loss)                                                 |       | (154,670   | )          | (554,889   | )          | (298,400   | )          | (790,327   | )          |
|                                                              |       |       |       |       |       |       |       |       |       |
| Deemed Dividend                                                   |       | (37,875    | )          | —     |       | —     |       | —     |       |
|                                                              |       |       |       |       |       |       |       |       |       |
| Net loss attributable to common stockholders                      |       | $          | (192,545   | )          | $          | (554,889   | )          | $          | (298,400   | ) | $ | (790,327 | ) |
|                                                              |       |       |       |       |       |       |       |       |       |
| Earnings (loss) per common share-basic                            |       | $          | (0.05      | )          | $          | (0.15      | )          | $          | (0.08      | ) | $ | (0.21 | ) |
| Earnings (loss) per common share-diluted                          |       | $          | (0.05      | )          | $          | (0.15      | )          | $          | (0.08      | ) | $ | (0.21 | ) |
| Weighted average common  shares outstanding-basic and diluted     |       | 3,627,686  |       | 3,732,326  |       | 3,807,873  |       | 3,850,624  |       |

 

## ***Item 7.   Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.***

*Youshould read the following discussion and analysis in conjunction with our consolidatedfinancial statements and related notes included elsewhere in this report.Except for historical information, the following discussion containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Inaccurate assumptions and known and unknownrisks and uncertainties can affect the accuracy of forward-looking statements,and our actual results could differ materially from results that may beanticipated by such forward-looking statements. The principal factors thatcould cause or contribute to such differences include, but are not limited to,those discussed in the item 1A, “Risk Factors” and those discussed elsewhere inthis report. We do not intend to revise any forward-looking statements in orderto reflect events or circumstances that may subsequently arise.*

The followingdiscussion provides information and analysis of our results of operations fromfiscal years 2004 through fiscal 2006, and our liquidity and capital resources.

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### Overview

The followingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations (“**MD&A**”) is intended to help thereader understand our operations and business environment. It should be read inconjunction with the information set forth under the caption entitled “Item 6.Selected Financial Data” and our consolidated financial statements and notesthereto included elsewhere herein.  MD&A is provided as a supplement to (andshould be read in conjunction with) our financial statements and accompanyingnotes. Our fiscal year ends on March 31 and, unless otherwise noted,future references to years refer to our fiscal year rather than a calendaryear. Our MD&A includes the following sections:

Our Business — a generaldescription of our business and the industry in which we operate.

Significant Events — adiscussion of events that have had a significant impact on our accompanyingconsolidated financial statements.

Application of CriticalAccounting Policies — a discussion of accounting policies that require criticaljudgments and estimates.

Operations Review — ananalysis of our consolidated results of operations.

Impact of Inflation and RelatedMatters — a discussion on how inflation affects our business.

Liquidity and CapitalResources — an analysis of our cash flows, sources and uses of cash.

Seasonality — adiscussion on how seasonality affects our business.

**Our Business**

We are a globalprovider of custom solutions that leverage “Right ChannelingSM,” a methodology for ensuringthat companies make informed choices for multi-channel communication thatsupport their business goals and customer expectations. We offer call andcontact center solutions for customer acquisition, customer service, serviceintervention and technical support. We use modern customer contact solutioncenters, coupled with our state-of-the-art proprietary software systems andother non-proprietary technology, to provide domestic and international supportservices and technology solutions to our primary target markets consisting of: (1) smallto mid-sized companies or divisions of large companies that outsource customerand technical support; and/or (2) companies which may or may not outsourcebut are interested in deploying our Right Channeling and other unique offerings.We conduct ourprincipal business operations through our wholly-owned subsidiaries, SentoTechnical Services Corporation and Xtrasource Acquisition, Inc.

**Significant Events**

***Xtrasource Acquisition***

Effective October 1,2004, through our wholly owned subsidiary Xtrasource Acquisition, Inc., weacquired substantially all of the assets of Xtrasource, a non-affiliated,privately-held Delaware corporation with approximately $10 million in annualsales. We have agreed to pay the owners of Xtrasource a quarterly contingentearnout of 30% of earnings before interest, taxes, depreciation andamortization from the acquired Xtrasource operations (the “**Earnout**”)for the quarterly periods between the closing and September 30, 2009 (witha maximum cap of $6.5 million). Earnout payments are subject to various reductionsand offset rights including reductions for debt payments (to secured andunsecured creditors) and net working capital adjustment. We granted the ownersof Xtrasource a line of credit of no more than $200,000 to enable Xtrasource topay costs and expenses associated with closing its Brazilian subsidiary, whichwe did not acquire (and for which we did not assume its liabilities), and forordinary expenses 

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related to the transaction. Amounts drawn on the line of credit will be deducted from Earnout payments. Our consolidated operating results contain the operating results of the acquired business for the periods beginning on or after October 1, 2004.

Because of betterthan expected performance of the acquired Xtrasource operations during thefirst year since the acquisition, we increased our estimate of the Earnout inthe quarter ended December 31, 2005 by $722,000 and recorded thisadjustment as a true-up of the purchase price as permitted under generallyaccepted accounting principles in the United States (“GAAP”). This adjustmentbrings the total accrued contingent consideration for the purchase to$1,715,000. In conjunction with this true-up we also recognized a deferredforeign tax liability of $317,000 related to non-deductible amortization in ourEuropean tax jurisdictions. This deferred consideration true-up and relateddeferred foreign tax liability resulted in a corresponding increase in ourintangible assets, which resulted in increased amortization expense beginningduring our quarter ended December 31, 2005. Going forward, all true-ups tothe Earnout liability will be recognized in our operating results.

***Facilities Consolidation***

On January 27,2005, we announced our intention to consolidate our Utah call center operationsinto a single combined center. We completed this move during June 2005. Webelieve this consolidation enabled us to increase our efficiencies and reducethe cost of providing our services over the long-term. During the quarter endedJune 30, 2005, we incurred moving costs of approximately $25,000 and awrite-down of related leasehold improvements of $123,000. In addition, weaccrued rent expense for the remaining lease term on the vacated Utah centers(approximately $62,000) during the three months ended June 30, 2005. Theabove costs are identified as restructuring charges in our statement ofoperations for fiscal 2006. In addition, we reviewed the viability of thefuture utilization of our Green River, Wyoming facility that is currently notin use. Based on our review, we determined that it would not be economicallyfeasible to reopen this facility in the future and therefore have included thefuture costs associated with this facility ($268,000) in our restructuringaccrual during fiscal 2006. The restructuring charges discussed above had anegative impact on our operating results during the first quarter of fiscal2006.

***Job Training IncentiveReimbursement***

In October 2005,we applied for and were awarded job training reimbursements from the State ofNew Mexico’s Job Training Incentive Program (JTIP) of up to $1.1 million fortraining wages to be incurred for 314 positions in our Albuquerque contactsolution center. Based on our significant growth in the quarter, we amendedthat original request in December and were awarded up to an additional$431,000 of JTIP funding for another 131 positions. We also applied for andwere awarded up to $862,000 of JTIP funding for an additional 243 positionsanticipated to be hired between January and April 2006 as the ramp upof our Albuquerque operations continues. All of these awards are based on areimbursement of between 50% and 55% of the employees’ training wages. Themajority of the employees are contact and technical support agents who, among otherrequirements, must each complete 640 training hours before we can submit forreimbursement of their wages. We received our first cash payment in April 2006.We anticipate that these cash payments will continue during fiscal 2007.

Under GAAP, we accrued$752,552 of JTIP funds during fiscal 2006. The accrual is recognized as anoffset to cost of sales in our condensed consolidated statements of operationsfor the year ended March 31, 2006. The JTIP funds have already beenappropriated and reserved by the State of New Mexico for us. If our employeescomplete the required training hours, we can file the appropriate statutoryclaims requests to obtain the funds. These awards are one-time events that willbe recognized over the periods that we incur the related training costs. Weexpect that most of the remaining costs will be incurred during fiscal 2007. TheJTIP funds, if received, will help reduce actual training costs as well aspartially offset the impact of lower margin training revenue as we continue toramp-up our Albuquerque site.

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### **Application of CriticalAccounting Policies**

Management discussed with our AuditCommittee the development, selection and disclosure of our critical accountingpolicies and estimates and the application of these policies and estimates.

***Basis of Presentation and Consolidation***

Our consolidated financial statements are prepared in accordance with GAAP.Our significant accounting policies are described in Note 2 to our consolidatedfinancial statements. Included within these policies are our “criticalaccounting 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 accountingpolicies relate to revenue recognition, credit risk and stock-basedcompensation. The application of these accounting policies involves the exerciseof judgment and the use of assumptions as to future uncertainties, and as aresult, actual results will differ, and may differ materially, from theseestimates. The development and selection of these critical accounting policieshave been discussed, and are reviewed each year, with the Audit Committee ofour Board of Directors. The following is a discussion of our criticalaccounting policies and estimates.

***Revenue Recognition***

Revenue is recognized when persuasive evidence of anarrangement exists, delivery of services has occurred, the fee is fixed or determinable, and collection of theresulting receivable is reasonably assured. We generate revenue by deliveringcustomer support and/or technical assistance to users of our clients’ productsand/or services by providing communications utilizing live chat, Webcollaboration, email and telephone interactions. We recognize revenues asservices are provided, according to the terms of the underlying agreement withour clients which specify how the client will be charged, generally based on amonthly, hourly, per minute or per-contact rate. We also provide licenses to alimited number of our clients for the use of our customer contact softwaretools that we host. In these arrangements, we charge our client a monthly feebased on the number of the users. Revenue under these arrangements isrecognized as the service is provided.

Revenues generated from professional and consultingservices are recognized as the service is provided, based on time and materials incurred at contractuallyagreed upon rates.

***Credit Risk***

We have established an allowance for doubtful accounts toreserve for uncollectible 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, we have experienced exceptions from time to time. During fiscal 2005,we established a specific reserve of $475,000 for a financially distressedclient. During the three months ended September 30, 2005, thiscustomer was able to acquire additional funding and paid us $181,593 againsttheir receivable and gave us a note for $400,000 that matures in fiscal 2007for the remaining balance. We have fully reserved the note and will recognizethe repayment upon payment from the customer. There can be no assurance that our future credit losses willbe within our expectations. Additionally, our revenues and accounts receivableare concentrated in relatively few customers. A significant change in theliquidity or financial position of any one of these customers or a furtherdeterioration in the economic environment, in general, could have an adverseimpact on the collectibility of our accounts receivable and our future operatingresults.

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***Stock-Based Compensation***

In December 2004,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 123R, Share*-Based Payment*(SFAS 123R), which requires the measurement of all share-based payments to employees,including grants of employee stock options, using a fair-value-based method andthe recording of such expense in our consolidated statements of operations. Proforma disclosures currently permitted under Statement of FinancialAccounting Standards No. 123, *Accountingfor Stock Based Compensation* (SFAS 123) are no longer analternative to financial statement recognition under SFAS 123R.

Under theprovisions of SFAS 123R, the variable accounting treatment of our options thatwere repriced in April 2003 is no longer required. Since the repricing andthrough September 2005, we were required to record an expense or benefitfrom “marking-to-market” exercisable and outstanding repriced options. We haverecorded a cumulative net expense of $1,147,000 from April 2003 through September 2005from marking these options to market. This cumulative charge is mainly due tonet increases in the price of our common stock from the $1.60 market value pershare on the date of the re-pricing. We believe the elimination of the variableaccounting treatment of these options under the provisions of SFAS 123R willbenefit us in future periods due to the expected continuation of pricevolatility of our common stock. Therefore, we elected to adopt the provisionsof SFAS 123R for the reporting period beginning October 1, 2005.

We took steps in September 2005to reduce the cost exposure of implementing SFAS 123R, including acceleratingthe vesting of all outstanding stock options with exercise prices above thefair market value as of September 30, 2005 (“under-water” options). Weused the modified prospective method of adopting the provisions of SFAS 123R. Underthis method, the unamortized value of non-vested awards granted prior to theadoption of SFAS 123R is required to be expensed in our consolidated statementof operations over the remaining vesting period. By accelerating the vesting ofour outstanding underwater options prior to the adoption of SFAS 123R, we wereable to reduce the amount of future expense that otherwise would have beenrequired to recognize on these options after adopting SFAS 123R. Optionsgranted after the adoption of SFAS 123R are expensed over their vesting period.

For the periodsprior to October 1, 2005, we applied the provisions of SFAS 123. SFAS 123 encouragesentities to adopt a fair-value-based method of accounting for stock options orsimilar equity instruments. However, it also allows an entity to continue measuring compensation costfor stock based compensation using the intrinsic-value method of accountingprescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(APB 25). We elected to continue to apply the provisions of APB 25 and providepro forma disclosures required by SFAS 123 in the footnotes to the consolidatedfinancial statements. We use the Black Scholes option-pricing model todetermine the amount of additional pro forma expense related to these optionsas presented in our disclosures. Under GAAP, had we adopted a fair-value-basedmethod of accounting for stock options, the pro forma expense for these optionswould have been recorded as expense in our statements of operations and couldhave materially affected our operating results.

### **Operations Review**

***Fiscal 2006 Compared to Fiscal 2005***

*Revenues.*Our revenues increased 61%or $19,344,000, from $31,786,000 for the 2005 fiscal year to $51,129,000 forthe 2006 fiscal year.The primary reason for the increase was $14,875,000 of additional net revenuegenerated from our existing client base. The additional net revenue fromexisting clients in the 2006 fiscal year includes a full 12 months of revenuefrom the clients of the previously mentioned acquired entity whereas the 2005fiscal year included only six months of revenue from clients of the acquiredentity. We were also able to generate $4,469,000 in revenue from new clients.

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*Cost of sales.*Our cost of sales increased$14,748,000, or 54% from $27,252,000 for the 2005 fiscal year to $42,000,000for the 2006 fiscal year. This increase in cost of sales was primarily theresult of increased business as discussed in the revenue section above. Ourgross profit as a percentage of sales increased to 18% for the 2006 fiscal yearfrom 14% for the 2005 fiscal year. The increase in gross profit relatedprimarily to revenue growth from clients needing higher-margin professionalservices and cost containment efforts which resulted in personnel cost savings.This growth was partially offset by our accrual of $753,000 of JTIP trainingfunds receivable during fiscal 2006. The accrual is recognized as an offset tocost of sales in the condensed consolidated statements of operations. The JTIPprogram was initiated during fiscal 2006 so there are no amounts for fiscal2005.

*Selling, general and administrativeexpenses.*Ourselling, general and administrative expenses increased by 66%, or $3,379,000,from $5,091,000 for the 2005 fiscal year to $8,470,000 for the 2006 fiscal year.This increase was primarily due to increased marketing efforts resulting inmore revenues and growth in personnel and facilities costs related to managingthe expanding business.

*Product development*. Our product developmentcosts decreased by 44%, or $127,000, from $292,000 for the 2005 fiscal year to$165,000 for the 2006 fiscal year. This decrease was primarily due to ournearing completion on current product offering initiatives.

*Specific provision for doubtful account*. In fiscal 2005, werecorded a one-time charge of $475,000 to increase our bad debt provision for afinancially distressed client. The client incurred difficulties obtainingfinancing needed to fund an aggressive growth strategy causing us to believe itwas likely the client would not be able to pay its obligation. During thecurrent year this client paid $181,593 related to this specific provision fordoubtful account and gave us a note for $400,000 that matures in fiscal 2007for the remaining balance due. The amount of this note has been recorded as a notereceivable with a full reserve as of March 31, 2006. If repaid by theclient during fiscal 2007 the full amount of this note will be recognized as anadditional offset against the specific provision for doubtful account on ourstatement of operations. We also accrue provisions for bad debts during theordinary course of business when events or circumstances indicate that areceivable may not be collectible. These provisions offset our receivablebalance and are included in selling, general and administrative expenses forfiscal 2006 and 2005.

*Amortizationof intangible assets.*  Effective October 1,2004, the Company acquired substantially all of the assets and operations ofXtrasource. At that time the fair value of the identified net assets includedan allocation of $1,366,000 to intangible assets (which primarily representedthe acquired customer base, the related assigned contracts and certain futureprospects). The expected life of these intangible assets is estimated to befive years and accordingly, an amortization expense of $364,000 and $137,000has been recorded for the years ended March 31, 2006 and 2005,respectively.

*Restructuringcharge.*  In January 2005 we approved a planto consolidate our Utah contact solution centers into one “super-center”. Webelieve that this consolidation will improve our utilization of resources andthereby increase our productivity and profitability. As part of this plan, wediscontinued the use of one of our facilities in March 2005. Restructuringcharges of $477,575 and $220,000 related to these activities were recorded forthe 2006 and 2005 fiscalyears, respectively. The charges include accrued facilities andrelocation costs as well as an impairment of approximately $123,000 and$100,000 of leasehold improvements that were located in the abandoned facilityfor the 2006 and 2005 fiscal years, respectively.

*Non-cash charge for valuation of warrants(operating)*.We also issued warrants to purchase common stock to a non-employee forconsulting services. Pursuant to Emerging Issues Task Force (EITF) 96-18,*Accounting for Equity Instruments that areIssued to Other than Employees for Acquiring or in Conjunction with SellingGoods or Services*, we accounted for these arrangements based on thefair value of the warrants issued. The fair value of these warrants wasmeasured each quarter as the related services 

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were provided and the underlying warrants vested. We usethe Black Scholes pricing model to determine the value of these warrants. Theresulting quarterly change in value of these warrants was charged to income. Duringthe 2006 and 2005 fiscal years, we recorded non-cash charges for these warrantsof $0 and $240,000, respectively. Our arrangement with this consultant wasterminated in October 2005.

*Stock-based compensation.*InApril 2003, our Board of Directors approved an employee stock optionexchange program. Under this program, options to purchase 377,342 shares ofcommon stock with exercise prices above $2.00 per share were exchanged foroptions to purchase 313,592 shares of common stock at an exercise price equalto the then current market price of $1.60. This exchange program was consideredto be an effective “repricing” of stock options, which requires us to adjustthe amount of compensation expense we recognize each quarter until the stockoptions are exercised, forfeited or expire (see Note 8 to our auditedconsolidated financial statements). The cumulative amount of this charge iscalculated by multiplying the exercisable number of options as of the applicable measurement date bythe difference between the market price of stock on such date and the exercise price of $1.60, less any amountspreviously recognized.

During fiscal 2006we recorded a non-cash stock-based compensation benefit of $69,000, a $277,000change from $346,000****of non-cashstock-based compensation expense that we recorded during fiscal 2005. Thisincrease was primarily a result of early adoption of SFAS No. 123R,changes in vested and unexercised options under the exchange program, andfluctuations in the market value of our common stock. As described in moredetail in Note 2 to the consolidated financial statements, SFAS No. 123Rrevised SFAS No. 123 and supersedes APB 25 and requires companies toexpense the value of employee stock options and other equity-based awards.

*Interest income.*Our interest incomeincreased $2,000 or 2% from $97,000 in fiscal 2005 to $99,000 in fiscal 2006. Theprimary reason for this increase was the increase in interest rates in fiscal2006.

*Interest expense.*Our interest expenseincreased $34,000, or 27%, from $130,000 during the fiscal year ended March 31,2005 to $164,000 during the fiscal year ended March 31, 2006. The increasein interest expense was due primarily to increasing interest rates and theincrease in long-term debt and capital lease obligations during fiscal 2006.

*Non-cash charge for valuation of warrantsand conversion of debentures.*This expense relates to the amortization of debt discountcreated by assigning a portion of the proceeds received in conjunction withconvertible debentures and notes payable financings to warrants issued with thedebt. We amortize this cost over the life of the corresponding debt. This costdecreased $240,000, or 100%, from $240,000 for fiscal 2005 to $0 for fiscal2006. The conversion of all of our convertible debt to equity during fiscal2005 required us to accelerate the amortization of this cost and is the primaryreason for the decrease in expense over the prior year.

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***Fiscal 2005 Compared to Fiscal 2004***

*Revenues.*Our revenues increased 49%or $10,390,000, from $21,396,000 for the 2004 fiscal year to $31,786,000 forthe 2005 fiscal year. The primary reasons for the increase were $5,278,000 ofincremental revenue attributable to our acquisition of Xtrasource and$4,550,000 million of additional net revenue generated from our existing clientbase. We also generated $562,000 in revenue from new clients.

*Cost of sales.*Our cost of sales increased$9,180,000, or 51%, from $18,072,000 for the 2004 fiscal year to $27,252,000for the 2005 fiscal year. This increase in cost was primarily the result ofincreased business as discussed in the revenue section above. Our gross profitas a percentage of sales decreased to 14% for the 2005 fiscal year from 16% forthe 2004 fiscal year. The decrease in gross profit related primarily to lessrevenue as a percentage of total revenue being generated from high-marginprofessional services and “ramp-up” costs we incurred due to the increase inbusiness volume.

*Selling, general and administrativeexpenses.*Ourselling, general and administrative expenses increased by 91%, or $2,425,000,from $2,666,000 for the 2004 fiscal year to $5,091,000 for the 2005 fiscal year.This increase was primarily due to increased marketing efforts that resulted inmore revenues for the 2005 fiscal year and additional costs associated with thebusiness we acquired from Xtrasource.

*Product development*. We spent $292,000 inproduct development during fiscal 2005. We believe that this product developmentexpenditure was necessary for anticipated new business and to enhance ourproduct offerings. We incurred no product development costs during fiscal 2004.

*Specific provision for doubtful account*. In fiscal 2005, werecorded a one-time charge of $475,000 to increase our bad debt provision for afinancially distressed client. The client incurred difficulties obtainingfinancing needed to fund an aggressive growth strategy causing us to believethat it is likely the client will not be able to pay its obligation. Werecorded no such provisionduring fiscal 2004. We accrue provisions for bad debts during the ordinarycourse of business when events or circumstances indicate that a receivable maynot be collectible. These provisions are included in selling, general andadministrative expenses for fiscal 2005 and 2004.

*Amortizationof intangible assets.*Effective October 1, 2004, weacquired substantially all of the assets and operations of Xtrasource. Weallocated the purchase price over the fair value of the assets acquired,including an allocation of $1,366,000 to intangible assets which primarilyrepresent the acquired customer base and the related assigned contracts. Wehave determined that the expected life of these intangible assets is five yearsand accordingly, we recorded an expense of $137,000 for the amortization ofthese intangibles during the last six months of fiscal 2005. There was nocomparable expense during fiscal 2004.

*Restructuring charge*. In January 2005 weapproved a plan to consolidate our Utah contact solution centers into one “super-center”.We believe that this consolidation will improve our utilization of resourcesand thereby increase our productivity and profitability. As part of this plan,we stopped using one of our facilities in March 2005 and recorded $220,000of related restructuring charges. The charges include accrued facilities andrelocation costs as well as an impairment of approximately $100,000 ofleasehold improvements that were located in the abandoned facility.

*Non-cash charge for valuation of warrants(operating)*.We also issued warrants to purchase common stock to a non-employee forconsulting services. Pursuant to Emerging Issues Task Force (EITF) 96-18,“*Accounting for Equity Instruments that areIssued to Other than Employees for Acquiring or in Conjunction with SellingGoods or Services*,” we accounted for these arrangements based on thefair value of the warrants issued. The fair value of these warrants wasmeasured each quarter as the related services were provided and the underlyingwarrants vested. We use the Black Scholes pricing model to determine the valueof these warrants. The resulting quarterly change in value of these warrantswas charged to 

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income. During fiscal 2005, we recorded a charge for thesewarrants of $240,000. Our arrangement with this consultant was terminated in October 2005.We did not incur any similar charges in fiscal 2004.

*Stock-based compensation.*InApril 2003, our Board of Directors approved an employee stock optionexchange program. Under this program, options to purchase 377,342 shares ofcommon stock with exercise prices above $2.00 per share were exchanged foroptions to purchase 313,592 shares of common stock at an exercise price equalto the then current market price of $1.60. This exchange program was consideredto be an effective “repricing” of stock options, which requires us to adjustthe amount of compensation expense we recognize each quarter until the stockoptions are exercised, forfeited or expire (see Note 8 to our consolidatedfinancial statements). The cumulative amount of this charge is calculated bymultiplying the exercisable number of options as of the applicable measurement date by the difference betweenthe market price of stock on such date andthe exercise price of $1.60, less any amounts previously recognized.

During fiscal 2005we recorded a non-cash stock-based compensation benefit of $346,000, a$1,908,000 change from $1,562,000****ofnon-cash stock-based compensation expense that we recorded during fiscal 2004. Thisincrease was primarily a result of changes in vested and unexercised optionsunder the exchange program and fluctuations in the market value of our commonstock.

*Interest income.*Our interest incomeincreased $74,000, or 322%, from $23,000 in fiscal 2004 to $97,000 in fiscal2005. The primary reason for this increase was our increase in cash balancesresulting primarily from the sale of common stock in March 2004.

*Interest expense.*Our interest expensedecreased $106,000, or 45%, from $236,000 during the fiscal year ended March 31,2004 to $130,000 during the fiscal year ended March 31, 2005. The decreasein interest expense was due primarily to the conversion of all of ourconvertible debt into equity during fiscal 2004.

*Non-cash charge for valuation of warrantsand conversion of debentures.*This expense relates to the amortization of debt discountcreated by assigning a portion of the proceeds received in conjunction withconvertible debentures and notes payable financings to warrants issued with thedebt. We amortize this cost over the life of the corresponding debt. This costdecreased $214,000, or 94%, from $228,000 for the fiscal 2004 to $14,000 forfiscal 2005. The conversion of all of our convertible debt to equity duringfiscal 2004 required us to accelerate the amortization of this cost and is theprimary reason for the decrease in expense over the prior year. The $14,000charge in fiscal 2005 related exclusively to warrants issued with notes payablefinancings.

**Impact of Inflation and Related Matters***.*

Our operations have been impacted in 2006 by risingpersonnel costs. The increasing personnel costs relate to short supplies ofqualified personnel in some of our customer call centers. We have beensuccessful in passing on some, but not all, of the increased personnel costs toour clients. It is not possible to predict the future trend of supplies ofqualified personnel at reasonable rates, or our ability to pass on future priceincreases to clients.

 

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###  

### **Liquidity and Capital Resources**

*Summaryof Cash Flow Activities.* Net cash provided by operatingactivities during 2006 was approximately $749,000 compared to $1,552,000 during2005. This decline was primarily attributable to increases in receivables and otherassets ($4,449,000), which were partially offset by increases in accountspayable and accrued and other current liabilities ($2,978,000). Our workingcapital decreased $1,960,000 or 36%, from $5,498,000 at March 31, 2005 to$3,538,000 at March 31, 2006. The decrease in cash flow from operatingactivities caused by the large increase in receivables and other assets islargely due to significant additional revenue achieved late in fiscal 2006which had not been collected, when compared with revenues for the similarperiod in 2005. The net increase in payables and other accrued and currentliabilities was also due to this increased business volume during the fourthquarter of fiscal 2006.

We believe that wehave sufficient capital resources to continue our current level of operationsfor the foreseeable future. However, we experienced significant growth duringthe 2006 fiscal year. If this growth continues, we may need to acquireadditional debt and/or equity financing to provide funding for facilitiesbuild-outs and working capital requirements.

*InvestingActivities.* During the year ended March 31, 2006$4,333,000 of cash was used to purchase property and equipment compared to only$1,230,000 in the prior year. A significant portion of these capitalexpenditures were necessary to open thecontact solution center in Albuquerque, New Mexico in October 2005,rather than “maintenance” of operating capacity. We intend to continue toexpand our business through growth of existing operations, and strategicacquisitions of entities that expand our current operating platform.Acquisitions are an important part of our business strategy and to that end,management routinely reviews potential complementary acquisitions. It ispossible that some portion of future cash and cash equivalents and/or proceedsfrom the issuance of stock or debt will be used to fund acquisitions ofcomplementary businesses.

*FinancingActivities.* Included in our cash flow from financingactivities is $3,670,000 of proceeds from the issuance of long-term debt whichwas partially offset by $1,309,000 in principal payments of long-term debt andcapital leases. This represents an increase in the current and long-termportion of our debt and capital leases of $2,375,000, or 139%, from $1,705,000at March 31, 2005 to $4,080,000 at March 31, 2006. With the exception of $1,000,000 that wasoutstanding on our credit line as of March 31, 2006, these borrowings wereused to help finance property and equipment purchases.

Currently, we havean operating credit line with a bank that allows us to borrow up to $3,000,000and is based on 80% of eligible accounts receivable. As of March 31, 2006and 2005 we had $1,000,000 and $0 outstanding on this line of credit,respectively. The line of credit accrues interest at 1% over the bank’s primerate (7.75% and 5.75% at March 31, 2006 and 2005, respectively).

On January 26,2006, we executed an amendment to loan documents, including an amended andrestated schedule to our loan and security agreement. The amendment was laterextended to June 30, 2006. This amendment calls for an additional$1,500,000 term loan with the bank to be used for the purchase of property andequipment. The loan can be drawn upon in minimum increments of $100,000 throughJune 30, 2006 (“Availability End Date”). The loan accrues interest at 1.5%over the bank’s prime rate. We pay interest only on this loan until theAvailability End Date at which time we will be required to make principal andinterest payments. The principal is to be repaid in equal monthly installmentsover 36 months from the Availability End Date. We also have the option to fixthe interest rate to 4.5% over the yield on United States Treasury Notes with athree year maturity as of the Availability End Date. The foregoing loanagreements call for us to maintain certain liquidity and net worth or debtservice and quick ratio covenants. On June 23,2006, we amended the loan and security agreement for the period from March 31,2006 to June 30, 2006 to modify the provisions of related to the liquidityand net worth or debt service and quick ratio covenants. We were in compliancewith all debt covenants at March 31, 2006.

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We also spent $887,000 on the acquisition of the Xtrasource assets and$681,000 on the payment of accrued offering costs during the year ended March 31,2005. The amount spent on the Xtrasource acquisition includes the purchase of Xtrasource’s secured debt.

Options and Employee Stock Purchases — In 2006, cash proceedsfrom the exercise of options, warrants and employee stock purchases totaled $193,000, comparedto $436,000 in 2005. Option exercise activity is largely dependent on theCompany’s stock price and is not predictable. To the extent non-qualified stockoptions are exercised, or there are disqualifying dispositions of sharesobtained upon the exercise of incentive stock options, the Company receives anincome tax deduction generally equal to the income recognized by the optionee.These tax deductions have not resulted in a reduction to the amount oftaxes paid due to the NOLs and operating losses. Additionally, these deductions do not affect income taxexpense or the effective income tax rate; rather they are reflected asincreases in capital in excess of par value in the consolidated balance sheets.

Summary of Future Cash Requirements — Significant futurecash uses, in addition to operational working capital requirements, are currently expected toconsist primarily of debt service payments on outstanding long-term debt, andcapital expenditures.

Off-Balance Sheet Arrangements — Although we have operatingleases for facilities and equipment, we do not have any off-balance sheetarrangements that have, or are reasonably likely to have, a current or futureeffect on its financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures, or capitalresources that are material to investors.

Contractual Obligations and Contingent Liabilities andCommitments — The following table presents a summary of our contractual obligations by period asof March 31, 2006:

| ** **                          | ** ** | ** **                 | ** ** | **Payments Due by fiscal Year** | ** ** | ** **         | ** ** |
|-------------------------------------|------------|----------------------------|------------|-----------------------------------------------------|------------|--------------------|------------|
| **Contractual Obligations:**   | ** ** | **Under 1 Year** | ** ** | **1-3 Years**                                  | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** | **Total** | ** ** |
| Long Term Debt (principal only) (1) |       | $                          | 1,947,000  |                                                | $          | 1,376,000          |       | $ | 37,000 |   | $ | — |   | $ | 3,360,000 |   |
| Capital Leases                      |       | 296,000                    |       | 328,000                                             |       | 185,000            |       | — |   | 809,000 |   |
| Operating Leases                    |       | 2,985,000                  |       | 5,168,000                                           |       | 3,522,000          |       | 193,000 |   | 11,868,000 |   |
| Less: subleases                     |       | (47,000                    | )          | (62,000                                             | )          | —             |       | — |   | (109,000 | ) |
| Total Contractual Cash Obligations  |       | $                          | 5,181,000  |                                                | $          | 6,810,000          |       | $ | 3,744,000 |   | $ | 193,000 |   | $ | 15,928,000 |   |

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(1)    Ourlong-term debt carries interest rates of 7.4% to 9.3%.

Recent AccountingPronouncements — We have reviewed all recently issued accounting standards todetermine their potential effect, if any, on the results of operations orfinancial position of the Company. Based on that review, we do not currentlybelieve any of these recent accounting pronouncements will have a significanteffect on our current or future financial position, results of operations, cashflows, or disclosures.

Risks Related toour Common Stock — The price of our common stock historically has beenvolatile. This volatility may affect the price at which you could sell yourcommon stock, and the sale of substantial amounts of our common stock couldadversely affect the price of our common stock.

The market pricefor our common stock has varied between a high of $10.02 and a low of $2.24 duringthe 12 month period ended March 31, 2006. Our stock price is likely tocontinue to be volatile and subject to significant price and volumefluctuations in response to market and other factors, including the otherfactors discussed in “Risks Relating to our Business;” variations in ourquarterly operating results from our expectations or those of securitiesanalysts or investors; downward revisions in securities analysts’ estimates;and announcement by us of significant acquisitions, or capital commitments.

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In the past,following periods of volatility in the market price of their stock, manycompanies have been the subject of securities class action litigation. If we becomeinvolved in securities class action litigation in the future, it could resultin substantial costs and diversion of our management’s attention and resourcesand could harm our stock price, business, prospects, results of operations andfinancial condition.

In addition, thebroader stock market has experienced significant price and volume fluctuationsin recent years. This volatility has affected the market prices of securitiesissued by many companies for reasons unrelated to their operating performanceand may adversely affect the price of our common stock. In addition, ourannouncements of our quarterly operating results, changes in general conditionsin the economy or the financial markets and other developments affecting us,our affiliates or our competitors could cause the market price of our commonstock to fluctuate substantially.

We have never paiddividends and do not anticipate paying any dividends on our common stock in thefuture, so any short-term return on your investment will depend on the marketprice of our capital stock. We currently intend to retain earnings to financeour operations and growth. The terms and conditions of our long-term debtrestrict and limit payments or distributions in respect of our capital stock.

### **Seasonality**

Our operatingresults have historically been affected by the seasonal variances experiencedby some of our significant clients. Historically, our third and fourth quartershave been favorably affected by a significant increase in service requests weexperienced from our support of certain clients’ products and/or services ascompared to the first quarter in which we have historically experienced asignificant decrease. Going forward, we anticipate that we will continue tohave seasonal variances.

## ***Item 7A.  Quantitative andQualitative Disclosures About Market Risk.***

We are exposed to financial market risks, primarily relatedto changes in interest rates. We do not use derivative financial instrumentsfor speculative or trading purposes as these risks have not been material to usin the past. Interest expense over the past three fiscal years has been lessthan one percent of sales.

*Non-Guaranteed Federal Deposits Risk.*Certain cash and cashequivalents we hold are deposited with financial institutions, and at timessuch amounts have exceeded insured depository limits. The Company periodicallyinspects the soundness of the financial institutions with which it doesbusiness to manage its risk related to such uninsured deposits.

*Foreign Currency Risk.*We face foreign currencyrisks primarily as a result of the revenues we derive from sales made outsidethe U.S, expense incurred outside the U.S., and from intercompany accountbalances between our U.S. companies and our non-U.S. subsidiaries. In fiscal2006, approximately 20% of our net sales and 21% of our operating expenses weredenominated in currencies other than the U.S. dollar. The Euro is consideredthe functional currency in our non-U.S. operations, and revenue and expensesare translated at average exchange rates for the reported periods. Therefore,our foreign sales and expenses will be higher in a period in which there is aweakening of the U.S. dollar and will be lower in a period in which there is astrengthening of the U.S. dollar. Given the uncertainty of exchange ratefluctuations and the varying performance of our foreign subsidiaries, we cannotestimate the affect of these fluctuations on our future business, results ofoperations and financial condition. Fluctuations in the exchange rates betweenthe U.S. dollar and other currencies could effectively increase or decrease theselling prices of our services in international markets where the prices of ourservices are denominated in U.S. dollars. We regularly monitor our foreigncurrency risks and may take measures to reduce the impact of foreign exchangefluctuations on our operating results. To date, we have not used derivativefinancial instruments for hedging, trading or speculating on foreign currencyexchange. Average currency exchange rates to convert one U.S. dollar into eachlocal currency for which we had sales of over $5,000 in 2006 and 2005 were asfollows:

|      | ** ** | **2006** | ** ** | **2005** | ** ** |
|------|------------|----------|------------|----------|------------|
| Euro |       | 1.20     |       | 1.31     |       |

 

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## ***Item 8.   Financial Statements and Supplementary Data.***

The financial statementsrequired by Item 8 of this Report begin following the signature page. Supplementarydata is set forth in Item 6 of this Report. All information that has beenomitted is either inapplicable or not required.

## ***Item 9.   Changes in and Disagreements with Accountantson Accounting and Financial Disclosure.***

None.

## ***Item 9A. Controlsand Procedures.***

We maintaindisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed by us in the reports that we file or submit to the SECunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified by the SEC’s rules and forms, and thatinformation is accumulated and communicated to our management, including ourprincipal executive and principal financial officers (whom we refer to in thisReport as our “**Certifying Officers**”), asappropriate to allow timely decisions regarding required disclosure. Ourmanagement evaluated, with the participation of our Certifying Officers, theeffectiveness of our disclosure controls and procedures as of March 31,2006, pursuant to Rule 13a-15(b) promulgated under the ExchangeAct. This evaluation included a review of the controls’ objectives and design,the operation of the controls, and the effect of the controls on theinformation presented herein. Our management, including our Certifying Officers,do not expect that disclosure controls can or will prevent or detect all errorsand all fraud, if any. A control system, no matter how well designed andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Also, the projection of anyevaluation of the disclosure controls and procedures to future periods issubject to the risk that the disclosure controls and procedures may becomeinadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

Based on theirreview and evaluation, and subject to the inherent limitations described above,Our Certifying Officers have concluded that our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) were effective as of March 31, 2006.

Internal Controlover Financial Reporting — Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act. Our internal control overfinancial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with accounting principles generallyaccepted in the United States of America.

Because ofinherent limitations, internal control over financial reporting may not preventor detect misstatements. Therefore, even internal controls determined to beeffective can provide only reasonable assurance with respect to financialstatement preparation and presentation. The effectiveness of the Company’sinternal control over financial reporting is subject to various inherent limitations,including cost limitations, judgments used in decision making, assumptionsabout the likelihood of future events, the possibility of human error, and therisk of fraud. The projection of any evaluation of effectiveness to futureperiods is subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with policies maydeteriorate. Because of these limitations, there can be no assurance that anysystem of internal control over financial reporting will be successful inpreventing all errors or fraud or in making all material information known in atimely manner to the appropriate levels of management.

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Our management has assessed the effectiveness of internalcontrols over financial reporting as March 31, 2006 using the criteriaissued by the Committee of Sponsoring Organizations of the Treadway Commissionin “Internal Control — Integrated Framework.” Based on that assessment, ourmanagement believes that our internal control over financial reporting waseffective as of March 31, 2006. Management is not aware of any significantchanges (including corrective actions with regard to significant deficienciesor material weaknesses) in our internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of the evaluationreferenced above.

## ***Item 9B.    Other Information.***

None.

# **PART III**

## ***Item 10.  Directors and Executive Officers of theRegistrant.***

**Directors**

Each of our directors serve until the next annual meetingof shareholders and until his successor is duly elected and qualified. Certaininformation regarding our directors is set forth below:
| **Name**                         | ** ** | **Age** | ** ** | **Position**                                     | ** ** | **Director Since** | ** ** |
|----------------------------------|------------|---------|------------|--------------------------------------------------|------------|-------------------------|------------|
|                             |       |    |       |                                             |       |                    |       |
| C. Lloyd Mahaffey  (1),(2)       |       | 50      |       | Chairman  of the Board                           |       | 2004                    |       |
| Patrick F. O’Neal           |       | 59      |       | President,  Chief Executive Officer and Director |       | 2002                    |       |
| Kim A. Cooper (1),(2)            |       | 47      |       | Director                                         |       | 1999                    |       |
| Richard E. Dyer (3)              |       | 59      |       | Director                                         |       | 2004                    |       |
| Donald H. Livingstone  (3)       |       | 63      |       | Director                                         |       | 2004                    |       |
| Eric Olafson (1), (3)            |       | 45      |       | Director                                         |       | 2001                    |       |
| Phillip J. Windley, PhD (2) |       | 48      |       | Director                                         |       | 2003                    |       |

----

(1)           Memberof Compensation Committee

(2)           Memberof Governance and Nominating Committee

(3)           Memberof Audit Committee

*C.Lloyd Mahaffey* was appointed to serve as a director in March 2004and has served as Chairman of the Board since October 26, 2004. Mr. Mahaffeyhas over 25 years of experience in the development, funding and marketing ofadvanced technology systems to business, education, consumer and governmentmarkets. Mr. Mahaffey has been the Managing Partner for Dynamis Group,LLC., a development and construction company with offices in Eagle and McCall,Idaho, since 2004 and the Managing Partner of Carloma Group, a diversifiedprivate equity company since 1998. A long term technology venture capitalistand senior operating executive, Mr. Mahaffey served as a Managing Partnerof Redleaf Ventures and Aspen Ventures (SBIC) from 1998 to 2004. From 1995 to1998, Mr. Mahaffey served as the Chief Operating Officer, as well asSenior Vice President and General Manager of Global Development and Marketingfor VeriFone. While there, he was responsible for VeriFone’s early stageinvestments in WebTV, CyberCash, and VeriSign. He led the team that soldVeriFone to Hewlett Packard for $1.3 billion. Prior to joining Verifone, Mr. Mahaffeyserved in a variety of senior executive roles at Apple Computer, Inc.during its formative years and was responsible for the development of Apple’shighly regarded Education and Federal Government business segments worldwide.Mr. Mahaffey received his bachelor’s degree in history at The Citadel, TheMilitary College of South Carolina, in 1978, where he was an Honor Graduate. Healso attended Stanford University’s Graduate School of Business TechnologyExecutive Program in 1987.

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*PatrickF. O’Neal* was appointed to serve as our President and ChiefExecutive Officer, and as a director, in January 2002. Prior to joiningSento, from September 1996 to January 2002, Mr. O’Neal was theManaging Director of Digital Lighthouse Corporation (“**DLC**”).DLC provided proprietary sales and support software as well as contact solutioncenter and integration services for direct to customer initiatives forcompanies such as American Express Brokerage, Sony U.S. and Sony Europe,Instinet Clearing Services (a subsidiary of Reuters) and Norwest Bank.Mr. O’Neal also served on the Board of Directors of Digital LighthouseCorporation from March 1996 to January 2000 and was president ofthree subsidiaries of DLC that dealt with regulated industries (securities,insurance and mortgage services). Prior to DLC Mr. O’Neal held variousmanagement positions with American United Life Insurance Company, ContinentalAssurance, E.F. Hutton, Inc., Hutton Financial Services and Eden FinancialServices, Inc. Mr. O’Neal received his bachelor’s degree from IndianaState University and his law degree (Doctor of Jurisprudence) from IndianaUniversity.

*KimA Cooper* was appointed to serve as a director in August 1999.Since January 2003, Mr. Cooper has been the President and ChiefExecutive Officer of Exceed, LLC, a consulting firm that provides business andlegal consulting services to public and private companies, and since May 2003,he has been Chairman of the Board for TechTeam Global, Inc., amultinational enterprise service provider. Since January 2005 Mr. Cooperhas been the President and Chief Executive Officer of Exceed III, LLC adeveloper and marketer of enterprise automation software. Between 1996 and2003, he was founder and  Chief ExecutiveOfficer of the following companies: Digital Harbor, Inc., ComDais, Inc.,GlobalSim, Inc., DriveSafety, Inc., Venafi, Inc.; GeneralCounsel of E-Idea Labs, Inc. and Chief Operating Officer of Sorenson Media, Inc.Prior to 1996, Mr. Cooper was the Vice President of Worldwide Marketingand Business Development for Novell, Inc. for two years, and the VicePresident of Worldwide Customer Services, Sales & Marketing forWordPerfect Corporation for ten years. Mr. Cooper also currently serves asa director for Authoritative.Net, Inc. He is a practicing corporateattorney and graduated with honors from Brigham Young University Law School.

*RichardE. Dyer* was appointed to serve as a director in November 2004and he has served as a member of the Audit Committee since his appointment.Mr. Dyer recently retired as Vice President of Americas Sales for SanDiskCorporation, the world’s largest supplier of flash memory data storage cardproducts, where he oversaw OEM and retail channels in the Americas. He joinedSanDisk in 1998 and established the company’s worldwide retail channel, growingrevenues to $1.6 billion in that channel. Mr. Dyer has also held executivepositions in sales and marketing for Adobe Systems and for Eastman Kodak, wherehe served as Vice President of the Digital & Applied Imaging Divisionand provided leadership in revitalizing the performance of its U.S. salesorganization. Mr. Dyer also has experience with Apple Computer andHewlett-Packard.

*Donald H. Livingstone* was appointed to serve as adirector in November 2004 and has served as Chairman of the AuditCommittee since his appointment. Since May 1995, Mr. Livingstone has beenthe Director of the Center for Entrepreneurship and a Teaching Professor in theMarriott School of Business of Brigham Young University (“**BYU**”).Prior to joining the faculty of BYU in 1994, Mr. Livingstone had a 29-yearcareer with Arthur Andersen. At Arthur Andersen, he spent 19 years as a partnerin the San Francisco and Los Angeles offices where he supervised the financialservices practice.

Additionally, Mr. Livingstonecurrently serves as a member of the Board of Directors of Micrel Incorporated,where he is Chairman of the Audit Committee, as well as a member of theCompensation and Corporate Governance Committees. He also serves as amember of the Board of Directors and is Chairman of the Audit Committee ofAmericanWest Bancorp, and is a Director and member of the Audit Committee ofAmerican Express Centurion Bank, a wholly owned credit card issuing subsidiaryof American Express Company. He previously served as a director of CaliforniaIndependent Bancorp (“**CIB**”) and thenof Humboldt Bancorp, which acquired CIB. Mr. Livingstone has alsoserved with the Eureka Family of Mutual Funds and Tropical SportswearInternational. He chaired the Audit Committees in each of these companies.

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*EricOlafson* was appointed to serve as a director in October 2001.Since 2000, Mr. Olafson has been the Chairman of the Board of TomaxCorporation, a developer and marketer of web-based software for retailers. Priorto that, from 1990 to 2000, Mr. Olafson served as the President and ChiefExecutive Officer of Tomax. From 1987 to 1990, Mr. Olafson served as theVice President of Marketing at Tomax. From 1986 to 1987, Mr. Olafsonserved as a consultant to Tomax. Prior to 1986, Mr. Olafson was aco-founder of Dyonix Greentree Technologies, a Canadian software developmentcompany.

*PhillipJ. Windley, PhD,* was appointed to serve as a director inOctober 2003. Since May 2003, Dr. Windley has been an AssociateProfessor of Computer Science at Brigham Young University. In 2002 and 2003, Dr. Windleywas a consultant, author and advisor in usinginformation technology   Dr. Windleyserved during 2001 and 2002 as the Chief Information Officer for the State ofUtah, serving in the Governor’s cabinet and as a member of the Governor’ssenior staff. In 1999 and 2000, Dr. Windley served as the Vice Presidentfor Product Development and Operations at Excite@Home, managing a large,interdisciplinary team of product managers, engineers, and technicians developingand operating large-scale internet and e-commerce products. Prior to joiningExcite@Home, from 1998 to 1999, Dr. Windley served as the Chief TechnologyOfficer of iMall, Inc. Dr. Windley was a professor of ComputerScience at Brigham Young University from 1993 to 1999 and the University ofIdaho from 1990 to 1993. While at Brigham Young University, Dr. Windleyfounded and directed the Laboratory for Applied Logic. Dr. Windleyreceived his PhD in computer science from the University of California, Davis in1990.

**Executive Officers**

In addition to Mr. O’Neal,whose biography is set forth above, certain biographical information isfurnished below with respect to the following executive officers of Sento andour subsidiaries. Each of the executive officers serves until terminated by ourBoard of Directors or until the officer resigns.

*Anthony J. Sansone,*41,was appointed to serve as our Senior Vice President, Chief Financial Officerand Corporate Secretary in July 2004. Prior to joining Sento, Mr. Sansonewas the Vice President of the Client Finance Group for JP Morgan ChaseCommercial Card Solutions since January 2003. From August 1997 to December 2002,Mr. Sansone served as Vice President, Treasurer and Corporate Secretaryfor Convergence Communications, Inc., which provided data, video and voiceservices in nine Latin America countries.  Mr. Sansone also serves as an officer ofthe MountainWest Capital Network, an organization fostering deal flow, capitalgrowth and business development in the State of Utah. Mr. Sansone receivedhis bachelor’s degree in accounting from Utah State University and his mastersdegree in business administration from the University of Utah.

*StephenW. Fulling*, 42, was appointed as our Senior Vice Presidentand Chief Technology Officer in January 2004. From March 2002 until January 2004,Mr. Fulling was Director of Information Technology Services at the Stateof Utah where he was responsible for a $60 million information technologybudget and over 250 employees. From August 1999 until February 2002, Mr. Fullingmanaged an engineering and operations division for Excite@Home, in support of a$20 million e-commerce business. From October 1996 until August 1999,Mr. Fulling was the Senior Vice President of Engineering and Operations atiMall Inc., where he built a technology organization that was instrumental inthe acquisition of iMall Inc. by Excite@Home in 1999. Mr. Fulling has over16 years of experience in successfully developing products that use Internetand telecommunications technologies. Mr. Fulling graduated with a bachelor’sdegree in computer science from the University of California.

*Thomas C. Tyler,* 55, was appointed as ourSenior Vice President of Sales and Marketing in January 2005 after servingas our Senior Vice President of Business Development after our acquisition ofthe Xtrasource assets. Mr. Tyler was founder, President, CEO, andBoard Chairman of Xtrasource from 1994 to 2004 prior to the acquisition. From1989 through 1994, Mr. Tyler was President and CEO of UniversalElectronics Inc. (NASDAQ), a Cleveland-based manufacturer of universal remotecontrols. 

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During his tenurewith Universal, Mr. Tyler expanded the company by diversification ofproducts and markets, bringing sales of $240,000 in 1988 to $96 million in 1994,making Universal #7 on the list of *Business Week*magazine’s100 Hottest Growing Small Companies List in America. In 1993, Mr. Tylerwas able to guide the company through an IPO and secondary offering, raisingnearly $75 million of capital to fund the company’s rapid growth. Prior toUniversal Electronics, Mr. Tyler served as President of MTC/USA, Inc.,an independent consumer electronics distribution company. He also held variouspositions within Technicare Corporation, a Division of Johnson &Johnson, including Director of Magnetic Resonance Marketing and MagneticResonance Product Director, as well as various sales and marketing positionswith Eveready Battery Co., a then subsidiary of Union Carbide Corporation.Mr. Tyler received his bachelors of science degree from the StateUniversity of New York at Brockport.

*Chris Wells,* 46, was appointed as ourVice President of Client Relations in January 2005. Mr. Wells servedas our Senior Vice President of Sales from April 2003 to January 2005.Prior to joining Sento, Mr. Wells consulted as the General Manager for a$29 million dollar technology upgrade project for the State of Utah from June 2002to April 2003. Mr. Wells was Vice President and General Manager forExcite@Home Hosting Services from October 1999 to March 2002. Hisresponsibilities included building outsourcing shared hosting and e-commerceservices to major Fortune 500 accounts. Prior to serving as Vice President andGeneral Manager, Mr. Wells served from June 1998 to October 1999as the Vice President of Major Accounts at Imall Inc., a small Internete-commerce start-up, which was purchased 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.

The following persons are not executive officers but areexpected to make a significant contribution to our business:

*TamAmbrose*, 43, was appointed Vice President, Human Resources inSeptember 2005. Ms. Ambrose relies on her 20 years of human resourcesexperience as she leads Sento’s HR efforts including recruiting, compensationplanning, benefits administration, organizational development, compliance andHR site operations. Prior to joining Sento, Tam was Human Resources Directorfor The Layton Companies, a holding company with four operating companies doingbusiness throughout the United States. Ms. Ambrose also served as RegionalHR Director with the 2002 Olympic Games. She was a member of the HR managementgroup tasked with overseeing all aspects of the 2002 Olympic Games’ HRoperations while simultaneously developing and planning the exit strategy for3,000 employees and 30,000 volunteers. Early in her career, Ms. Ambrosewas the Director of HR for the Durango Mountain Resort where she wasresponsible for the recruiting, hiring and training of 1,200 employees eachyear. Tam received her bachelor of arts degree in business administration fromFort Lewis College and is certified as a Senior Professional in Human Resources(SPHR).

*Mike Williams,* 33, was appointed asour Vice President of U.S. Operations in April 2002. Mr. Williamsstarted with Sento in January 1999 and has worked with Sento’s morestrategic relationships in a Senior Account Manager role. His prior experiencespans several industries with his more recent experience within the customercontact industry. In the contact center industry, he has experience in managingmultiple contact solution center locations world-wide, including remote centersin locations such as India, South Africa, Northern Ireland and Scotland.Mr. Williams is currently an advisory board member for JD Power &Associates and the SSPA, working toward the development of a Contact CenterCertification Award program. Mr. Williams attended Utah Valley StateCollege.

*Emile Koolstra,* 32, was appointedVice President of European Operations in November 2004 in conjunction withour acquisition of Xtrasource. Mr. Koolstra heads the Contact CenterManagement, IT, Human Resources and Project Management departments for both ofSento’s European offices in The Netherlands and in France. Mr. Koolstrawas employed by Xtrasource from its inception in 1986 until our acquisition ofXtrasource in 2005. He fulfilled several positions within Xtrasource, and wasone of the key-players to bring the organization from a 20 to a 300-seatoperation. Prior to Xtrasource, Mr. Koolstra was 

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employed in thepan-European customer support center of Universal Electronics. Mr. Koolstraholds a propaedeutics business science degree from the Technical University,Twente, in The Netherlands.

*Rick Steiner*, 51, was appointedVice President of Quality and Training in January 2003. Mr. Steinerhas worked in the quality and performance field for 15 years. His prior workexperience includes Convergys Corporation and American Express. While atAmerican Express, Mr. Steiner was awarded the Chairman’s Award for QualityImprovement. Mr. Steiner is a member of ASQ (American Society for QualityControl) a recognized national quality organization. Mr. Steiner attendedBrigham Young University where he studied business and psychology.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Section 16(a) ofthe 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”). Reportingpersons are also required by SEC regulations to furnish us with copies of all Section 16(a) formsthey file. Based solely on a review of the copies of such forms furnished to usand written representations from our executive officers and directors, webelieve that for the fiscal year ended March 31, 2006 all of our executiveofficers and directors, as well as persons beneficially holding more than tenpercent of our common stock, filed the required reports on a timely basis,except as previously disclosed.

**Annual Meetings, BoardMeetings and Committees**

Our last annual shareholder’s meeting washeld in February 2006. Four directors in office at such time attended themeeting. During fiscal 2006, our Board of Directors held four board meetingsand met informally on numerous occasions and approved relevant matters bywritten consent. All incumbent directors attended at least 75% of all boardmeetings and applicable committee meetings.

Our Board of Directors has standingAudit, Governance & Nominating, Compensation and Strategy Committees. Themembers of our Audit Committee are Donald H. Livingstone (Chairman), Richard E.Dyer and Eric Olafson. The members of the Governance & NominatingCommittee are Kim Cooper (Chairman), Lloyd Mahaffey and Phillip Windley. Themembers of our Compensation Committee are Eric Olafson (Chairman), Kim A.Cooper and C. Lloyd Mahaffey. All the directors are members of the StrategyCommittee and Phillip Windley is Chairman.

All members of our Audit Committee areindependent according to Nasdaq’s listing standards, and our Board of Directorshas determined that the Audit Committee has one member qualifying as an auditcommittee financial expert, as defined in Item 401(e) of Regulation S-B. Theperson our Board of Directors has determined is an audit committee financialexpert is Donald H. Livingstone.

Our Board of Directors has also adopted awritten Audit Committee Charter, a copy of which has been filed previously withthe SEC on January 19, 2006 as an exhibit to our proxy statement preparedin connection with our 2005 annual meeting of shareholders. The AuditCommittee oversees our accounting and financial reporting processes and relatedaudits. This involves, among other tasks, the selection of our independentpublic accountants for ratification by our shareholders, pre-approvingengagements of our independent public accountants with respect to audit andnon-audit services, reviewing our accounting practices and controls andadministering our Code of Ethics for Officers and Finance Department Employeesand whistleblower policy.

The members of ourCompensation Committee are Eric Olafson (Chairman), Kim A. Cooper and LloydMahaffey. Our Compensation Committee reviews and establishes compensation forour executive officers, except the Chief Executive Officer, whose compensation isapproved by our Board of Directors upon recommendation of the CompensationCommittee. Our Compensation Committee also approves the amount of contributionsto the employees’ retirement plan and administers our stock option plans.

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The members of our Governance and Nominating (“**G&N****Committee**”) are Kim A. Cooper(Chairman), Phillip J. Windley and C. Lloyd Mahaffey. Our G&N Committeerecommends to our Board of Directors nominees for election to the board. OurG&N Committee considers recommendations for director nominees  by shareholders if the names of thosenominees and relevant biographical information are properly submitted inwriting to our Corporate Secretary in the manner contemplated by our Bylaws. Adirector nominee must have a strong professional or other background, areputation for integrity and responsibility and experience relevant to ourbusiness and operations. A director nominee must be able to commit appropriatetime to prepare for, attend and participate in all meetings of our Board ofDirectors and its committees, as applicable, and the annual meeting ofshareholders and must not have any conflicts of interest with our business andoperations. Our G&N Committee will also require some director nominees tobe independent as defined under the Nasdaq listing standards. All directornominees, whether submitted by a shareholder or our G&N Committee, will beevaluated in the same manner. All current members of our G&N Committee areindependent for purposes of the Nasdaq listing standards. Our G&N Committeealso  conducts annual officer anddirector performance evaluations, advises the Board of Directorsconcerning corporate governance matters, is responsible for seeing that allsubcommittees of the Board have approved charters, and develops and recommendsto the Board the corporate governance guidelines applicable to the Company. OurBoard of Directors has adopted a written Governance and Nominating CommitteeCharter, a copy of which has been filed previously with the SEC on January 19,2006 as an exhibit to our proxy statement prepared in connection with our 2005annual meeting of shareholders.

The process employed by the Board of Directors for identifying andevaluating nominees for director is flexible and based primarily on thedirectors’ subjective weighting of the needs of Sento and the extent to whichexisting directors and prospective nominees meet those needs. Factorsconsidered by the Board of Directors in the nomination process include eachnominee’s:

·                  judgment and integrity,

·                  business and management experience,

·                  relationship of work experience and education tothe current and proposed lines of business of the Company,

·                  ability to work well as a team with existingdirectors and management,

·                  the interplay of the candidate’s experience withthe experience of other directors,

·                  the extent to which the candidate would be adesirable addition to the Board of Directors and any committees of the Board ofDirectors, and

·                  the extent to which the candidate satisfies anyobjective requirements (such as independence or expertise requirements)applicable to the Board of Directors or any committees of the Board ofDirectors.

Candidates submitted by stockholders in accordance with the policies setforth in the most recent proxy statement delivered to stockholders areconsidered under the same standards as nominees recommended by other persons.

Our StrategyCommittee was formed on April 20, 2005. Each member of the board is amember of the Strategy Committee which is chaired by Phillip J. Windley. TheStrategy Committee works with our management team to review and developmentstrategic direction for emerging issues such as technology platforms.

 

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**Code of Ethics**

We have adopted the****Sento Corporation Code of Ethics forOfficers and Finance Department Employees, which constitutes a code of ethicsthat applies to the principal executive officer, principal financial officer,principal accounting officer or controller, or persons performing similarfunctions, as defined in Item 406 of Regulation S-K under the Exchange Act. Wehave posted our Code of Ethics for Officers and Finance Department Employees onour website at www.sento.com.

## ***Item 11.******   ******Executive Compensation.***

**SummaryCompensation Table**

The following table provides certain summary informationconcerning the compensation paid or accrued by us or on behalf of our ChiefExecutive Officer, as well as all our other executive officers whose aggregatecompensation for the fiscal year ended March 31, 2006 exceeded $100,000(collectively, the **“Named Executive Officers”**).
|                                                | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **  | ** ** | ** **       | ** ** | **Long-Term Compensation** | ** ** | ** **     | ** ** |
|------------------------------------------------|------------|------------------------------|------------|------------|------------|-------------|------------|------------------|------------|---------------------------------|------------|----------------|------------|
| ** **                                     | ** ** | **Annual Compensation** | ** ** | **Awards** | ** ** | **Payouts** | ** ** | ** **       | ** ** |
| ** **                                     | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **  | ** ** | **Other**        | ** ** | **Restricted**                  | ** ** | **Securities** | ** ** | ** ** | ** ** | **All** | ** ** |
| ** **                                     | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **  | ** ** | **Annual**       | ** ** | **Stock**                       | ** ** | **Underlying** | ** ** | **LTIP** | ** ** | **Other** | ** ** |
| ** **                                     | ** ** | ** **                   | ** ** | **Salary** | ** ** | **Bonus**   | ** ** | **Compensation** | ** ** | **Award(s)**                    | ** ** | **Options**    | ** ** | **Payouts** | ** ** | **Compensation** | ** ** |
| **Name and Principal Position** | ** ** | **Year**                     | ** ** | **($)**    | ** ** | **($)**     | ** ** | **($)**          | ** ** | **($)**                         | ** ** | **(#)**        | ** ** | **($)** | ** ** | **($)** | ** ** |
| Patrick F. O’Neal                         |       | 2006                         |       | 220,000    |       | 73,592      | (1)        | —           |       | —                          |       | 35,000         |       | — |   | — |   |
| Chief Executive                                |       | 2005                         |       | 214,231    |       | 20,000      | (2)        | —           |       | —                          |       | 25,000         |       | — |   | — |   |
| Officer                                        |       | 2004                         |       | 170,000    |       | 30,000      |       | —           |       | —                          |       | 20,000         |       | — |   | — |   |
|                                                |       |                         |       |       |       |        |       |             |       |                            |       |           |       |   |   |   |   |
| Anthony J. Sansone (3)                         |       | 2006                         |       | 150,000    |       | 30,383      | (1)        | —           |       | —                          |       | 25,000         |       | — |   | — |   |
| Senior Vice  President,                        |       | 2005                         |       | 93,462     |       | —      |       | —           |       | —                          |       | 25,000         |       | — |   | — |   |
| Chief Financial  Officer                       |       | 2004                         |       | —     |       | —      |       | —           |       | —                          |       | —         |       | — |   | — |   |
| and Corporate                                  |       |                         |       |       |       |        |       |             |       |                            |       |           |       |   |   |   |   |
| Secretary                                      |       |                         |       |       |       |        |       |             |       |                            |       |           |       |   |   |   |   |
|                                           |       |                         |       |       |       |        |       |             |       |                            |       |           |       |   |   |   |   |
| Stephen W. Fulling (4)                         |       | 2006                         |       | 130,000    |       | 26,500      | (1)        | —           |       | —                          |       | 25,000         |       | — |   | — |   |
| Senior Vice President                          |       | 2005                         |       | 120,000    |       | 2,000       |       | —           |       | —                          |       | —         |       | — |   | — |   |
| and Chief Technology                           |       | 2004                         |       | 20,769     |       | —      |       | —           |       | —                          |       | —         |       | — |   | — |   |
| Officer                                        |       |                         |       |       |       |        |       |             |       |                            |       |           |       |   |   |   |   |
|                                                |       |                         |       |       |       |        |       |             |       |                            |       |           |       |   |   |   |   |
| Thomas C. Tyler (5)                            |       | 2006                         |       | 150,000    |       | —      |       | 91,018           |       | —                          |       | 15,000         |       | — |   | — |   |
| Senior Vice  President                         |       | 2005                         |       | 75,000     |       | —      |       | —           |       | —                          |       | —         |       | — |   | — |   |
| of Sales and  Marketing                        |       | 2004                         |       | —     |       | —      |       | —           |       | —                          |       | —         |       | — |   | — |   |
|                                           |       |                         |       |       |       |        |       |             |       |                            |       |           |       |   |   |   |   |
| Chris Wells (6)                                |       | 2006                         |       | 100,000    |       | —      |       | 74,760           |       | —                          |       | —         |       | — |   | — |   |
| Vice President of                              |       | 2005                         |       | 100,000    |       | —      |       | 46,558           |       | —                          |       | 5,000          |       | — |   | — |   |
| Client Relations                               |       | 2004                         |       | 113,462    |       | —      |       | 9,601            |       | —                          |       | 7,500          |       | — |   | — |   |

_________________________

(1)          Include quarterly bonuses earned under an existing bonusplan and a discretionary bonus awarded by our board of directors for exceedingrevenue target but not meeting profit target for year-end results.

(2)          Mr. O’Neal’s annual salary was changed to $220,000during fiscal 2005.

(3)          Mr. Sansone was appointed to serve as our Senior VicePresident, Chief Financial Officer and Corporate Secretary on July 6, 2004.Mr. Sansone’s annual salary during fiscal 2005 was $135,000.

(4)          Mr. Fulling was appointed to serve as Senior VicePresident and Chief Technology Officer on January 19, 2004. Mr. Fulling’sannual salary during fiscal 2004 was $120,000.

(5)          Mr. Tyler joined the Company in October 2004 andwas appointed as Sr. Vice President of Sales and Marketing in January 2005.Mr. Tyler’s annual salary during fiscal 2005 was $150,000. Amountsreported as other annual compensation in the above table for Mr. Tylerrepresents sales commissions.

(6)          Mr. Wells joined the Company in April 2003 as Sr.Vice President of Sales. He held this position until January 2005 at whichtime he became Vice President of Client Relations (which is not an executiveofficer position). Amounts reported as other annual compensation in the abovetable for Mr. Wells represents sales commissions. Mr. Wells’s annualsalary during fiscal 2005 was $100,000.

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**Option Grants in LastFiscal Year**

The following table sets forth individualgrants of options to acquire shares of our common stock made to the NamedExecutive Officers during the fiscal year ended March 31, 2006.

 
| ** **             | ** ** | **Options** | ** ** | **Percent of Total  Options  Granted to  Employees in** | ** ** | ** **              | ** ** | ** **               | ** **         | **Potential Realizable Value at**Assumed Annual Rates ofStock Price Appreciation forOption Term | ** ** |
|------------------------|------------|-------------|------------|------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Name**               | ** ** | **Granted** | ** ** | **fiscal Year**                                                   | ** ** | **Exercice Price** | ** ** | **Expiration Date** | ** **         | **5%**                                                                                                                                            | ** ** | **10%** | ** ** |
| Patrick F. O’Neal |       | 35,000      |       | 14                                                                     | %          | $                       | 3.10       |                     | July 29, 2015 |                                                                                                                                              | $          | 68,235 |   | $ | 172,921 |   |
| Anthony J. Sansone     |       | 25,000      |       | 10                                                                     | %          | $                       | 3.10       |                     | July 29, 2015 |                                                                                                                                              | $          | 48,739 |   | $ | 123,515 |   |
| Stephen W. Fulling     |       | 25,000      |       | 10                                                                     | %          | $                       | 3.10       |                     | July 29, 2015 |                                                                                                                                              | $          | 48,739 |   | $ | 123,515 |   |
| Thomas  C. Tyler       |       | 15,000      |       | 6                                                                      | %          | $                       | 3.10       |                     | July 29, 2015 |                                                                                                                                              | $          | 29,244 |   | $ | 74,109 |   |
| Chris  Wells           |       | —      |       | —                                                                 |       | —                  |       | —                   |               | —                                                                                                                                            |       | — |   |

 

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

The following table sets forth theaggregate value of unexercised options to acquire shares of our common stockheld by the Named Executive Officers on March 31, 2006, and the valuerealized upon the exercise of options during the fiscal year ended March 31,2006.

 
| ** **             | ** ** | **Shares Acquired** | ** ** | **Value**          | ** ** | **Number of Unexercised  Options at FY End 2006(2)** | ** ** | **Value of Unexercised**In-the-Money Options  at FY End 2006(3) | ** ** |
|------------------------|------------|--------------------------|------------|--------------------|------------|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| **Name**               | ** ** | **on Exercise**     | ** ** | **Realized($)(1)** | ** ** | **Exercisable**                                                                    | ** ** | **Unexercisable**                                                                             | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Patrick F. O’Neal |       | —                   |       | —             |       | 153,262                                                                            |       | 10,488                                                                                        |       | $ | 764,648 |   | $ | 63,977 |   |
| Anthony J. Sansone     |       | —                   |       | —             |       | 50,000                                                                             |       | —                                                                                        |       | $ | 115,000 |   | $ | — |   |
| Stephen W. Fulling     |       | —                   |       | —             |       | 45,000                                                                             |       | —                                                                                        |       | $ | 177,600 |   | $ | — |   |
| Thomas C. Tyler        |       | —                   |       | —             |       | 25,000                                                                             |       | —                                                                                        |       | $ | 115,000 |   | $ | — |   |
| Chris  Wells           |       | 1,875                    |       | $                  | 10,181     |                                                                               | 8,437      |                                                                                          | 2,188      |   | $ | 20,966 |   | $ | 13,347 |   |
|                        |            |                          |            |                    |            |                                                                                    |            |                                                                                               |            |  |  |  |  |  |  |  |

----

(1)          Calculated based on the difference between the exerciseprice and the value of the shares as of the date acquired.

(2)          Includes shares of our common stock subject to optionsexercisable within 60 days of March 31, 2006.

(3)          Calculated based on the difference between the exerciseprice and the price of a share of our common stock on March 31, 2006. Theprice of our common stock on March 31, 2006 was $7.70 per share (asreported on the Nasdaq (SmallCap) Stock Market).

**Director Compensation**

During the 2006 fiscal year, ournon-employee directors receive compensation of $4,000****for attendance at each quarterly Board meeting (except forthe Chairman of the Board who receives $8,000 for attendance at each quarterlyBoard meeting) and $2,000 for participation in each quarterly committee meeting.As additional incentive to serve, non-employee board members from time to timereceive options to purchase shares of our common stock. Mr. Mahaffeyreceived options to purchase 11,250 shares of our common stock at $2.32 pershare during fiscal 2006. Mr. Cooper, Mr. Dyer, Mr. Livingstone,Mr. Olafson and Mr. Windley each received options to purchase 7,500shares of our common stock at $2.32 per share during fiscal 2006. Mr. Mahaffeyalso received an additional $5,000 per month from February 1, 2005 throughDecember 31, 2005 for additional services rendered as Chairman during suchperiod, including evaluating merger and acquisition opportunities and assistingthe Corporation’s efforts to achieve sales growth. On September 30, 2005,in conjunction with strategic opportunities related to the Company’s early 

42

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implementation of FASB 123R, the Board of Directorsapproved an acceleration of all previously awarded underwater options,including options awarded to Directors. Additionally, the options awarded in2006 immediately vested.

For the 2007 fiscal year, the non-employee directors will becompensated with a quarterly retainer rather than per meeting fees topotentially reduce amounts that might otherwise be payable. Such directors willreceive quarterly compensation for all Board meetings attended during thequarter of $4,000 (except for the Chairman of the Board who will receive$8,000). Members of the audit committee shall receive quarterly compensationfor all audit committee meetings attended during the quarter of $2,500 (exceptfor the chairman of the audit committee who will receive $3,500). Members ofthe compensation, governance and technology committees shall receive quarterlycompensation for all committee meetings attended during the quarter of $2,000(including the chairman of such committees). Each non-employee director willreceive an annual grant of options to purchase 7,500 shares (except for theChairman of the Board who will receive options to purchase 11,250 shares),priced as of the date of the grant. Additional compensation to any non-employeedirector for additional or extraordinary board-related services or for anynon-board related consulting or other services, if any, shall be specificallydetermined on a case by case basis by the compensation committee or the fullboard.

**EmploymentAgreements and Change of Control Arrangements**

We have adopted the Sento Corporation1999 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 NamedExecutive Officers are among the participants in the Incentive Plan. Inaddition, options issued to the Named Executive Officers and all directorsprovide that upon a change in control of Sento all such options immediatelyvest and become exercisable.

We have entered into employment agreementswith our Chief Executive Officer, Chief Financial Officer, Chief TechnologyOfficer and Senior Vice President of Sales and Marketing. The employmentagreements have initial terms of between one and three years. Under theagreements, the employees are entitled to a base salary, incentive bonuses andstock options, as determined by the Board of Directors, standard benefits suchas health and life insurance and reimbursement of reasonable expenses.

We can terminatethe employment contracts for cause, which is defined in the agreements, orwithout cause. In addition, the employee can terminate the contract for causeor on 180 days notice. If the contract is terminated without cause or as aresult of a “change of control,” as defined in the agreements, the employeesare entitled to receive post-employment insurance coverage and/or severance payof up to 12 months salary, depending on the particular agreement. Theagreements also contain non-competition, non-solicitation and assignment ofinventions provisions which we believe are consistent with industry practice.

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## ***Item 12.******           ******Security Ownership of Certain Beneficial Owners andManagement and Related Shareholder Matters.***

**Beneficial OwnershipTable**

The following table sets forthinformation as of May 31, 2006 with respect to the beneficial ownership ofshares of our common stock by each person known by us to be the beneficialowner of more than 5% of our common stock, by each director, by each of theNamed Executive Officers and by all directors and executive officers as agroup. Unless otherwise noted, each person named has sole voting and investmentpower with respect to the shares indicated. The percentages set forth belowhave been computed based on the number of outstanding shares of our commonstock, which were 3,953,036 shares as of May 31, 2006. The businessaddress of each of the following persons is 420 East South Temple, Suite 400,Salt Lake City, Utah 84111.

|                                                                         | ** ** | **Beneficial Ownership**              | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                              | ** ** | **As of May 31, 2006** | ** ** |
| ** **                                                              | ** ** | **Number of**                         | ** ** | **Percentage** | ** ** |
| **Name and Address of Beneficial Owner**       | ** ** | **Shares**                                 | ** ** | **of Class*** | ** ** |
|                                                                    |       |                                       |       |   |   |
| Patrick F. O’Neal                                                  |       | 164,947                                    | (1)        | 4 | % |
| President, Chief Executive  Officer and Director                        |       |                                       |       |   |   |
|                                                                         |       |                                       |       |   |   |
| Anthony J. Sansone                                                      |       | 41,300                                     | (2)        | 1 | % |
| Senior Vice President,  Chief Financial Officer and Corporate Secretary |       |                                       |       |   |   |
|                                                                    |       |                                       |       |   |   |
| C. Lloyd Mahaffey                                                       |       | 38,000                                     | (3)        | 1 | % |
| Chairman of the Board                                                   |       |                                       |       |   |   |
|                                                                         |       |                                       |       |   |   |
| Eric Olafson                                                            |       | 34,342                                     | (4)        | ** |   |
| Director                                                                |       |                                       |       |   |   |
|                                                                    |       |                                       |       |   |   |
| Kim A. Cooper                                                           |       | 26,025                                     | (5)        | ** |   |
| Director                                                                |       |                                       |       |   |   |
|                                                                         |       |                                       |       |   |   |
| Thomas C. Tyler                                                         |       | 26,000                                     | (6)        | ** |   |
| Senior Vice President  of Sales and Marketing                           |       |                                       |       |   |   |
|                                                                    |       |                                       |       |   |   |
| Stephen W. Fulling                                                      |       | 25,000                                     | (7)        | ** |   |
| Senior Vice President and  Chief Technology and Information Officer     |       |                                       |       |   |   |
|                                                                         |       |                                       |       |   |   |
| Phillip J. Windley                                                      |       | 23,900                                     | (8)        | ** |   |
| Director                                                                |       |                                       |       |   |   |
|                                                                    |       |                                       |       |   |   |
| Richard E. Dyer                                                         |       | 19,000                                     | (9)        | ** |   |
| Director                                                                |       |                                       |       |   |   |
|                                                                         |       |                                       |       |   |   |
| Donald H. Livingstone                                                   |       | 18,000                                     | (10)       | ** |   |
| Director                                                                |       |                                       |       |   |   |
|                                                                    |       |                                       |       |   |   |
| Chris Wells                                                             |       | 11,060                                     | (11)       | ** |   |
| Vice President of Client  Relations                                     |       |                                       |       |   |   |
|                                                                         |       |                                       |       |   |   |
| All executive officers and directors as a group (11 persons)            |       | 427,574                                    | (12)       | 16 | % |

 

44

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----

*                 Beneficial ownership as a percentage of theclass for each person holding options, warrants or other rights exercisablewithin 60 days of May 31, 2006 has been calculated as though shares of ourcommon stock subject to such options were outstanding, but such shares have notbeen deemed outstanding for the purpose of calculating the percentage of theclass owned by any other person.

**          Represents less than 1% of the outstandingshares of our common stock.

(1)          Includespresently exercisable options to purchase 153,262 shares of our common stock.

(2)          Includespresently exercisable options to purchase 40,000 shares of our common stock.

(3)          Includespresently exercisable options to purchase 30,000 shares of our common stock.

(4)          Includes presentlyexercisable options to purchase 22,500 shares of our common stock and 7,956shares of our common stock held by the Olafson Trust, of which Mr. Olafsonis a trustee.

(5)          Includespresently exercisable options to purchase 24,375 shares of our common stock.

(6)          Includespresently exercisable options to purchase 25,000 shares of our common stock.

(7)          Includespresently exercisable options to purchase 25,000 shares of our common stock.

(8)          Includespresently exercisable options to purchase 22,500 shares of our common stock.

(9)          Includespresently exercisable options to purchase 15,000 shares of our common stock.

(10)    Includes presentlyexercisable options to purchase 15,000 shares of our common stock.

(11)    Includes presentlyexercisable options to purchase 8,437 shares of our common stock.

(12)    Includes presentlyexercisable options to purchase 381,074 shares of our common stock.

**Securities Authorized for Issuance Under EquityCompensation Plans**

The followingtable contains information regarding our equity compensation plans as of March 31,2006.

**EQUITY COMPENSATION PLANINFORMATION**

** **
| ** **                                                      | ** ** | **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)     |       | 589,264                                                                                                                                  |       | $                                                                                                       | 3.94       |                                                                                                                                                                                                                    | 519,481    |   |
| Equity compensation plans not approved  by security holders (2) |       | 110,000                                                                                                                                  |       | $                                                                                                       | 5.58       |                                                                                                                                                                                                                    | —     |   |
| Total                                                           |       | 699,264                                                                                                                                  |       | $                                                                                                       | 4.20       |                                                                                                                                                                                                                    | 519,481    |   |

----

(1)          Consists of our stock option plan and employee stockpurchase plan. See Note 8 to our consolidated financial statements in thisReport for additional information regarding these plans.

(2)          Consists of warrants to purchase shares of our common stock.See Note 8 to our consolidated financial statements in this Report foradditional information regarding these warrants.

The warrants disclosed in the precedingtable were issued to placement agents in conjunction with the issuance ofconvertible debt and common stock, and in exchange for consulting servicespursuant to individual compensation arrangements. These warrants give the holdersthe right to purchase shares of our common stock at a price equal to the fairmarket value of a share of our common stock at the time of issuance of the warrants.The terms of these warrants range from three to five years from the date ofissuance of the warrants.

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## ***Item13.******           ******CertainRelationships and Related Transactions.***

During fiscal2005, we acquired the assets of Xtrasource. Under the provisions of thepurchase agreement, we agreed to pay the former shareholders of Xtrasource aquarterly earnout consisting of 30% of earnings before interest, taxes,depreciation and amortization generated from the Xtrasource operations (“EBITDA”).In addition, we agreed to advance the former shareholders of Xtrasourceup to $200,000 for the payment of their portion of closing costs for thetransaction and for the settlement of liabilities not assumed by us in theacquisition. These advances are to be repaid by reductions in the earnoutpayments to the former shareholders. Thomas C. Tyler, the Company’s currentSenior Vice President of Sales and Marketing is one of the former shareholdersof Xtrasource.

In March of1999, we entered into a consulting agreement with GT Investments, a companythat is wholly owned by Gary B. Filler, who servedas our Chairman until September 2004. Under the agreement, we paid GTInvestments a monthly fee for services provided by Mr. Filler. The totalexpense incurred by the Company under its arrangement with GT Investments, was$33,000 for the fiscal year ended March 31, 2005 and $66,000 for thefiscal year ended March 31, 2004. The consulting agreement was cancelledin September 2004.

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

**Audit Fees**

The aggregate fees billed by Ernst &Young LLP, our independent public accountants (“E&Y”), for professionalservices rendered for the audit of our financial statements and the reviews ofour financial statements included in our Quarterly Reports on Forms 10-Qwere approximately $148,000 for the fiscal year ended March 31, 2006 andapproximately $106,000, for the fiscal year ended March 31, 2005.

**Audit-Related Fees**

The aggregate fees billed by E&Y forassurance and related services performed by E&Y that were reasonablyrelated to the performance of the audit of our financial statements and are notreported in the preceding paragraph were approximately $38,000 for the fiscalyear ended March 31, 2006 and approximately $82,000 for the fiscal yearended March 31, 2005. Audit-related fees relate primarilyto audits of employee benefit plans, review of our registration statement filedin fiscal 2005 and miscellaneous accounting and internal control relatedconsultations including consultations on merger and acquisition activity.

**Tax Fees**

The aggregate fees billed by E&Y fortax compliance, tax advice and tax planning were approximately $30,000 for thefiscal year ended March 31, 2006 and approximately $25,000 for the fiscalyear ended March 31, 2005. For fiscal 2006 and 2005, tax fees relatedprimarily to the preparation of our income tax returns

**All Other Fees**

There were no fees billed by E&Y forother non-audit services during fiscal years 2006 and 2005.

**Pre-Approval Policiesand Procedures**

The Audit Committee of our Board ofDirectors ensures that we engage our public accountants to provide only auditand non-audit services that are compatible with maintaining the independence of ourpublic accountants. Our Audit Committee approves or pre-approves all servicesprovided by our public accountants. Permitted services include audit andaudit-related services, tax and other non-audit related 

46

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services. Certain services are identifiedas restricted. Restricted services are those services that may not be providedby our external public accountants, whether identified in statute or determinedin the opinion of our Audit Committee to be incompatible with the role of an independent auditor. Allfees identified in the preceding four paragraphs were approved by our AuditCommittee. During the fiscal year ended March 31, 2006, our AuditCommittee reviewed all non-audit services provided by our external publicaccountants, and concluded that the provision of such non-audit services wascompatible with maintaining the independence of the external publicaccountants.

# **PART IV**

## ***Item15.******              ******Exhibitsand Financial Statement Schedules.***

(a)                1.   Financial Statements

| Consolidated  Financial Statements of Sento Corporation                                                                 |   |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                    |   |   |
| Report of Independent Registered Public Accounting  Firm                                                                |   | F-1    |
| Consolidated Balance Sheets as of March 31, 2005  and 2006                                                         |   | F-2    |
| Consolidated Statements of Operations for the years  ended March 31, 2004, 2005 and 2006                           |   | F-3    |
| Consolidated Statements of Changes in Stockholders’  Equity for the years ended March 31, 2004, 2005 and 2006 |   | F-4    |
| Consolidated Statements of Cash Flows for the years  ended March 31, 2004, 2005 and 2006                           |   | F-5    |
| Notes to Consolidated Statements                                                                                        |   | F-7    |

 

2.         FinancialStatement Schedules

All financial statement schedules forwhich provision is made in the applicable accounting regulations of theSecurities and Exchange Commission are not required under the relatedinstructions, are inapplicable, or the required information has been providedin the consolidated financial statements or notes thereto.

3.         Listing ofExhibits

 
| Exhibit  Number | ** ** | **Description**                                                                                    | ** ** | **Incorporated  by Reference** | ** ** | **Filed  Herewith** | ** ** |
|-----------------|------------|----------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|---------------------|------------|
| 3.1             |       | Amended and Restated Articles of Incorporation                                                     |       | (1)                            |       |                |       |
| 3.3             |       | Amended Bylaws                                                                                     |       | (1)                            |       |                |       |
| 10.1            |       | Sento Corporation 1999 Omnibus Stock Incentive Plan                                                |       | (2)                            |       |                |       |
| 10.2            |       | Sento Corporation 1996 Employee Stock Purchase Plan  (Amended and Restated)                        |       | (2)                            |       |                |       |
| 10.3            |       | Lease Agreement, dated January 1, 2000, between  the Company and K.E.B. Enterprises LP        |       | (2)                            |       |                |       |
| 10.4            |       | Lease Agreement, dated May 24, 2000, between  the Company and Abinadi, Inc.              |       | (2)                            |       |                |       |
| 10.5            |       | Business Lease with Wyoming Financial Properties  Inc.                                             |       | (3)                            |       |                |       |
| 10.8            |       | Equipment Lease with NTFC Capital Corporation                                                      |       | (4)                            |       |                |       |
| 10.9            |       | Lease agreement between the Company and Pracvest LLC                                               |       | (5)                            |       |                |       |
| 10.10           |       | Loan and security agreement between the Company and  Silicon Valley Bank dated April 15, 2003 |       | (6)                            |       |                |       |
| 10.12           |       | Form of Warrant to purchase shares of Common  Stock                                           |       | (6)                            |       |                |       |
| 10.13           |       | Equipment lease with General Electric Capital  Corporation dated April 30, 2002               |       | (6)                            |       |                |       |
| 10.14           |       | First Amendment to Sento Corporation 1999 Omnibus  Stock Incentive Plan                            |       | (6)                            |       |                |       |

 

47

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| Exhibit  Number | ** ** | **Description**                                                                                                                     | ** ** | **Incorporated  by Reference** | ** ** | **Filed  Herewith** | ** ** |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|---------------------|------------|
| 10.15           |       | Canyon Park Technology Center Office Building Lease  Agreement                                                                      |       | (7)                            |       |                |       |
| 10.16           |       | Sublease agreement between Sento Corporation and  Symantec Corporation                                                              |       | (7)                            |       |                |       |
| 10.17           |       | Securities Purchase Agreement dated March 30,  2004                                                                            |       | (8)                            |       |                |       |
| 10.18           |       | Registration Rights Agreement dated March 30,  2004                                                                            |       | (8)                            |       |                |       |
| 10.19           |       | Form of Common Stock Purchase Warrant                                                                                          |       | (8)                            |       |                |       |
| 10.20           |       | Amendment to Loan Documents with Silicon Valley Bank                                                                                |       | (8)                            |       |                |       |
| 10.21           |       | Amended and Restated Schedule to Loan and Security  Agreement with Silicon Valley Bank                                              |       | (8)                            |       |                |       |
| 10.22           |       | Warrant to purchase Common Stock issued to  Shareholder Relations                                                                   |       | (8)                            |       |                |       |
| 10.23           |       | Form of Warrant to purchase Common Stock  issuable to Remsen Funding Corporation                                               |       | (8)                            |       |                |       |
| 10.24           |       | Employment Agreement between Sento Corporation and  Patrick O’Neal                                                             |       | (9)                            |       |                |       |
| 10.25           |       | Employment Agreement between Sento Corporation and  Thomas Tyler                                                                    |       | (10)                           |       |                |       |
| 10.26           |       | Employment Agreement between Sento Corporation and  Anthony Sansone                                                                 |       | (11)                           |       |                |       |
| 10.27           |       | Lease Agreement with Bay Pacific, Co.                                                                                               |       | (12)                           |       |                |       |
| 10.28           |       | Amendment to Canyon Park Technology Center Office  Building Lease Agreement                                                         |       | (12)                           |       |                |       |
| 10.29           |       | Amendment to Lease Agreement with K.E.B. Enterprises  L.P.                                                                          |       | (12)                           |       |                |       |
| 10.30           |       | Amendment to Loan Documents with Silicon Valley Bank                                                                                |       | (12)                           |       |                |       |
| 10.31           |       | Amended and Restated Schedule to Loan and Security  Agreement with Silicon Valley Bank                                              |       | (12)                           |       |                |       |
| 10.32           |       | Office Lease With Centurion SW LLC                                                                                                  |       | (13)                           |       |                |       |
| 10.33           |       | Lease Amendment Number Three with AP Southeast  Portfolio Partners L.P.                                                             |       | (13)                           |       |                |       |
| 10.34           |       | Amendment to Loan Documents and Third Amended and  Restated Schedule to Loan and Security Agreement with Silicon Valley  Bank  |       | (14)                           |       |                |       |
| 10.35           |       | Amendment one to lease agreement with Centurion  Southwest, LLC                                                                     |       | (14)                           |       |                |       |
| 10.36           |       | Amendment two to lease agreement with Centurion  Southwest, LLC                                                                     |       | (14)                           |       |                |       |
| 10.37           |       | First amendment to lease agreement with Bay Pacific  Corporation                                                                    |       | (14)                           |       |                |       |
| 10.38           |       | Second amendment to lease agreement with Bay Pacific  Corporation                                                                   |       | (14)                           |       |                |       |
| 10.39           |       | Amendment four to lease agreement with AP Southeast  Portfolio Partners, L.P.                                                       |       | (14)                           |       |                |       |
| 10.40           |       | Master lease and schedule 1 with Tetra Financial  Group LLC                                                                    |       | (14)                           |       |                |       |
| 10.41           |       | Master lease agreement and schedules with Dell  Financial Services                                                                  |       | (14)                           |       |                |       |
| 10.42           |       | Amendment to Loan Documents and Fourth Amended and  Restated Schedule to Loan and Security Agreement with Silicon Valley  Bank |       |                           |       | (15)                |       |
| 10.43           |       | Amendment to Loan Documents and Fifth Amended and  Restated Schedule to Loan and Security Agreement with Silicon Valley  Bank  |       |                           |       | (15)                |       |
| 21              |       | Subsidiaries of the Registrant                                                                                                      |       |                           |       | (15)                |       |
| 23              |       | Consent of Ernst & Young LLP, Independent  Registered Public Accounting Firm                                               |       |                           |       | (15)                |       |
| 31.1            |       | Certification of the Company’s Principal Executive  Officer                                                                    |       |                           |       | (15)                |       |
| 31.2            |       | Certification of the Company’s Principal Financial  Officer                                                                    |       |                           |       | (15)                |       |
| 32.1            |       | Certification of the Company’s Principal Executive  Officer                                                                    |       |                           |       | (15)                |       |
| 32.2            |       | Certification of the Company’s Principal Financial  Officer                                                                    |       |                           |       | (15)                |       |

 

48

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| (1)    | Incorporated by reference to Form 8-K,  filed with the Commission on June 8, 2005.                                                                                   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                           |
| (2)    | Incorporated by reference to Annual Report on  Form 10-KSB for the fiscal year ended March 31, 2000, filed  with the Commission on June 16, 2000.               |
|   |                                                                                                                                                                           |
| (3)    | Incorporated by reference to Quarterly Report on  Form 10-QSB for the fiscal quarter ended December 31, 2000,  filed with the Commission on February 12, 2001.  |
|   |                                                                                                                                                                           |
| (4)    | Incorporated by reference to Annual Report on  Form 10-KSB for the fiscal year ended March 31, 2002, filed  with the Commission on June 28, 2002.               |
|   |                                                                                                                                                                           |
| (5)    | Incorporated by reference to Quarterly Report on  Form 10-QSB for the fiscal quarter ended December 31, 1998,  filed with the Commission on February 5, 1999.   |
|   |                                                                                                                                                                           |
| (6)    | Incorporated by reference to Annual Report on  Form 10-KSB for the fiscal year ended March 31, 2003, filed  with the Commission on June 30, 2003.               |
|   |                                                                                                                                                                           |
| (7)    | Incorporated by reference to Quarterly Report on  Form 10-QSB for the fiscal quarter ended September 30, 2003,  filed with the Commission on November 13, 2003. |
|   |                                                                                                                                                                           |
| (8)    | Incorporated by reference to Annual Report on  Form 10-KSB for the fiscal year ended March 31, 2004, filed  with the Commission on May 20, 2004.                |
|   |                                                                                                                                                                           |
| (9)    | Incorporated by reference to Form 8-K  filed with the Commission on November 24, 2004.                                                                               |
|   |                                                                                                                                                                           |
| (10)   | Incorporated by reference to Form 8-K  filed with the Commission on November 30, 2004.                                                                               |
|   |                                                                                                                                                                           |
| (11)   | Incorporated by reference to Form 8-K  filed with the Commission on June 10, 2005.                                                                                   |
|   |                                                                                                                                                                           |
| (12)   | Incorporated by reference to Annual Report on  Form 10-KSB for the fiscal year ended March 31, 2005, filed  with the Commission on June 29, 2005.               |
|   |                                                                                                                                                                           |
| (13)   | Incorporated by reference to Quarterly Report on  Form 10-QSB for the fiscal quarter ended September 30, 2005,  filed with the Commission on November 14, 2005. |
|   |                                                                                                                                                                           |
| (14)   | Incorporated by reference to Quarterly Report on  Form 10-QSB for the fiscal quarter ended December 31, 2005,  filed with the Commission on February 14, 2006.  |
|   |                                                                                                                                                                           |
| (15)   | Filed herewith and attached to this Annual Report on  Form 10-K for the fiscal year ended March 31, 2006.                                                            |

 

49

----

 

# **SIGNATURES**

In accordance with Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has caused this AnnualReport on Form 10-K to be signed on its behalf by the undersigned,thereunto duly authorized, on June 28, 2006.
|        | SENTO CORPORATION |
|--------|-------------------|
|   |              |   |
|   | By:               | /s/ PATRICK F. O’NEAL |
|   |              | Patrick F. O’Neal |
|   |              | President and Chief Executive Officer |
|   |              |   |
|   | By:               | /s/ ANTHONY J. SANSONE |
|   |              | Anthony J. Sansone |
|   |              | Senior Vice President, Chief Financial Officer |
|   |              | and Corporate Secretary |

 

In accordance withthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities indicatedon June 28, 2006.

 
| Signature                   | ** ** | **Title**                                    | ** ** | **Date**            |
|-----------------------------|------------|----------------------------------------------|------------|---------------------|
| ** **                  | ** ** | ** **                                   | ** ** | ** **          |
| /s/ C. Lloyd  Mahaffey      |       | Director, Chairman of the Board              |       | June 28,  2006 |
| C. Lloyd Mahaffey           |       |                                         |       | ** **          |
|                        |       |                                         |       | ** **          |
| /s/ Patrick F.  O’Neal |       | President, Chief Executive Officer and       |       | June 28,  2006 |
| Patrick F. O’Neal      |       | Director (Principal Executive Officer)       |       | ** **          |
|                        |       |                                         |       | ** **          |
| /s/ Kim A.  Cooper          |       | Director                                     |       | June 28,  2006 |
| Kim A. Cooper               |       |                                         |       | ** **          |
|                        |       |                                         |       | ** **          |
| /s/ Eric Olafson            |       | Director                                     |       | June 28,  2006 |
| Eric Olafson                |       |                                         |       | ** **          |
|                        |       |                                         |       | ** **          |
| /s/ Donald H.  Livingstone  |       | Director                                     |       | June 28,  2006 |
| Donald H. Livingstone       |       |                                         |       | ** **          |
|                        |       |                                         |       | ** **          |
| /s/ Richard E.  Dyer        |       | Director                                     |       | June 28,  2006 |
| Richard E. Dyer             |       |                                         |       | ** **          |
|                        |       |                                         |       | ** **          |
| /s/ Phillip J.  Windley     |       | Director                                     |       | June 28,  2006 |
| Phillip J. Windley          |       |                                         |       | ** **          |
|                        |       |                                         |       | ** **          |
| /s/ Anthony J.  Sansone     |       | Senior Vice President, Chief Financial       |       | June 28,  2006 |
| Anthony J. Sansone          |       | Officer and Corporate Secretary              |       | ** **          |
|                        |       | (Principal Financial and Accounting Officer) |       | ** **          |

 

50

----

##  

## ***Report ofIndependent Registered Public Accounting Firm***

The Board of Directorsand StockholdersSento Corporation and Subsidiaries

We have audited theaccompanying consolidated balance sheets of Sento Corporation and Subsidiariesas of March 31, 2006 and 2005, and the related consolidated statements ofoperations, stockholders’ equity and comprehensive loss and cash flows for eachof the three years in the period ended March 31, 2006. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. We were not engaged to perform an audit of theCompany’s internal control over financial reporting. Our audits included considerationof internal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

**In our opinion, the financialstatements referred to above present fairly, in all material respects, the consolidatedfinancial position of Sento Corporation and Subsidiaries at March 31, 2006and 2005, and the consolidated results of their operations and their cash flowsfor each of the three years in the period ended March 31,2006 inconformity with U.S. generally accepted accounting principles.**

**As discussed in Note 2 to thefinancial statements, the Company changed its method of accounting forstock-based compensation.**

/s/ Ernst & Young LLP

Salt Lake City,UtahJune 23, 2006

F-1

----

 

**SentoCorporation and Subsidiaries**

**Consolidated Balance Sheets**
| ** **                                                                                                                                                    | ** ** | **March 31** | ** **     | **March 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|----------------|-------------------|------------|
| ** **                                                                                                                                                    | ** ** | **2006**          | ** **     | **2005**          | ** ** |
| Assets                                                                                                                                                        |       |              |           |              |       |
| Current assets:                                                                                                                                               |       |              |           |              |       |
| Cash and cash equivalents                                                                                                                                     |       | **$**             | **4,498,707**  | ** **        | $          | 5,698,195 |   |
| Accounts receivable, less allowance for doubtful  accounts of $120,000 and $749,000 at March 31, 2006 and 2005, respectively                                  |       | **7,688,374**     | ** **     | 4,326,315         |       |
| Training reimbursement receivable                                                                                                                             |       | **736,000**       | ** **     | —            |       |
| Prepaid and other current assets                                                                                                                              |       | **1,068,987**     | ** **     | 643,059           |       |
|                                                                                                                                                          |       | ** **        | ** **     |              |       |
| Total current  assets                                                                                                                                         |       | **13,992,068**    | ** **     | 10,667,569        |       |
|                                                                                                                                                          |       | ** **        | ** **     |              |       |
| Property and  equipment, net                                                                                                                                  |       | **7,068,197**     | ** **     | 4,031,632         |       |
| Intangible  assets, net                                                                                                                                       |       | **1,904,274**     | ** **     | 1,229,607         |       |
| Other assets                                                                                                                                                  |       | **350,375**       | ** **     | 296,775           |       |
|                                                                                                                                                          |       | ** **        | ** **     |              |       |
| Total assets                                                                                                                                                  |       | **$**             | **23,314,914** | ** **        | $          | 16,225,583 |   |
|                                                                                                                                                          |       | ** **        | ** **     |              |       |
| Liabilities and  stockholders' equity                                                                                                                         |       | ** **        | ** **     |              |       |
| Current  liabilities:                                                                                                                                         |       | ** **        | ** **     |              |       |
| Accounts payable                                                                                                                                              |       | **$**             | **3,686,890**  | ** **        | $          | 2,110,013 |   |
| Accrued salaries and payroll taxes                                                                                                                            |       | **3,559,149**     | ** **     | 1,559,676         |       |
| Current portion of accrued restructuring expense                                                                                                              |       | **86,832**        | ** **     | 118,793           |       |
| Current portion of long-term debt and capital leases                                                                                                          |       | **2,155,339**     | ** **     | 745,699           |       |
| Current portion of accrued contingent consideration  from business acquisition                                                                                |       | **470,528**       | ** **     | —            |       |
| Current portion of deferred lease incentive                                                                                                                   |       | **62,834**        | ** **     | —            |       |
| Current portion of deferred tax liability                                                                                                                     |       | **82,572**        | ** **     | —            |       |
| Other current liabilities                                                                                                                                     |       | **349,447**       | ** **     | 635,834           |       |
|                                                                                                                                                          |       | ** **        | ** **     |              |       |
| Total current  liabilities                                                                                                                                    |       | **10,453,591**    | ** **     | 5,170,015         |       |
|                                                                                                                                                          |       | ** **        | ** **     |              |       |
| Long-term debt  and capital leases, net of current portion                                                                                                    |       | **1,924,902**     | ** **     | 959,259           |       |
|                                                                                                                                                          |       | ** **        | ** **     |              |       |
| Accrued  contingent consideration from business acquisition, net of current portion                                                                           |       | **1,244,275**     | ** **     | 907,898           |       |
| Accrued  restructuring expense, net of current portion                                                                                                        |       | **115,771**       | ** **     | —            |       |
| Deferred lease  incentive, net of current portion                                                                                                             |       | **323,013**       | ** **     | —            |       |
| Deferred tax  liability, net of current portion                                                                                                               |       | **206,432**       | ** **     | —            |       |
| Total  liabilities                                                                                                                                            |       | **14,267,984**    | ** **     | 7,037,172         |       |
|                                                                                                                                                          |       | ** **        | ** **     |              |       |
| Commitments and  contingencies                                                                                                                                |       | ** **        | ** **     |              |       |
|                                                                                                                                                          |       | ** **        | ** **     |              |       |
| Stockholders'  equity:                                                                                                                                        |       | ** **        | ** **     |              |       |
| Common stock, $0.25 par value, 50,000,000 shares  authorized; 3,868,207 and 3,860,304 shares issued and outstanding at March  31, 2006 and 2005, respectively |       | **967,052**       | ** **     | 965,077           |       |
| Additional paid-in capital                                                                                                                                    |       | **20,583,158**    | ** **     | 20,662,508        |       |
| Treasury stock                                                                                                                                                |       | **—**        | ** **     | (203,681          | )          |
| Accumulated deficit                                                                                                                                           |       | **(12,432,253**   | **)**          | (12,278,163       | )          |
| Accumulated other comprehensive income (loss):                                                                                                                |       | ** **        | ** **     |              |       |
| Cumulative foreign currency translation adjustment                                                                                                            |       | **(71,027**       | **)**          | 42,670            |       |
|                                                                                                                                                          |       | ** **        | ** **     |              |       |
| Total  stockholders' equity                                                                                                                                   |       | **9,046,930**     | ** **     | 9,188,411         |       |
|                                                                                                                                                          |       | ** **        | ** **     |              |       |
| Total  liabilities and stockholders' equity                                                                                                                   |       | **$**             | **23,314,914** | ** **        | $          | 16,225,583 |   |

 

*Seeaccompanying notes.*

F-2

----

* *

**SentoCorporation and Subsidiaries**

**Consolidated Statements of Operations**
| ** **                                                                                                                                                                    | ** ** | **Year Ended** | ** **     |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|----------------|
| ** **                                                                                                                                                                    | ** ** | **March 31**   | ** **     | **March 31** | ** ** | **March 31** | ** ** |
| ** **                                                                                                                                                                    | ** ** | **2006**            | ** **     | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                                                          |       |                |           |   |   |   |   |
| Revenue, net                                                                                                                                                                  |       | **$**               | **51,129,319** | ** ** | $ | 31,785,561 |   | $ | 21,396,118 |   |
| Cost of sales  (excluding share-based compensation of $0, $2,099 and $233,635 for 2006, 2005  and 2004, respectively)                                                         |       | **42,752,540**      | ** **     | 27,252,379 |   | 18,071,787 |   |
| Less: training  reimbursements                                                                                                                                                |       | **(752,552**        | **)**          | — |   | — |   |
|                                                                                                                                                                          |       | ** **          | ** **     |   |   |   |   |
| Net cost of  sales                                                                                                                                                            |       | **41,999,988**      | ** **     | 27,252,379 |   | 18,071,787 |   |
|                                                                                                                                                                          |       | ** **          | ** **     |   |   |   |   |
| Gross profit                                                                                                                                                                  |       | **9,129,331**       | ** **     | 4,533,182 |   | 3,324,331 |   |
|                                                                                                                                                                          |       | ** **          | ** **     |   |   |   |   |
| Selling,  general, and administrative expenses (excluding stock based (benefit)  compensation of $(68,652), $(348,436) and $1,328,473 for 2006, 2005 and 2004,  respectively) |       | **8,470,039**       | ** **     | 5,090,976 |   | 2,665,723 |   |
| Product  development                                                                                                                                                          |       | **164,915**         | ** **     | 292,303 |   | — |   |
| Specific provision  for doubtful account                                                                                                                                      |       | **(181,593**        | **)**          | 475,000 |   | — |   |
| Amortization of  intangible assets                                                                                                                                            |       | **364,037**         | ** **     | 136,594 |   | — |   |
| Restructuring  charge                                                                                                                                                         |       | **477,575**         | ** **     | 220,000 |   | — |   |
| Non-cash charge  for valuation of warrants                                                                                                                                    |       | **—**          | ** **     | 239,558 |   | — |   |
| Stock based  (benefit) compensation                                                                                                                                           |       | **(68,652**         | **)**          | (346,337 | ) | 1,562,108 |   |
|                                                                                                                                                                          |       | ** **          | ** **     |   |   |   |   |
| Loss from operations                                                                                                                                                          |       | **(96,990**         | **)**          | (1,574,912 | ) | (903,500 | ) |
|                                                                                                                                                                          |       | ** **          | ** **     |   |   |   |   |
| Interest income                                                                                                                                                               |       | **99,108**          | ** **     | 96,986 |   | 23,452 |   |
| Interest expense                                                                                                                                                              |       | **(164,357**        | **)**          | (129,747 | ) | (236,244 | ) |
| Non-cash  interest expense related to warrants issued with convertible debentures                                                                                             |       | **(13,988**         | **)**          | (13,568 | ) | (228,162 | ) |
| Other expense,  net                                                                                                                                                           |       | **(13,022**         | **)**          | (33,771 | ) | (120,776 | ) |
|                                                                                                                                                                          |       | ** **          | ** **     |   |   |   |   |
| Net loss before income tax benefit (expense)                                                                                                                                  |       | **(189,249**        | **)**          | (1,655,012 | ) | (1,465,230 | ) |
| Income tax  benefit (expense)                                                                                                                                                 |       | **35,159**          | ** **     | (143,273 | ) | — |   |
|                                                                                                                                                                          |       | ** **          | ** **     |   |   |   |   |
| Net loss                                                                                                                                                                      |       | **(154,090**        | **)**          | (1,798,285 | ) | (1,465,230 | ) |
| Deemed dividend  as a result of warrant modification                                                                                                                          |       | —              | ** **     | (37,875 | ) | — |   |
|                                                                                                                                                                          |       | ** **          | ** **     |   |   |   |   |
| Net loss attributable to common stockholders                                                                                                                                  |       | **$**               | **(154,090**   | **)** | $ | (1,836,160 | ) | $ | (1,465,230 | ) |
|                                                                                                                                                                          |       | ** **          | ** **     |   |   |   |   |
| Net loss per  share - basic and diluted                                                                                                                                       |       | **$**               | **(0.04**      | **)** | $ | (0.49 | ) | $ | (0.63 | ) |
|                                                                                                                                                                          |       | ** **          | ** **     |   |   |   |   |
| Weighted average shares  outstanding                                                                                                                                          |       | **3,819,143**       | ** **     | 3,754,627 |   | 2,317,516 |   |

 

*Seeaccompanying notes.*

F-3

----

 

**Sento Corporation and Subsidiaries**

**ConsolidatedStatement of Stockholders' Equity and Comprehensive Loss**
| ** **                                                                              | ** ** | ** **            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **        | ** ** | ** **             | ** **  |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|-------------|----------------|------------|-----------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|------------------------|-------------|
| ** **                                                                              | ** ** | ** **            | ** ** | ** **  | ** **  | **Additional** | ** ** | ** **      | ** ** | ** **        | ** ** | **Other**              | ** ** | **Total**         | ** ** | **Total**              | ** **  |
| ** **                                                                              | ** ** | **Common Stock** | ** ** | **Paid-in** | ** **  | **Treasury**   | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | **Stockholders'**      | ** ** | **Comprehensive** | ** ** |
| ** **                                                                              | ** ** | **Shares**            | ** ** | **Amount**  | ** **  | **Capital**    | ** ** | **Stock**       | ** ** | **Deficit**       | ** ** | **Income (Loss)** | ** ** | **Equity**        | ** ** | **Income (Loss)** | ** **  |
|                                                                                    |       |                  |       |        |        |           |       |            |       |              |       |                   |       |              |       |                   |        |
| 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  for the year ended March 31, 2004                                             |       | —                |       | —      |        | —         |       | —          |       | (1,465,230        | )          | —                 |       | (1,465,230        | )          | $                      | (1,465,230  | ) |
|                                                                                    |       |                  |       |        |        |           |       |            |       |              |       |                   |       |              |       |                   |        |
| Net  comprehensive loss for the year ended March 31, 2004                               |       | —                |       | —      |        | —         |       | —          |       | —            |       | —                 |       | —            |       | $                      | (1,465,230  | ) |
|                                                                                    |       |                  |       |        |        |           |       |            |       |              |       |                   |       |              |       |                   |        |
| Balances at March 31, 2004                                                              |       | 3,452,898             |       | 863,225     |        | 20,512,919     |       | —          |       | (10,479,878       | )          | —                 |       | 10,896,266        |       |                   |        |
|                                                                                    |       |                  |       |        |        |           |       |            |       |              |       |                   |       |              |       |                   |        |
| Adjustment to accrued offering costs from March 2004  offering of common stock warrants |       | —                |       | —      |        | (53,973        | )          | —          |       | —            |       | —                 |       | (53,973           | )          |                   |        |
| Exercise of warrants                                                                    |       | 217,853               |       | 54,463      |        | 33,662         |       | —          |       | —            |       | —                 |       | 88,125            |       |                   |        |
| Exercise of stock options                                                               |       | 168,752               |       | 42,189      |        | 229,156        |       | —          |       | —            |       | —                 |       | 271,345           |       |                   |        |
| Employee stock purchases                                                                |       | 22,565                |       | 5,641       |        | 70,471         |       | —          |       | —            |       | —                 |       | 76,112            |       |                   |        |
| Stock-based compensation on revaluation of stock options                                |       | —                |       | —      |        | (346,337       | )          | —          |       | —            |       | —                 |       | (346,337          | )          |                   |        |
| Non-employee warrants issued for services                                               |       | —                |       | —      |        | 239,558        |       | —          |       | —            |       | —                 |       | 239,558           |       |                   |        |
| Common stock cancelled to satisfy receivable                                            |       | (1,764                | )          | (441        | )           | (22,948        | )          | —          |       | —            |       | —                 |       | (23,389           | )          |                   |        |
| Purchase of treasury stock                                                              |       | —                |       | —      |        | —         |       | (203,681        | )          | —            |       | —                 |       | (203,681          | )          |                   |        |
| Comprehensive loss:                                                                     |       |                  |       |        |        |           |       |            |       |              |       |                   |       |              |       |                   |        |
| Cumulative  foreign currency translation adjustment                                     |       | —                |       | —      |        | —         |       | —          |       | —            |       | 42,670                 |       | 42,670            |       | $                      | 42,670      |   |
| Net loss  for the year ended March 31, 2005                                             |       | —                |       | —      |        | —         |       | —          |       | (1,798,285        | )          | —                 |       | (1,798,285        | )          | (1,798,285             | )           |
|                                                                                    |       |                  |       |        |        |           |       |            |       |              |       |                   |       |              |       |                   |        |
| Net  comprehensive loss for the year ended March 31, 2005                               |       | —                |       | —      |        | —         |       | —          |       | —            |       | —                 |       | —            |       | $                      | (1,755,615  | ) |
|                                                                                    |       |                  |       |        |        |           |       |            |       |              |       |                   |       |              |       |                   |        |
| Balances at March 31, 2005                                                              |       | 3,860,304             |       | 965,077     |        | 20,662,508     |       | (203,681        | )          | (12,278,163       | )          | 42,670                 |       | 9,188,411         |       |                   |        |
|                                                                                    |       |                  |       |        |        |           |       |            |       |              |       |                   |       |              |       |                   |        |
| Exercise of warrants                                                                    |       | **6,250**             | ** ** | **1,562**   | ** **  | **12,500**     | ** ** | **—**      | ** ** | **—**        | ** ** | **—**             | ** ** | **14,062**        | ** ** |                   |        |
| Exercise of stock options                                                               |       | **42,133**            | ** ** | **10,533**  | ** **  | **99,430**     | ** ** | **—**      | ** ** | **—**        | ** ** | **—**             | ** ** | **109,963**       | ** ** |                   |        |
| Employee stock purchases                                                                |       | **36,257**            | ** ** | **9,064**   | ** **  | **59,982**     | ** ** | **—**      | ** ** | **—**        | ** ** | **—**             | ** ** | **69,046**        | ** ** |                   |        |
| Purchase of treasury stock                                                              |       | **—**            | ** ** | **—**  | ** **  | **—**     | ** ** | **(55,939**     | **)**      | **—**        | ** ** | **—**             | ** ** | **(55,939**       | **)**      |                   |        |
| Retirement of treasury stock                                                            |       | **(76,737**           | **)**      | **(19,184** | **)**       | **(240,436**   | **)**      | **259,620**     | ** ** | **—**        | ** ** | **—**             | ** ** | **—**        | ** ** |                   |        |
| Stock-based compensation on revaluation of stock options                                |       | **—**            | ** ** | **—**  | ** **  | **(68,652**    | **)**      | **—**      | ** ** | **—**        | ** ** | **—**             | ** ** | **(68,652**       | **)**      |                   |        |
| Stock-based 123R expenses                                                               |       | **—**            | ** ** | **—**  | ** **  | **57,826**     | ** ** | **—**      | ** ** | **—**        | ** ** | **—**             | ** ** | **57,826**        | ** ** |                   |        |
| Comprehensive loss:                                                                     |       | ** **            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **      | ** ** | ** **        | ** ** | ** **             | ** ** | ** **        | ** ** |                   |        |
| Cumulative  foreign currency translation adjustment                                     |       | **—**            | ** ** | **—**  | ** **  | **—**     | ** ** | **—**      | ** ** | **—**        | ** ** | **(113,697**           | **)**      | **(113,697**      | **)**      | $                      | (113,697    | ) |
| Net loss  for the year ended March 31, 2006                                             |       | **—**            | ** ** | **—**  | ** **  | **—**     | ** ** | **—**      | ** ** | **(154,090**      | **)**      | **—**             | ** ** | **(154,090**      | **)**      | (154,090               | )           |
|                                                                                    |       | ** **            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **      | ** ** | ** **        | ** ** | ** **             | ** ** | ** **        | ** ** |                   |        |
| Net  comprehensive loss for the year ended March 31, 2006                               |       | **—**            | ** ** | **—**  | ** **  | **—**     | ** ** | **—**      | ** ** | **—**        | ** ** | **—**             | ** ** | ** **        | ** ** | $                      | (267,787    | ) |
|                                                                                    |       | ** **            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **      | ** ** | ** **        | ** ** | ** **             | ** ** | ** **        | ** ** |                   |        |
| Balances at March 31, 2006                                                              |       | **3,868,207**         | ** ** | **$**       | **967,052** | ** **     | **$**      | **20,583,158**  | ** ** | **$**             | **—** | ** **             | **$**      | **(12,432,253**   | **)**      | **$**                  | **(71,027** | **)** | **$** | **9,046,930** | ** ** |   |   |

 

*See accompanying notes.*

F-4

----

 

**Sento Corporation and Subsidiaries**

**ConsolidatedStatements of Cash Flows**
| ** **                                                                             | ** ** | **Year Ended** | ** **    |
|----------------------------------------------------------------------------------------|------------|---------------------|---------------|
| ** **                                                                             | ** ** | **March 31**   | ** **    | **March 31** | ** ** | **March 31** | ** ** |
| ** **                                                                             | ** ** | **2006**            | ** **    | **2005** | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                  |       |                |          |   |   |   |   |
| Net loss                                                                               |       | **$**               | **(154,090**  | **)** | $ | (1,798,285 | ) | $ | (1,465,230 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities:       |       | ** **          | ** **    |   |   |   |   |
| Depreciation                                                                           |       | **1,725,518**       | ** **    | 1,644,242 |   | 1,478,989 |   |
| Amortization  of intangible assets                                                     |       | **364,037**         | ** **    | 136,594 |   | — |   |
| Amortization  of deferred lease incentives                                             |       | **(40,781**         | **)**         | — |   | — |   |
| Amortization  of debt offering costs                                                   |       | **—**          | ** **    | 41,610 |   | 83,598 |   |
|                                                                                   |       | ** **          | ** **    |   |   |   |   |
| Non-cash  interest expense related to warrants issued with convertible debentures      |       | **13,988**          | ** **    | 13,568 |   | 228,162 |   |
| Stock-based  123R expense                                                              |       | **57,826**          | ** **    | — |   | — |   |
| Stock-based  (benefit) compensation on revaluation of stock options                    |       | **(68,652**         | **)**         | (346,337 | ) | 1,562,108 |   |
| Valuation  of non-employee warrants issued for services                                |       | **—**          | ** **    | 239,558 |   | 22,917 |   |
| Provisions  for losses on accounts receivable                                          |       | **(128,832**        | **)**         | 618,826 |   | 280,469 |   |
| Restructuring  charge                                                                  |       | **477,575**         | ** **    | 220,000 |   | — |   |
| Provision  for deferred taxes                                                          |       | **(27,524**         | **)**         | — |   | — |   |
| Net loss  on disposal of assets                                                        |       | **—**          | ** **    | 784 |   | 2,668 |   |
| Changes  in operating assets and liabilities:                                          |       | ** **          | ** **    |   |   |   |   |
| Accounts  receivable                                                                   |       | **(3,233,227**      | **)**         | 1,499,492 |   | (2,063,717 | ) |
| Other  assets                                                                          |       | **(1,215,528**      | **)**         | (39,671 | ) | (214,882 | ) |
| Accounts  payable                                                                      |       | **1,576,877**       | ** **    | (255,374 | ) | (394,359 | ) |
| Accrued  liabilities and other                                                         |       | **1,401,382**       | ** **    | (423,099 | ) | 497,269 |   |
|                                                                                   |       | ** **          | ** **    |   |   |   |   |
| Net cash  provided by operating activities                                             |       | **748,569**         | ** **    | 1,551,908 |   | 17,992 |   |
|                                                                                   |       | ** **          | ** **    |   |   |   |   |
| Cash flows from investing activities:                                                  |       | ** **          | ** **    |   |   |   |   |
| Purchase  of capital assets                                                            |       | **(4,332,787**      | **)**         | (1,230,222 | ) | (1,309,442 | ) |
| Proceeds  from sale of assets                                                          |       | **—**          | ** **    | 3,527 |   | 1,362 |   |
| Acquisition  of business, including purchase of acquired business' secured debt        |       | **—**          | ** **    | (887,177 | ) | — |   |
|                                                                                   |       | ** **          | ** **    |   |   |   |   |
| Net cash  used in investing activities                                                 |       | **(4,332,787**      | **)**         | (2,113,872 | ) | (1,308,080 | ) |
|                                                                                   |       | ** **          | ** **    |   |   |   |   |
| Cash flows from financing activities:                                                  |       | ** **          | ** **    |   |   |   |   |
| Proceeds  from issuance of long-term debt and line of credit                           |       | **3,669,988**       | ** **    | 1,175,352 |   | 381,563 |   |
| Principal  payments on long-term debt, capital leases, and line of credit              |       | **(1,308,693**      | **)**         | (1,076,238 | ) | (1,371,560 | ) |
| Proceeds  received from debenture offering                                             |       | **—**          | ** **    | — |   | 240,000 |   |
| Principal  payments on debentures                                                      |       | **—**          | ** **    | — |   | (765,270 | ) |
| Proceeds  from issuance of common stock (including $627,364 of accrued offering costs) |       | **—**          | ** **    | — |   | 6,670,198 |   |
| Payment  of accrued offering costs                                                     |       | **—**          | ** **    | (681,337 | ) | — |   |
| Proceeds  from exercise of stock options, warrants and employee stock purchases        |       | **193,071**         | ** **    | 435,582 |   | 119,631 |   |
| Purchase  of treasury stock                                                            |       | **(55,939**         | **)**         | (203,681 | ) | — |   |
|                                                                                   |       | ** **          | ** **    |   |   |   |   |
| Net cash  provided by (used in) financing activities                                   |       | **2,498,427**       | ** **    | (350,322 | ) | 5,274,562 |   |
|                                                                                   |       | ** **          | ** **    |   |   |   |   |
| Effect of  foreign currency translation                                                |       | **(113,697**        | **)**         | 42,670 |   | — |   |
|                                                                                   |       | ** **          | ** **    |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents                                   |       | **(1,199,488**      | **)**         | (869,616 | ) | 3,984,474 |   |
| Cash and cash equivalents at beginning of year                                         |       | **5,698,195**       | ** **    | 6,567,811 |   | 2,583,337 |   |
|                                                                                   |       | ** **          | ** **    |   |   |   |   |
| Cash and cash equivalents at end of year                                               |       | **$**               | **4,498,707** | ** ** | $ | 5,698,195 |   | $ | 6,567,811 |   |

 

*See accompanying notes.*

F-5

----

 

**Sento Corporation and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

 
| ** **                                                             | ** ** | **Year Ended** | ** **  |
|------------------------------------------------------------------------|------------|---------------------|-------------|
| ** **                                                             | ** ** | **March 31**   | ** **  | **March 31** | ** ** | **March 31** | ** ** |
| ** **                                                             | ** ** | **2006**            | ** **  | **2005** | ** ** | **2004** | ** ** |
| Supplemental disclosures of cash flow information                      |       |                |        |   |   |   |   |
| Cash paid  for interest                                                |       | **$**               | **163,357** |   | $ | 127,832 |   | $ | 264,420 |   |
| Cash paid  for taxes                                                   |       | **28,240**          |        | 46,477 |   | — |   |
| Noncash investing and financing activities:                            |       | ** **          |        |   |   |   |   |
| Assets  acquired under capital leases and notes payable                |       | **—**          |        | 157,136 |   | 263,216 |   |
| Conversion  of debentures for common stock                             |       | **—**          |        | — |   | 982,080 |   |
| Common  stock cancelled to satisfy receivable                          |       | **—**          |        | 23,389 |   | — |   |
| Cancellation  of treasury shares                                       |       | **259,620**         |        | — |   | — |   |
|                                                                   |       | ** **          |        |   |   |   |   |
| Assets acquired and liabilities assumed through business  acquisition: |       | ** **          |        |   |   |   |   |
| Assets  acquired:                                                      |       | ** **          |        |   |   |   |   |
| Receivables                                                            |       | **$**               | **—**  |   | $ | 1,835,911 |   | $ | — |   |
| Property  and equipment                                                |       | **—**          |        | 201,810 |   | — |   |
| Other  assets, including $1,366,201 of intangible assets               |       | **—**          |        | 1,690,560 |   | — |   |
| Purchase  price adjustment to intangible assets                        |       | **722,000**         |        | — |   | — |   |
|                                                                   |       | ** **          |        | — |   |   |   |
| Total  assets acquired                                                 |       | **722,000**         |        | 3,728,281 |   | — |   |
| Less liabilities assumed:                                              |       | ** **          |        |   |   |   |   |
| Accounts  payable                                                      |       | **—**          |        | 1,030,978 |   | — |   |
| Accrued  contingent consideration                                      |       | **722,000**         |        | 907,898 |   | — |   |
| Long-term  debt and capital leases                                     |       | **—**          |        | 51,680 |   | — |   |
| Other  liabilities, including $75,000 of accrued purchase liabilities  |       | **—**          |        | 850,548 |   | — |   |
|                                                                   |       | ** **          |        |   |   |   |   |
| Net cash paid                                                          |       | **$**               | **—**  |   | $ | 887,177 |   | $ | — |   |

 

*See accompanying notes.*

 

F-6

----

 

**Notes toConsolidated Financial StatementsMarch 31, 2006**

 

**1.  Description of Business**

Sento Corporation(“Sento”) is a global provider of call and contact solution center services forcustomer acquisition, customer service, service intervention and technicalsupport for a diversified portfolio of organizations. These services includeself-help, live chat, Web collaboration, email, and telephone. Sento deploys adistributed workforce strategy and customer-centric applications to providecustomer care and support. Sento conducts its principal business through itswholly-owned subsidiaries Sento Technical Services Corporation and XtrasourceAcquisition, Inc.

**2.   Summaryof Significant Accounting Policies**

**Principlesof Consolidation**

The accompanyingfinancial statements include the consolidated financial statements of Sento andits wholly-owned subsidiaries (collectively, the “Company”). All significantintercompany balances and transactions have been eliminated in consolidation.

**Cash andCash Equivalents**

 The Companyconsiders all short-term highly liquid investments with an original maturity ofthree months or less to be cash equivalents. Certain cash and cash equivalentsare deposited with financial institutions, and at times such amounts exceededinsured depository limits. The Company periodically inspects the soundness ofthe financial institutions with which it does business to manage its riskrelated to such uninsured deposits.

**Allowancefor Doubtful Accounts**

The Company hasestablished an allowance for doubtful accounts to reserve for potentially uncollectibleaccounts receivable. Receivables are reviewed on an account-by-account basis todetermine the probability of collection. Management judgment is exercised indetermining the probability of collection. Factors considered in making thisjudgment are the age of the receivable, the financial resources of clients,previous client history and recent client communications. A provision for baddebts is accrued during the ordinary course of business when events orcircumstances indicate that a receivable may not be collectible. Credit losseshave generally been within management’s expectations; however, there can be noassurance that future credit losses will be within amounts estimated by management.These provisions are included in selling, general and administrative expensesfor fiscal 2006, 2005 and 2004.

During fiscal 2005,the Company reserved $475,000 for a financially distressed client. During thecurrent year the Company received a payment of $181,593 and entered into a NoteReceivable, which replaced the trade receivable from this client, for $400,000which is fully reserved and due on June 30, 2006. If this note is repaid,the full amount will be recognized as an additional offset against the specificprovision for doubtful account on our statement of operations. 

**Propertyand Equipment**

Property andequipment are recorded at cost. Expenditures for major improvements arecapitalized. Depreciation of fixed assets is computed on the straight-linemethod over the estimated useful lives of individual classes of assets.Leasehold improvements are depreciated over the shorter of the remaining leaseterm or the useful life of the improvements. The estimated useful lives ofequipment and furniture are three to ten years. Major replacements, whichextend the useful lives of equipment, are capitalized and depreciated over theremaining useful lives. Normal maintenance and repair items are expensed asincurred.

F-7

----

 

Costs associatedwith the development of software to be sold, leased or otherwise marketed as aseparate product or as part of a product or process are either expensed orcapitalized in accordance with the provisions of SFAS No. 86*, “Accounting for the Costs of Computer Software tobe Sold, Leased or Otherwise Marketed.”*Costs associated withsoftware developed for internal use are either expensed or capitalized pursuantto the provisions of Statement of Position 98-1,*“Accounting for the Costs of Computer Software Developedor Obtained for Internal Use*.” Amounts capitalized are amortizedover the estimated useful life of the software, generally three years, subjectto the periodic review of these capitalized costs for impairment as required bySFAS No. 121, *“Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.”*

**FinancialInstruments**

The carrying valueof accounts receivable, accounts payable, accrued expenses, and debtapproximate their estimated fair value as of March 31, 2006 and 2005.

**IntangibleAssets**

Intangible assetsconsist of customer contracts and a customer base acquired through theacquisition of Xtrasource, Inc. (“Xtrasource”). The Company engaged anindependent valuation expert to determine the value of these assets which arebeing amortized on a straight line basis over their expected useful life offive years. Management reviews these assets for impairment on an annual basis.Because of better than expected performance of the acquired Xtrasourceoperations during the first year since the acquisition, the Company increased itsestimate of the earnout in the quarter ended December 31, 2005 by $722,000and recorded this increase as an adjustment to intangible assets acquired underthe purchase acquisition. As of March 31, 2006 and 2005 the carrying valueof this intangible asset was $1,904,274 and $1,229,607, respectively. As of March 31,2006 and 2005 the accrued contingent consideration related to this Intangibleasset was $1,714,803 and $907,898, respectively. The Company incurredamortization expense related to these assets of $364,037, $136,594 and $0 forthe fiscal years ended March 31, 2006, 2005 and 2004.

**IncomeTaxes**

Income taxes areaccounted for under the asset and liability method. Deferred tax assets anddeferred tax liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and deferred tax liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and deferred tax liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date. Our European operationsare not included in our U.S. consolidated federal tax return and we fileseparate returns with the appropriate taxing authority for each country of ournon-U.S. operations. Deferred income tax assets are reviewed periodically basedon changing events for recoverability, and valuation allowances are provided asnecessary.

**RevenueRecognition**

Revenue isrecognized when persuasive evidence of an arrangement exists, delivery ofservices has occurred, the fee is fixed or determinable, and collection of theresulting receivable is reasonably assured. Revenue is recognized when theservices have been provided to the end customer and the customer interaction iscompleted.

The Companyprimarily generates revenue by delivering technical assistance to users of itscustomers’ products through the use of live chat, Web collaboration, email andtelephone interactions. Revenue is recognized as the service is provided, basedon the terms of the underlying customer contract, generally based on a monthly,hourly, per minute or per call rate. The Company also provides licenses to itscustomers for the use of certain of its customer contact software tools that arehosted by the Company. In these arrangements, the customers are charged amonthly fee based on the number of users. Revenue under these arrangements isrecognized 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.

F-8

----

 

**Stock-BasedCompensation**

On October 1, 2005, the Company early adopted Statement of FinancialAccounting Standards No. 123R (revised 2004), “*Share-BasedPayments*” (“SFAS 123R”), requiring measurement and recognition ofexpense for all share-based payment awards to employees and directors based onestimated fair values. SFAS No. 123R supersedes Financial AccountingStandard No. 123 “*Accounting for Stock-BasedCompensation*” and Accounting Principles Board Opinion No. 25, “*Accounting for Stock Issued to Employees*”. Prior to October 1,2005, the Company accounted for stock option plans under the recognition andmeasurement provisions of Accounting Principles Board Opinion No. 25, “*Accounting for Stock Issued to Employees*” (“APB 25”) andrelated interpretations, as permitted by Statement of Financial AccountingStandards No. 123, “*Accounting for Stock-BasedCompensation*” (“SFAS 123”), which did not require compensation costbe recognized for the Company’s stock options provided the option exerciseprice was established at 100% of the common stock fair market value on the dateof the grant.  Effective October 1,2005, the Company eliminated variable accounting treatment for stock optionswith its adoption of the fair value provisions of SFAS 123R, using the modifiedprospective transition method. Under this transition method, compensation costrecognized subsequent to October 1, 2005 includes compensation costrelated to non-vested stock awards as of October 1, 2005, by recognizingthe unamortized grant date fair value of those awards over their remainingservice period with no change in historical earnings. Awards granted after October 1,2005 are valued at fair value in accordance with the provisions of SFAS No. 123Rand recognized on a straight line basis over the service periods of each award. Additionally, SFAS No. 123Rrequires companies to record compensation expense for the unvested portion ofpreviously granted awards as they continue to vest, as calculated previouslyand recorded in accordance with the provisions of SFAS No. 148, “*Accounting for Stock-Based Compensation-Transition and Disclosure*.”  During the first six months of thecurrent fiscal year, the Company recognized stock-based compensation benefit of$68,652 pursuant to the provisions of APB 25. During the final six months ofthe current fiscal year, the Company recognized stock-based compensationexpense of $57,826 which was included with selling, general and administrativeexpenses on the Consolidated Statement of Operations in accordance with theprovisions of SFAS 123R.  Results for prior periods have not beenrestated.

The Company continuesto estimate the fair values of stock option awards granted after October 1,2005 using a Black-Scholes option pricing model and the following assumptions:expected stock price volatility of 75% to 90%, risk-free interest rates rangingfrom 3.7% to 4.0%, weighted average expected option lives of 5 years, andno dividend yield. The Black-Scholes option valuation model was developed foruse in estimating the fair value of traded options that have no vestingrestrictions and that are fully transferable. In addition, option valuationmodels require the input of highly subjective assumptions including expectedstock price volatility.

If the fair valueprovision of SFASR No. 123R would have been applied to all stock-basedcompensation for periods prior to October 1, 2005, net income and earningsper share would have been changed to the pro forma amounts shown in thefollowing table for the years indicated as follows:

 
| ** **                                                                                     | ** ** | ** **   | ** ** | **2006**       | ** **     | **2005** | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------|------------|----------------|----------------|----------|------------|------------|------------|
| Net loss  attributable to common stockholders                                                  |       | As  reported | ** ** | **$**          | **(154,090**   | **)**    | $          | (1,836,160 | )          | $ | (1,465,230 | ) |
| Add actual  compensation (benefit) expense included in reported net loss                       |       | Pro  forma   | ** ** | **(68,652**    | **)**          | (346,337 | )          | 1,562,108  |       |
| Deduct expense  determined under fair value provision of SFAS No. 123                     |       | Pro  forma   | ** ** | **(1,111,276** | **)**          | (463,024 | )          | (428,496   | )          |
| Pro forma net  loss attributable to common stockholders had the Company not adopted SFAS  123R |       | Pro  forma   | ** ** | **$**          | **(1,334,018** | **)**    | $          | (2,645,521 | )          | $ | (331,618 | ) |
|                                                                                           | ** ** | ** **   |       |           |           |     |       |       |       |
| Basic and  diluted income (loss) per share                                                     |       | As  reported | ** ** | **$**          | **(0.04**      | **)**    | $          | (0.49      | )          | $ | (0.63 | ) |
|                                                                                           |       | Pro forma    | ** ** | **$**          | **(0.35**      | **)**    | $          | (0.70      | )          | $ | (0.14 | ) |

 

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

F-9

----

 

**AdvertisingCosts**

Advertising costsare expensed as incurred. Advertising costs amounted to $365,856, $163,109 and$82,497 in fiscal 2006, 2005 and 2004, respectively.

**Deferred LeaseIncentives**

During the current fiscal year the Company receivedconstruction allowances from landlords. The construction allowances are deferredand amortized as a reduction of rent expense on a straight-line basis over theterm of the lease, starting at the time we take physical possession of theproperty. Related to these construction allowances, a deferred lease incentiveof $385,847 and $0 was recorded as of March 31, 2006 and 2005,respectively.

**Foreign CurrencyTranslation**

Assets and liabilities of the Company’s foreignsubsidiary are translated to U.S. dollars at the exchange rates effective on March 31,2006 and 2005. Revenues, costs of sales, expenses and other income aretranslated at average rates of exchange prevailing during the fiscal year.Translation adjustments resulting from this process are recorded as accumulatedother comprehensive income within stockholders’ equity.

**Net LossPer Common Share**

Basic loss per share iscomputed in accordance with Statement of Financial Accounting Standards No. 128,“*Earnings Per Share*.*”*Basic net loss per share is computed as net loss divided by the weightedaverage number of common shares outstanding for the period. Diluted net lossper share reflects the potential dilution that could occur from common sharesissueable through stock options, warrants, and other convertible securities,calculated using the treasury stock method (as modified by SFAS No. 123R),and the assumed conversion of convertible securities, using the if-convertedmethod, when such stock-based awards and convertible securities are dilutive.The computation of diluted net loss per share does not assume exercise orconversion of securities that would have an antidilutive effect on net loss percommon share. During the years ended March 31, 2006, 2005 and 2004, stockoptions and warrants for the purchase of 180,284, 259,601 and 646,101 shares ofcommon stock, respectively, were excluded from the computation of diluted netloss per share as the impact would have been antidilutive.

**ComprehensiveLoss**

Comprehensive lossis comprised of net loss and foreign currency translation adjustments which areexcluded from net loss on the Consolidated Statement of Operations. Comprehensiveloss is shown in the Consolidated Statement of Stockholder’s Equity. There wereno items of other comprehensive loss during fiscal 2004.

**Concentrationof Credit Risk**

In the normalcourse of business, the Company provides unsecured credit terms to itscustomers. Accordingly, the Company performs ongoing credit evaluations of itscustomers and maintains allowances for possible losses. Four clients accountedfor approximately 63% of the Company’s revenues with 24%, 15%, 14% and 10% ofrevenues for fiscal 2006. Two clients accounted for approximately 46% of theCompany’s revenues with 28% and 18% of revenues for fiscal 2005. Two clientsaccounted for approximately 47% of the Company’s revenues with 29% and 18% ofrevenues for fiscal 2004.

**Use ofEstimates**

The preparation ofthe Company’s consolidated financial statements in conformity with US GAAPrequires management of the Company to make 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 U.S. generallyaccepted accounting principles. Actual results could differ materially fromthose estimates.

**Product Development**

Product development costsconsist primarily of personnel-related costs and are expensed as incurred. Suchcosts total $164,915, $292,303, and $0, for fiscal years 2006, 2005 and 2004,respectively.

F-10

----

 

**Commitments and Contingencies**

In accounting for legalmatters and other contingencies, the Company follows the guidance of SFAS No. 5,“Accounting for Contingencies,” under which loss contingencies are accountedfor based upon the likelihood of an impairment of an asset or the incurrence ofa liability. If a loss contingency is “probable” and the amount of loss can bereasonably estimated, accrual of such contingency is recorded and the relateddisclosure is made. If a loss contingency is “reasonably possible,” disclosureis made, including the potential range of loss, if determinable. Losscontingencies that are “remote” are neither accounted for nor disclosed. Gaincontingencies are given no accounting recognition, but are disclosed ifmaterial.

**Recent Issued AccountingStandards**

The Company hasreviewed all recently issued accounting standards to determine their potentialeffect, if any, on the results of operations or financial position of theCompany. Based on that review, the Company does not currently believe that anyof these other recent accounting pronouncements will have a significant effecton its current or future financial position, results of operations, cash flows,or disclosures, except as disclosed above under the heading “Stock-BasedCompensation.”

In May 2005, the FASB issued SFAS No. 154, *“Accounting Changes and Error Corrections”* (“SFAS 154”)which replaces Accounting Principles Board Opinions No. 20, *“Accounting Changes”* and SFAS No. 3, *“Reporting Accounting Changes in Interim Financial Statements-AnAmendment of APB Opinion No. 28.”* SFAS 154 provides guidance onthe accounting for and reporting of accounting changes and error corrections.It establishes retrospective application, or the latest practicable date, asthe required method for reporting a change in accounting principle and thereporting of a correction of an error. SFAS 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005 and is required to be adopted by the Company in the first quarter offiscal 2007. The Company does not expect the adoption of SFAS 154 will have amaterial impact on its consolidated results of operations and financialcondition.

**3.   Propertyand Equipment**

Property and equipmentconsisted of the following:

|                                              | ** ** | **March 31,  2006** | ** **    | **March 31,  2005** | ** ** |
|----------------------------------------------|------------|--------------------------|---------------|--------------------------|------------|
| Leasehold  improvements                      | ** ** | **$**                    | **1,048,487** |                     | $          | 1,027,363 |   |
| Furniture,  fixtures, equipment and software | ** ** | **13,933,181**           |          | 10,382,930               |       |
|                                         |       |                     | ** **    | ** **               |       |
|                                         | ** ** | **14,981,668**           |          | 11,410,293               |       |
| Less accumulated  depreciation               | ** ** | **(7,913,471**           | **)**         | (7,378,661               | )          |
|                                         |       |                     | ** **    | ** **               |       |
|                                         | ** ** | **$**                    | **7,068,197** |                     | $          | 4,031,632 |   |

 

Depreciation forthe 2006, 2005 and 2004 fiscal years was $1,725,518, $1,644,242 and$1,478,989, respectively. Depreciation expense includes amortization of assetsacquired under capital leases.

**4.   NotesPayable and Capital Leases**

Effective March 20,2006, the Company renewed its line of credit with a bank that allows theCompany to borrow the lesser of $3,000,000 or 80% of eligible accountsreceivable. The line of credit accrues interest at 1% over the bank’s primerate (7.75% and 5.75%) as of March 31, 2006 and 2005, respectively, andmatures on June 30, 2007. At. March 31, 2006 and 2005 there was$1,000,000 and $0, respectively, drawn on this line of credit.

F-11

----

 

Effective March 20,2006, the Company amended the loan and security agreement which was enteredinto on April 15, 2003 for working capital and equipment financing. Theloan allows for minimum $100,000 draws with a maximum of $1,500,000 through June 30,2006. The Company is required to make interest-only payments equal to 1.5% overthe bank’s prime rate during the draw-down period. At the end of the draw-downperiod, the Company will be required to pay monthly installments of principaland interest over 36 months. Substantially all of the assets of theCompany serve as collateral for the Company’s existing bank debt and the aboveloan and the line of credit.

The foregoing loanagreement calls for the Company to maintain certain liquidity and net worth ordebt service and quick ratio covenants. The Company was in compliance with alldebt covenants at March 31, 2006.

Long-term debt,including capital lease obligations, consists of the following:
| ** **                                                                                                                                                                                                         | ** ** | **March 31,  2006** | ** **    | **March 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|---------------|--------------------------|------------|
| 7.4% note  payable in monthly installments totaling $23,225 through May 2007,  including interest, secured by furniture and equipment                                                                         | ** ** | **$**                    | **310,587**   | ** **               | $          | 556,534 |   |
| 8.46% note  payable in monthly installments totaling $22,802 through March 2008,  including interest, secured by furniture and equipment                                                                      | ** ** | **468,050**              |          | 702,076                  |       |
| 3.5% note  payable in quarterly installments totaling $13,773, including interest,  secured by equipment                                                                                                           | ** ** | **—**               |          | 105,963                  |       |
| 9.29% note  payable in monthly installments totaling $31,916 through March 2009,  including interest, secured by furniture and equipment, including an unused  commitment for $918,342 of additional funding. | ** ** | **1,000,000**            | ** **    | **—**               |       |
| 9.25% note  payable in monthly installments totaling $18,632 through June 2009,  including interest, secured by certain equipment                                                                             | ** ** | **581,658**              | ** **    | **—**               |       |
| 8.75% line of  credit due on June 30, 2007, including interest, secured by furniture  and equipment                                                                                                           | ** ** | **1,000,000**            | ** **    | **—**               |       |
|                                                                                                                                                                                                               |       |                     |          |                     |       |
| Gross  installment notes payable                                                                                                                                                                                   | ** ** | **3,360,295**            |          | 1,364,573                |       |
| Less: discount  on installment notes payable                                                                                                                                                                       | ** ** | **—**               | ** **    | (14,006                  | )          |
|                                                                                                                                                                                                               |       |                     |          |                     |       |
| Net installment  notes payable                                                                                                                                                                                     | ** ** | **3,360,295**            |          | 1,350,567                |       |
| Present value of  net minimum capital lease payments                                                                                                                                                               | ** ** | **719,946**              |          | 354,391                  |       |
|                                                                                                                                                                                                               |       |                     |          |                     |       |
| Total debt and  capital leases                                                                                                                                                                                     | ** ** | **4,080,241**            |          | 1,704,958                |       |
| Less: current  portion                                                                                                                                                                                             | ** ** | **(2,155,339**           | **)**         | (745,699                 | )          |
|                                                                                                                                                                                                               |       |                     |          |                     |       |
| Long-term debt and  capital leases, net of current portion                                                                                                                                                         | ** ** | **$**                    | **1,924,902** |                     | $          | 959,259 |   |

 

Theweighted-average interest rate on the face amount of outstanding long-termdebt, disregarding amortization of debt issue costs, was approximately 8.8% and7.7% at March 31, 2006 and 2005, respectively.

F-12

----

 

Capital leases arefor equipment. The majority of these leases have bargain purchase provisions.Future minimum capital lease payments, excluding taxes, insurance and othercosts, and aggregate maturities of installment notes payable as of March 31,2006 were as follows:

 

|                                                      | ** ** | **Capital  Leases** | ** ** | **Notes  Payable** | ** ** |
|------------------------------------------------------|------------|---------------------|------------|--------------------|------------|
| Fiscal Year                                          |       |                |       |               |       |
| 2007                                                 |       | $                   | 296,099    |               | $          | 1,947,100 |   |
| 2008                                                 |       | 170,853             |       | 802,724            |       |
| 2009                                                 |       | 156,817             |       | 573,645            |       |
| 2010                                                 |       | 110,494             |       | 36,826             |       |
| 2011                                                 |       | 74,813              |       | —             |       |
| Total payments                                       |       | 809,076             |       | $                  | 3,360,295  |   |
|                                                 |       |                |       |               |       |
| Less amounts representing  interest                  |       | (89,130             | )          |               |       |
|                                                 |       |                |       |               |       |
| Present value of net  minimum capital lease payments |       | $                   | 719,946    |               |       |   |

 

**5.   ConvertibleDebentures**

 During 2004,all of the outstanding convertible debentures from the February 2000debenture issuance, as refinanced in April 2003, were converted intocommon stock and certain debenture holders exercised warrants utilizingcashless exercise provisions by tendering 37,500 warrants for a net 21,428shares of common stock. During fiscal 2005, 204,250 warrants were tendered fora net 167,853 shares of common stock under the cashless exercise provisions ofthe warrants.

Based on the termsof the debentures and pursuant to the provisions of Emerging Issues Task ForceIssue No. 00-27 regarding certain convertible instruments, it wasdetermined that the debentures included a beneficial conversion feature. Basedon the value of the warrants issued with the debentures, as described below,and the stated conversion terms of the debentures, the beneficial conversionfeature was determined to have an implied value of approximately $53,000. Thisamount was reflected as a debt discount and an increase to additional paid-incapital to be amortized to interest expense over the term of the debt. Uponconversion of the debentures in 2004, the remaining debt discount related tothe beneficial conversion feature was recognized as interest expense.

The Company alsoissued warrants for the purchase of 50,000 shares of common stock to aplacement agent for services rendered in conjunction with the refinancing. All50,000 of these warrants were exercised for cash during fiscal 2005. Warrantsfor 37,500 shares of common stock were exercised at $1.60 per share, andwarrants for 12,500 shares common stock were exercised at $2.25 per share. Therelative fair value of the warrants of $36,000 (as determined using the BlackScholes valuation model with the following assumptions: contractuallife—3 years; volatility—66%; risk free interest rate—3.34%) was recordedas a deferred financing cost (included in other assets) and additional paid-incapital and was amortized to interest expense in fiscal 2004.

**6.   IncomeTaxes**

As of March 31,2006 and 2005, the Company had federal and state net operating losscarryforwards of approximately $10,145,000 and $10,537,000, respectively. Thenet operating loss carryforwards will expire at various dates beginning in 2021through 2026, if not utilized.

 

F-13

----

 

Income tax (benefit)expense from continuing operations consists of the following:

 

|                                  | ** ** | **Current  Current** | ** **  | **Deferred  Deferred** | ** ** | **Total**   | ** ** |
|----------------------------------|------------|----------------------|-------------|------------------------|------------|-------------|------------|
| Year ended  March 31, 2006: |       |                 |        |                   |       |        |       |
| Federal                          | ** ** | **$**                | **—**  | ** **             | **$**      | **—**  | ** ** | **$** | **—** | ** ** |
| State                            | ** ** | **12,296**           | ** **  | **—**             | ** ** | **12,296**  | ** ** |
| Foreign                          | ** ** | **(29,845**          | **)**       | **(17,610**            | **)**      | **(47,455** | **)**      |
|                             |       |                 | ** **  | ** **             | ** ** | ** **  | ** ** |
| Totals                           | ** ** | **$**                | **(17,549** | **)**                  | **$**      | **(17,610** | **)**      | **$** | **(35,159** | **)** |
|                             |       |                 |        |                   |       |        |       |
| Year ended  March 31, 2005: |       |                 |        |                   |       |        |       |
| Federal                          |       | $                    | —      |                   | $          | —      |       | $ | — |   |
| State                            |       | 3,292                |        | —                 |       | 3,292       |       |
| Foreign                          |       | 139,981              |        | —                 |       | 139,981     |       |
|                             |       |                 |        |                   |       |        |       |
| Totals                           |       | $                    | 143,273     |                   | $          | —      |       | $ | 143,273 |   |

 

Actual income taxexpense differs from the “expected” tax expense (computed by applying the U.S.federal corporate income tax rate of 34% to income before income taxes) asfollows:

 

|                                                                | ** ** | **Year Ended**     | ** **  |
|----------------------------------------------------------------|------------|-------------------------|-------------|
| ** **                                                     | ** ** | **March 31  2006** | ** **  | **March 31  2005** | ** ** |
| Tax (benefit) at U.S.  statutory rates                         | ** ** | **$**                   | **(64,345** | **)** | $ | (562,704 | ) |
| Increase (decrease) in  income taxes resulting from:           | ** ** | ** **              | ** **  | ** ** | ** ** |
| State tax  (benefit), net of federal tax effect                | ** ** | **(6,245**              | **)**       | (51,323 | ) |
| Change in  valuation allowance                                 | ** ** | **64,000**              |        | 733,000 |   |
| Difference in  foreign tax rate Difference in foreign tax rate | ** ** | **19,822**              |        | — |   |
| Nondeductible  meals and entertainment and other               | ** ** | **23,125**              |        | 90,355 |   |
| Change in  estimates and return to accrual differences         | ** ** | **(71,516**             | **)**       | (66,055 | ) |
|                                                           |       |                    | ** **  | ** ** | ** ** |
| Provision (benefit) for  income taxes                          | ** ** | **$**                   | **(35,159** | **)** | $ | 143,273 |   |

 

Significantcomponents of the Company’s deferred tax assets and liabilities for federal andstate income taxes are as follows:

|                                    | ** ** | **March 31** | ** **    | **March 31** | ** ** |
|------------------------------------|------------|-------------------|---------------|-------------------|------------|
| ** **                         | ** ** | **2006**          | ** **    | **2005**          | ** ** |
| Deferred tax assets:               | ** ** | ** **        |          |              |       |
| Net operating  loss carryforward   | ** ** | **$**             | **3,784,000** |              | $          | 3,930,000 |   |
| Deferred and  accrued compensation | ** ** | **145,000**       |          | 100,000           |       |
| Intangible  assets                 | ** ** | **251,000**       |          | 166,000           |       |
| Allowances and  reserves           | ** ** | **179,000**       |          | 249,000           |       |
| Accrued  liabilities               | ** ** | **230,000**       |          | 122,000           |       |
| Stock options                      | ** ** | **26,000**        |          | 6,000             |       |
| Other, net                         | ** ** | **15,000**        |          | 8,000             |       |
| Total deferred  tax assets         | ** ** | **$**             | **4,630,000** |              | $          | 4,581,000 |   |
|                               | ** ** | ** **        |          |              |       |
| Deferred tax  liabilities:         | ** ** | ** **        |          |              |       |
| Property and  equipment            | ** ** | **(11,000**       | **)**         | (26,000           | )          |
| Basis difference                   | ** ** | **(289,000**      | **)**         | —            |       |
| Net deferred tax assets            | ** ** | **4,330,000**     |          | 4,555,000         |       |
| Valuation Allowance                | ** ** | **(4,619,000**    | **)**         | (4,555,000        | )          |
|                               |       |              |          |              |       |
| Total                              | ** ** | **$**             | **(289,000**  | **)**             | $          | — |   |

 

F-14

----

 

Domestic andforeign components of income (loss) before income taxes are as follows:

 

|          | ** ** | **March 31,  2006** | ** **   | **March 31,  2005** | ** ** |
|----------|------------|--------------------------|--------------|--------------------------|------------|
| Domestic | ** ** | **$**                    | **(72,329**  | **)**                    | $          | (2,056,505 | ) |
| Foreign  | ** ** | **(116,920**             | **)**        | 401,493                  |       |
|     |       |                     |         |                     |       |
| Total    | ** ** | **$**                    | **(189,249** | **)**                    | $          | (1,655,012 | ) |

 

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

The net valuationallowance increased by $64,000 and $733,000 during the years ended March 31,2006 and 2005, respectively. Deferred income tax assets are reviewedperiodically based on changing events for recoverability, and valuationallowances are provided as necessary.

**7.****              Commitments andContingencies**

**OperatingLeases**

The Company hasnon-cancelable operating leases for equipment, software and office space. TheCompany incurred rent expense of $1,785,935, $1,356,778 and $845,748 for theyears ended March 31, 2006, 2005 and 2004, respectively. The Companysubleases space in one of its facilities under a non-cancelable operating lease.  Future minimum rent payments, and amounts due under subleases,under non-cancelable operating leases are as follows:

** **

|             | ** ** | **Minimum  Lease  Payment** | ** ** | **Amounts  Due Under  Subleases** | ** ** | **Net Amount  After  Subleases** | ** ** |
|-------------|------------|-----------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| Fiscal Year |       |                        |       |                                   |       |                                  |       |
| 2007        |       | $                           | 2,984,910  |                                   | $          | (46,752                               | )          | $ | 2,938,158 |   |
| 2008        |       | 2,748,468                   |       | (46,752                                | )          | 2,701,716                             |       |
| 2009        |       | 2,419,896                   |       | (15,584                                | )          | 2,404,312                             |       |
| 2010        |       | 1,972,511                   |       |                                   |       | 1,972,511                             |       |
| 2011        |       | 1,549,084                   |       |                                   |       | 1,549,084                             |       |
| Thereafter  |       | 193,031                     |       |                                   |       | 193,031                               |       |
|             |            |                             |            |                                        |            |                                       |            |  |  |  |

 

Future minimumrent payments exclude a $450,000 option forbearance payment which is due in the2010 fiscal year if the Company does not extend a lease renewal option.

**8.****              Common Stock**

**Issuanceof Common Stock**

In March 2004,the Company completed a private placement for the sale of 634,962 shares ofcommon stock at a price of $10.56 per share, resulting in net proceeds of$5,988,861. The terms of the private placement required the Company tofile a registration statement covering such shares of common stock.

F-15

----

 

In conjunctionwith the private placement, the Company issued warrants for the purchase of126,992 shares of common stock. The warrants became exercisable beginning in September 2004,have a term of three and one-half years, and an exercise price of $12.67. Incertain circumstances, the Company may have the right to call the warrants. TheCompany also issued warrants to purchase 30,000 shares of common stock, withthe same terms, to a placement agent for services rendered in conjunction withthe private placement.

**StockOptions**

The Company hasadopted a stock option plan (the “Plan”) pursuant to which the Company’s Boardof Directors may grant stock options to officers and key employees. The Planauthorizes grants of options to purchase up to 1,525,000 shares of authorizedbut unissued common stock. Stock options are granted with an exercise price notless than the stock’s fair market value at the date of grant. All stock optionsgranted to employees have ten-year terms; stock options granted tonon-management members of the Board of Directors generally have a five-yearterm. The number of shares granted, vesting period, and price per share are determinedby the Board of Directors. Stock options generally vest over one to four years.At March 31, 2006 and 2005, there were 519,481 and 248,259 additionalshares available for future grant under the Plan, respectively.

Stock optionactivity under the Plan, relating to qualified and nonqualified options duringthe periods indicated is as follows:
| ** **                                | ** ** | **2006**    | ** ** | **2005**      | ** ** | **2004**   | ** ** |
|-------------------------------------------|------------|-------------|------------|---------------|------------|------------|------------|
| ** **                                | ** ** | ** **  | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                | ** ** | **Number**  | ** ** | **Average**   | ** ** | **Number** | ** ** | **Average** | ** ** | **Number** | ** ** | **Average** | ** ** |
| ** **                                | ** ** | **of**      | ** ** | **Exercise**  | ** ** | **of**     | ** ** | **Exercise** | ** ** | **of** | ** ** | **Exercise** | ** ** |
| ** **                                | ** ** | **Shares**  | ** ** | **Price**     | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
| Balance outstanding at  beginning of year |       | **402,619** | ** ** | **$**         | **4.48**   |       | 403,535    |   | $ | 2.15 |   | 439,845 |   | $ | 6.71 |   |
| Granted                                   |       | **250,250** | ** ** | **2.98**      |       | 191,700    |       | 6.97 |   | 448,267 |   | 1.88 |   |
| Exercised                                 |       | **(42,133** | **)**      | **2.61**      |       | (168,752   | )          | 1.61 |   | (54,432 | ) | 1.61 |   |
| Forfeited                                 |       | **(21,472** | **)**      | **5.64**      |       | (23,864    | )          | 5.37 |   | (430,145 | ) | 6.79 |   |
| Balance outstanding at  end of year       |       | **589,264** | ** ** | **3.94**      |       | 402,619    |       | 4.48 |   | 403,535 |   | 2.15 |   |
| Exercisable at end of year                |       | **549,955** | ** ** | **$**         | **4.03**   |       | 149,881    |   | $ | 3.00 |   | 132,760 |   | $ | 2.39 |   |

 

The followingtable summarizes information about stock options outstanding at March 31,2006:
| **OPTIONS OUTSTANDING**                                                                          | ** ** | **OPTIONS EXERCISABLE** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                            | ** ** | ** **                   | ** ** | **Number of** | ** ** | **Weighted** | ** ** | **Weighted** | ** ** | **Number** | ** ** | **Weighted** | ** ** |
| **Range of Exercise**                                                                            | ** ** | **Outstanding**              | ** ** | **Average** | ** ** | **Average** | ** ** | **Exercisable** | ** ** | **Average** | ** ** |
| **Prices**                                                                                            | ** ** | **As of**               | ** ** | **Remaining** | ** ** | **Exercise** | ** ** | **As of** | ** ** | **Exercise** | ** ** |
| **Low**                                                                                               | ** ** | **High**                     | ** ** | **3/31/06** | ** ** | **Contractual Life** | ** ** | **Price** | ** ** | **3/31/06** | ** ** | **Price** | ** ** |
| $                1.60 |       | $                            | 1.60       |   | 152,229 |   | 6.51 |   | $ | 1.60 |   | 135,515 |   | $ | 1.60 |   |
| 1.65                                                                                                  |       | 2.88                         |       | 51,985 |   | 3.73 |   | 2.32 |   | 50,890 |   | 2.33 |   |
| 3.10                                                                                                  |       | 3.10                         |       | 157,000 |   | 9.30 |   | 3.10 |   | 157,000 |   | 3.10 |   |
| 3.14                                                                                                  |       | 4.99                         |       | 58,900 |   | 8.33 |   | 3.90 |   | 39,900 |   | 4.27 |   |
| 5.00                                                                                                  |       | 5.93                         |       | 51,250 |   | 3.87 |   | 5.14 |   | 48,750 |   | 5.10 |   |
| 6.31                                                                                                  |       | 6.31                         |       | 25,000 |   | 8.50 |   | 6.31 |   | 25,000 |   | 6.31 |   |
| 7.95                                                                                                  |       | 7.95                         |       | 25,000 |   | 8.25 |   | 7.95 |   | 25,000 |   | 7.95 |   |
| 8.07                                                                                                  |       | 8.07                         |       | 6,150 |   | 8.30 |   | 8.07 |   | 6,150 |   | 8.07 |   |
| 8.23                                                                                                  |       | 8.23                         |       | 55,500 |   | 8.08 |   | 8.23 |   | 55,500 |   | 8.23 |   |
| 18.00                                                                                                 |       | 18.00                        |       | 6,250 |   | 3.00 |   | 18.00 |   | 6,250 |   | 18.00 |   |
|                                                                                                  |       |                         |       | 589,264 |   | 7.25 |   | $ | 3.94 |   | 549,955 |   | $ | 4.03 |   |
|                                                                                                       |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-16

----

 

On April 23,2003, the Company’s Board of Directors approved an employee stock optionexchange program (“Exchange Program”), pursuant to which the Company grantedoptions to purchase 313,592 shares of the Company’s common stock at an exerciseprice of $1.60 per share in exchange for options to purchase 377,342 shares of theCompany’s common stock at exercise prices in excess of $2.00 per share. The newoptions issued under the Exchange Program are subject to variable optionaccounting in accordance with FASB Interpretation No. 44,*Accounting for Certain Transactions Involving StockCompensation*. Under variable option accounting, the Company isrequired 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). Thiscompensation must be recorded on a quarterly basis until the new options issuedunder the Exchange Program are exercised, forfeited or expire unexercised.

The impact of thenew options issued under the Exchange Program on the Company’s consolidatedfinancial statements will depend on quarterly fluctuations in the Company’scommon stock price and the dates of exercises, forfeitures or cancellations ofthe 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 fiscal years ended March 31, 2006, 2005 and2004, the Company recognized stock based (benefit) compensation of $(68,652),$(346,337) and $1,562,108, respectively, to reflect adjustments to the value ofthe options due to the changes in market price of the Company’s common stockabove the exercise price of $1.60 per share.

**EmployeeStock Purchase Plan**

The Company hasadopted a stock purchase plan under which 250,000 shares of common stock arereserved for future issuance to employees of the Company. The purpose of thestock purchase plan is to provide a method whereby employees of the Company mayacquire a proprietary interest in the Company through the purchase of shares ofcommon stock. The stock purchase plan is intended to qualify as an “employeestock purchase plan” under Section 423 of the Internal Revenue Code. Theprice at which stock is purchased under the stock purchase plan is equal to 85%of the fair market value of the common stock on the last day of the applicablepurchase period. As of March 31, 2006, 2005 and 2004, the Company had sold36,257, 22,565 and 18,231 shares, respectively to employees of the Companyunder this plan.

**RetirementPlan**

The Company has aqualified defined contribution retirement plan underSection 401(k) of the Internal Revenue Code. The plan covers allemployees who meet minimum age and service requirements, and allowsparticipants to defer a portion of their annual compensation on a pretax basis.In addition, employer contributions are made at the discretion of the Board ofDirectors. Participants are fully vested at all times in employeecontributions. Employer contributions vest over a six-year period. No employercontributions were made during fiscal years 2006, 2005 and 2004.

**StockWarrants**

The Company hasperiodically issued warrants in exchange for consulting services tonon-employees. Warrants to non-employees for services have been accounted forpursuant to Emerging Issues Task Force Issue No. 96-18,*Accounting for Equity Instruments That Are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling, Goods orServices*. Accordingly, the warrants are periodically revalued basedon the then fair market value of the underlying common stock during theperformance period. The Company recognized non-employee stock basedcompensation expense of $0, $239,558 and $0 for the fiscal years ended March 31,2006, 2005 and 2004, respectively.

In January 2004,the Company entered into a consulting agreement with terms that required theCompany to issue the consultant warrants to purchase 5,000 shares of commonstock each month. As of March 31, 2006 warrants to purchase 60,000 sharesof common stock were outstanding under this agreement. The warrants vest 25%every three months from the date of issuance, have a term of three and one-halfyears, and have an exercise price of $3.00 per share. No further warrants willbe issued under this agreement as the agreement has been terminated. The valueof these warrants, as determined using the Black-Scholes valuation model, wererecognized during the performance period as opposed to the vesting schedulesince the period of performance has ended.

F-17

----

 

Outstandingwarrants to purchase shares of the Company’s common stock, as of March 31,2006, are as follows:
| **Warrants**                                                  | ** ** | **Fiscal  Year  Issued** | ** ** | **Number  Of  Warrants** | ** ** | **Exercise   Price** | ** ** | **Expiration**                | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|---------------------------|------------|-------------------------------|------------|
|                                                          |       |                     |       |                     |       |                      |       |                          |       |
| Consultant for services                                       |       | 2005                     |       | 60,000                   |       | 3.00                      |       | July 2007-April 200 | 8          |
| 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           |       |
|                                                          |       |                     |       | 216,992                  |       |                      |       |                          |       |

 

**TreasuryStock**

On February 28,2005, the Company’s Board of Directors approved a stock buy-back planauthorizing the repurchase of up to 10% of its then outstanding common stockover a one-year period. The purchase price, amount of shares per purchase, andthe specific purchase dates are subject to approval by the Company’s Board ofDirectors and compliance with regulations of the Securities and ExchangeCommission. During the fiscal years ended March 31, 2006 and 2005, theCompany repurchased 16,938and 59,799 shares of common stock at a total cost of $55,939 and$203,681, respectively. As of March 31, 2006 the Company had retired allshares of treasury stock.

**9.   RelatedParty Transactions**

In March of1999, the Company entered into a consulting agreement with GT Investments, acompany that is wholly owned by Gary B. Filler, who served as Sento’s Chairmanuntil September 2004. Under the agreement, the Company paid GT Investmentsa monthly fee for services provided by Mr. Filler. The total expenseincurred by the Company under its arrangement with GT Investments was $33,000for the fiscal year ended March 31, 2005 and $66,000 for the fiscal yearended March 31, 2004. The consulting agreement was cancelled in September 2004.

During fiscal2005, the Company acquired the assets of Xtrasource (see note 11). Underthe provisions of the purchase agreement, the Company agreed to pay the formershareholders of Xtrasource a quarterly earnout consisting of 30% of earningsbefore interest, taxes, depreciation and amortization generated from theXtrasource operations (“EBITDA”). In addition, the Company has agreed toadvance the former shareholders of Xtrasource up to $200,000 (line of credit)for the payment of their portion of closing costs for the transaction and forthe settlement of liabilities not assumed by the Company in the acquisition.These advances are to be repaid by reductions in the earnout payments to the formershareholders. Thomas C. Tyler, the Company’s current Senior Vice President ofSales and Marketing is one of the former shareholders of Xtrasource, Inc.As of March 31, 2006, the Company had not paid any cash payments relatedto the Xtrasource acquisition earnout as all amounts earned through March 31,2006 had been offset against amounts prepaid by the Company. As of March 31,2006 and 2005 the accrued contingent consideration related to this intangibleasset was $1,714,803 and $907,898, respectively. This accrued amount included areduction of $108,955 and $84,729 for advances through March 31, 2006 and2005, respectively against the $200,000 line of credit.

**10.  Facilities Consolidation**

In January 2005,the Company approved a plan to consolidate its Utah contact solution centerfacilities into one “super center” by July 2005. As part of this plan,$477,575 and $220,000 of restructuring charges were charged to the Company’sstatement of operations for fiscal 2006 and 2005, respectively. Approximately$123,000 and $100,000 for fiscal 2006 and 2005, respectively, of this expenserelates to the impairment of leasehold improvements in a contact solutioncenter that the Company stopped using in March 2005. The remaining expenserelates to accrued facilities and relocation costs for the abandonedfacilities.

The following is areconciliation of accrued restructuring expense for the fiscal year endedMarch 31, 2006:

| Accrued restructuring  expense at March 31, 2005                                          |   | $        | 118,793 |   |
|------------------------------------------------------------------------------------------------|--------|----------|---------|--------|
| Accrual of future  facilities lease obligations, moving and other costs as of facility closing |   | 354,831  |    |
| Accretion of discount  on future rent                                                          |   | 9,456    |    |
| Costs paid during  period                                                                      |   | (280,477 | )       |
| Accrued restructuring  expense at March 31, 2006                                          |   | 202,603  |    |
| Less current portion of  accrued restructuring expense                                         |   | (86,832  | )       |
| Long-term accrued restructuring expense                                                        |   | $        | 115,771 |   |

 

F-18

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**11.  Business Acquisition**

Effective October 1,2004, the Company, through its wholly-owned subsidiary, Xtrasource Acquisition, Inc.(“Acquisition”), acquired substantially all of the assets of Xtrasource, anon-affiliated, privately-held Delaware corporation with approximately$10 million in annual sales. Acquisition agreed to pay the former ownersof Xtrasource a quarterly contingent earnout of 30% of earnings beforeinterest, taxes, depreciation and amortization generated from the Xtrasourceoperations (“Earnout”) for the quarterly periods between the closing and September 30,2009 (with a maximum aggregate cap of $6.5 million). Earnout payments aresubject to various reduction and offset rights including, but not limited to,reductions for debt payments (to secured and unsecured creditors) and workingcapital deficiencies. Because of better than expected performance of the acquiredXtrasource operations during the first year since the acquisition, the Companyincreased its estimate of the Earnout in the quarter ended December 31,2005 by $722,000 and recorded this adjustment as a true-up of the purchaseprice as permitted under purchase accounting rules. Acquisition has granted theformer owners of Xtrasource a line of credit of no more than $200,000 to enablethe former owners of Xtrasource to pay costs and expenses associated withclosing its Brazilian subsidiary, which Acquisition did not acquire (nor assumeits liabilities), and for ordinary course expenses related to the transaction. Amountsdrawn on the line of credit will be deducted from Earnout payments. As of March 31,2006 and 2005, the Company had advanced $108,955 and $84,729, respectively,including interest, under the line of credit which is included as a deductionto the accrued contingent consideration in the accompanying consolidatedfinancial statements. The Company’s consolidated operating results contain theoperating results of the acquired business beginning in the 2005 fiscal year.

The acquiredassets consist of call center operations with facilities in the United States,the Netherlands and France. Xtrasource offers integrated customer solutions,including help desk, technical assistance, and live web chat. The purchase ofXtrasource provides the Company with a larger geographic footprint andadditional language skills to enhance customer service. The purchase alsoallows the Company to broaden its product offerings. The purchase was accountedfor as follows:

 

| Assets acquired and  liabilities assumed through business acquisition: |   |      |      |
|------------------------------------------------------------------------|--------|-----------|-----------|
| Receivables                                                            |   | $         | 1,835,911 |   |
| Property and  equipment                                                |   | 201,810   |      |
| Other assets,  including $1,366,201 of intangible assets               |   | 1,690,560 |      |
|                                                                   |   |      |      |
| Total assets  acquired                                                 |   | 3,728,281 |      |
| Less liabilities  assumed:                                             |   |      |      |
| Accounts payable                                                       |   | 1,030,978 |      |
| Accrued  contingent consideration                                      |   | 907,898   |      |
| Long-term debt  and capital leases                                     |   | 51,680    |      |
| Other  liabilities, including $75,000 of accrued purchase liabilities  |   | 850,548   |      |
|                                                                   |   |      |      |
| Net cash paid                                                          |   | $         | 887,177   |   |

 

The intangibleassets acquired consist primarily of the Xtrasource customer contracts andcustomer base. These intangible assets are being amortized over the expecteduseful life of five years. As of March 31, 2006 and 2005 the carryingvalue of this intangible asset was $1,904,274 and $1,229,607, respectively. Asof March 31, 2006 and 2005 the accrued contingent consideration related tothis intangible asset was $1,714,803 and $907,898, respectively. The Companyincurred amortization expense related to these assets of $364,037, $136,594 and$0 for the fiscal years ended March 31, 2006, 2005 and 2004, respectively.

The accruedcontingent consideration represents the Company’s estimate of the Earnoutliability. This estimate is based on the Company’s forecasts of Xtrasource’searnings through September 2009. The actual amounts eventually paid forthe Earnout could differ materially from management’s estimate.

F-19

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**12.  Geographic Information**

Beginning October 1,2004, the Company operated contact and call centers in the United States andEurope. Prior to October 1, 2004, the Company operated only in the UnitedStates. The Company has attributed the following geographic area net revenue andlong-lived assets based on physical location of operations centers for thefiscal years ended March 31, 2006 and 2005:

|                     | ** ** | **March 31,  2006** | ** **     | **March 31,  2005** | ** ** |
|---------------------|------------|--------------------------|----------------|--------------------------|------------|
| Net revenue:        |       |                     |           |                     |       |
| United States       | ** ** | **$**                    | **41,126,000** |                     | $          | 27,407,000 |   |
| Europe              | ** ** | **10,003,000**           |           | 4,379,000                |       |
|                |       |                     |           |                     |       |
| Consolidated  total | ** ** | **$**                    | **51,129,000** |                     | $          | 31,786,000 |   |
|                |       |                     |           |                     |       |
| Long-lived assets:  |       |                     |           |                     |       |
| United States       | ** ** | **$**                    | **7,141,000**  |                     | $          | 4,246,000 |   |
| Europe              | ** ** | **2,182,000**            |           | 1,312,000                |       |
|                |       |                     |           |                     |       |
| Consolidated total  | ** ** | **$**                    | **9,323,000**  |                     | $          | 5,558,000 |   |

 

F-20

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