**SECURITIES AND EXCHANGECOMMISSIONWASHINGTON, D.C. 20549**

____________________________________________________

**FORM 10-KSB**

(MarkOne)

T            ANNUAL REPORT PURSUANT TO SECTION 13 or15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2004

o            TRANSITION REPORT PURSUANT TO SECTION 13 or15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM______ TO ________

**Commission File No.  001-14883**

| **ARS NETWORKS,  INCORPORATED**                                          |
|--------------------------------------------------------------------------|
| (Exact name of issuer  as specified in its charter)                      |
|                                                                     |  |
| **New Hampshire**                                                        | **14-1805077** |
| (State or other jurisdiction of incorporation or  organization)          | (I.R.S. Employer  Identification No.) |
|                                                                     |  |
| **1207 Delaware    Avenue,  Buffalo,   New York**                        | **14209** |
| (Address of  principal executive offices)                                | (Zip Code) |
|                                                                     |  |
| Registrant's telephone number, including area code:  **(716)  332-6143** |
|                                                                     | ** ** |
| Securities  registered under Section 12(b) of the Exchange Act:          | **None** |
|                                                                     |  |
| Securities  registered under Section 12(g) of the Exchange Act:          | **Common stock, par value $0.0001 per share** |
|                                                                          | (Title of class) |

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding twelve 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.  YesTNo o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant's knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB.  T

Stateissuer's revenues for its most recent fiscal year: $40,000.

State the aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was last sold, or the average bid and askedprice of such common equity, as of April 15, 2004: $0.0018

Indicate the number of shares outstanding of each ofthe registrant's classes of common stock as of April 8, 2004: 473,133,884.

Documents incorporated by reference:  None.

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**TABLE OF CONTENTS**

| Item 1.           Business................................................................................................................................................................                                                                                                                                                          | 2       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| Item 2.           Description of Property.......................................................................................................................................                                                                                                                                                                    | 9       |
| Item 3.           Legal Proceedings................................................................................................................................................                                                                                                                                                                 | 9       |
| Item 4.           Submission of Matters to a Vote of SecurityHolders....................................................................................                                                                                                                                                                                            |  9 |
| Item 5.           Market for Common Equity and Related Stockholder Matters.....................................................................                                                                                                                                                                                                     | 10      |
| Item 6.           Management's Discussion and Analysis orPlan of Operation....................................................................                                                                                                                                                                                                      | 11      |
| Item 7.           Financial Statements............................................................................................................................................                                                                                                                                                                  | 15      |
| Item 8.           Changes in and Disagreements With Accountants on Accounting and FinancialDisclosure...............                                                                                                                                                                                                                                | 15      |
| Item 8A.        Controls and Procedures.....................................................................................................................................                                                                                                                                                                                       | 16      |
| Item 9.           Directors, Executive Officers, Promoters and Control Persons; Compliance WithSection 16(a)                        of the Exchange Act.             | 16      |
| Item 10.         Executive Compensation......................................................................................................................................                                                                                                                                                                                 | 18      |
| Item 11.         Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters.                                                                                                                                                                                                                                               | 20      |
| Item 12.         Certain Relationships and RelatedTransactions..............................................................................................                                                                                                                                                                                                  | 20      |
| Item 13.         Exhibits and Reports on Form8-K.......................................................................................................................                                                                                                                                                                                       | 20      |
| Item 14.         Principal Accountant Fees andServices............................................................................................................                                                                                                                                                                                            | 22      |

 

 

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** **

**PART I**

Item 1.            Business.

We were originally organized in 1998 to design anddevelop advanced railway communications and data management systems.  As such,we have a limited operating history.  Our key corporate objectives and strategies for 2004 are:

-  To raise investment capital tomake equity investments in operating companies to generate ongoing revenues forus;  
-  To continue development of theCrosslogix and Refilter products so that these products can be brought tomarket. 
-  To seek strategic partners withregard to these products to ensure adequate financing, development, productionand sales for the ARS products. 

We plan to change our name at some appropriate date aspart of our plan to refocus our company in 2004 and beyond to benefit frominvestment opportunities.

We intend to enter into alliances that may differaccording to the operational relationship between the partners.  Some alliancesmay take the form of what economists call "vertical" relationships (*i.e*.,between suppliers and buyers) and other represent "horizontal" relationships (*i.e*.,between companies selling the same or similar products).  We will takeadvantage of alliances to combine capabilities, thus creating a competitiveentity that is stronger than the members would be by themselves.

We are currently reviewing investment options but havenot entered into any agreements beyond the review of potential options.  We arecurrently evaluating additional business opportunities that will likely resultin revenue and profit for us.  As of the date of this report, we haveraised $751,000 for such investments but have notentered into any definitive agreements to do so.

We will make investments that generate diversifiedrevenue sources for us.  To achieve this goal we have raised some investmentcapital, plan to form alliances and invest to take advantage of theincreasingly changing competitive nature of doing business in today's economy.  Manycompanies are teaming up to increase market penetration, develop technologies,and share the costs of new business development.  Cooperative competition isessential to our future success in today's ever-changing business environment.

During the current fiscal period, we do not anticipatepurchasing or selling any plant or significant equipment.

**Marketsand Marketing**

*Refilter.*  Dieselengines are the cause of a majority of the airborne pollutants that choke mostmajor cities worldwide.  Regulators internationally are setting stringentstandards for diesel emissions that must be met at varying milestones duringthe coming decade.  With over fifteen million diesel engines in operation inthe U.S., and in excess of 50 million worldwide, the current output of harmfulemissions is estimated to be well above 5 million tons per year.  According tothe Environmental Protection Agency (EPA), each year smog and soot account for15,000 premature deaths, one million respiratory problems, 400,000 asthmaattacks and thousands of cases of aggravated asthma, especially in children.  Itis this problem that, after two years of research, has lead to the developmentof an exhaust filtering system called "ARS Refilter."

The ARS Refilter Exhaust Filter System incorporates aremovable filter/converter system that is designed for cleaning when needed.  Thissystem does not require special fuel formulations and will work with currentengine management systems thus allowing for an estimated 90 percent reductionin emissions and therefore meeting the upcoming standards.  The ARS Refilter ExhaustFilter System will reduce particle emissions from combustion engines and hasapplications in transportation, mining and construction as well as otherindustries. 

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We have completed the necessary research and arecontinuing development with regard to a proto-type unit.  A search of theexhaust filter industry has shown that there are no similar systems availableon the market.  A patent notice of allowance has been granted and we anticipatethe patent will be issued with in the next two months.

We believe that there is an urgent need worldwide for ARSRefilter.  We have identified and are proceeding with negotiations regarding ajoint venture for the completion and marketing of the Refilter Product.  Duediligence by both parties continues with a significant degree of interest.

Throughout the world diesel engines are the powerplant of choice for running trains and heavy industrial equipment.  This isbecause a diesel engine is considered the most efficient form of internalcombustion engine available. The combination of a slow development in "low" or"zero" emissions engines and the perception that there is an adequate supply ofpetroleum products leads us to believe that diesel engines will continue todominate for some time to come and in ever increasing numbers each year.  Althoughthe diesel engine is, and will continue to be the most popular form ofindustrial drive, it comes at a very heavy cost to the environment.

The ARS Refilter has been issued a patent for itsunique practical system.  Our intention is to execute the initial developmentand license our patented refilter technology.

Recently, both the EPA & CARB (California AirResources Board) have been strongly suggesting that the upcoming emissionstandards are "tailored to force the use of diesel particulate filters on newheavy-duty engines."  During our research phase of the Refilter project, it wasapparent that both a catalytic converter and a particulate trap would be neededto meet the standards set.  Further research indicated that trying to make afilter system that would last the life of the vehicle would be impractical,primarily due to the typical long life span of a diesel engine.  This led ARSRefilter to the most practical solution: a removable filter/converter systemthat is designed for cleaning when needed.  To date fifteen percent of thedevelopment has been conducted and completion time for the balance ofdevelopment, assuming sufficient financial resources are available, andlicensing arrangements are made, will be approximately 10 months.  We intend toestablish strategic alliances with companies that would benefit from thesuccessful introduction of this product.

*Crosslogix.* The focus of our private wireless network (called "Crosslogix"TM*)*is management of railway traffic, control and public safety.  While our systemand its component parts were developed to improve safety at rail crossings, oursystem can support numerous applications in real time data collection,processing, monitoring and information analysis.  The system has evolved intoan integrated service information system that is the foundation of our wirelessprivate network.

Our first information service system application is ourlevel grade crossing.  Unlike traditional systems, we can add otherapplications to the system such as hot bearing detectors and flat wheeldetectors.  We then transmit the information recorded over our private networkto alert railway officials and service providers of problems related to safetyor maintenance.

We believe that our system benefits railway operatingefficiency because it can give virtually instant feedback on the location ofcars and freight, which includes capturing information and time-stamping it astrains pass through a crossing.  Plus, this innovative system is expected toallow communication between trains and crossing signals to provide motoristswith more complete information on train movements.  We believe that improvedinformation creates safer conditions and benefits for the railways and theircustomers, as well as motorists and pedestrians.

The railway industry has a well-defined and immediateneed for low-cost communications systems and multi functional advance warningsystems at railway level crossings*.*Because of the high cost ofpurchasing, installing and maintaining warning systems, the railways haveinstalled warning systems at only 67,000 railway crossings, leaving more than250,000 North American railway crossings without advanced warning formotorists.  In the United States, an average of 4,700 railway crossingaccidents have occurred annually over the past five years, resulting in anaverage of over 580 deaths and 2,500 injuries per year.  A train-vehiclecollision occurs every 90 minutes on average in the USA.  (Source:*Transport Safety Board 1999 Annual Report Canada*, *US Federal RailroadAdministration.)*

Our CrosslogixTM system is a modular communicationssystem that monitors train movements and provides security and warning systemsfor trains at highway grade crossings.  Communications and crossing systemscurrently in use are outdated, functionality is minimal and costs are high forinitial installation and ongoing maintenance.  In effect, they are deadassets.  Our solution offers the potential for these dead assets to becomerevenue generators.

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We have been in discussions with a major engineeringcompany that gave us a proposal to complete Crosslogix.  In this proposal, itis estimated that $600,000 of investment is required for product completion andinstallation of 2 market ready systems on a class I rail mainline.  Six to ninemonths of time is required to complete the project.  This would be the firststage of an arrangement that would see us complete our Crosslogix business planand market the system through licensing relationships to the US railwayindustry. 

We will approach the marketing of Crosslogix andRefilter through jointly owned ventures, licensing relationships andco-marketing programs, depending on the opportunity that makes the most senseupon completion of the technology. 

We will not manufacture our technology.  We willcontract manufacturing and assembly, with care taken to ensure that ISO standardsare maintained. 

We intend to develop a new web site that provideson-line information about us and allows us to communicate with the public andgovernment authorities.  In addition, we intend to use the web site in directmarketing campaigns to build customer awareness from the ground up.

*Publicity and Advertising, Brochures and TechnicalBriefs*.  We intend to develop a newweb site that provides on-line information about us and allows us to communicatewith the public and the government authorities.  In addition, we intend to usethe web site in direct marketing campaigns to build customer awareness from theground up.

*Procurement*. We will limit procurement to outsourcing contracts and service contracts.

**OurOrganization**

We were formedin New Hampshire on May 4, 1998.  Our executive offices are located at 1207 Delaware Avenue, Buffalo, New York 14209, telephone number (716) 332-6143.

In July 2000, we completed the purchase of T & TDiesel Power, Ltd. ("T & T").  However, underperformance by T&Tresulted in the sale of T&T in January 2003. 

We purchased Majestic Refilter on April 22, 2003.  Moredetailed discussion of this product and its benefits to us are noted below.

On April 25, 2003, we acquired all of the outstandingcommon shares of HMM Capital Holdings Inc. ("HMM") and with this transaction wealso acquired the license to distribute the ARS Fire Safety Tec fire retardantdoors.  The fire safety door product has not performed to our expectations;even though we made every reasonable effort to find distributors, bulkmanufacturers and others to assist bringing the product to its potential.  Ultimately,we determined that it was no longer prudent to expend valuable time andfinancial resources in pursuit of this product.  As such, we discontinued ourefforts to market this product as of January 31, 2004. There were no assets,liabilities, revenue or expenses related to this business.

In this Form 10-KSB Annual Report, references to "us"refer to ARS Networks, Incorporated, unless the context indicates otherwise.

InMarch 2004, the Company established a subsidiary, Vermont Motors Cars Inc. topursue investments in an automobile dealership.  Two of the Company'sdirectors were appointed as directors of the subsidiary and a total of $751,000was invested in the subsidiary to date.  The Company withdrew from thesediscussions in March 2004.

OnMarch 26, 2004 we filed an amendment to our certificate of incorporation withthe Secretary of State of New Hampshire increasing the number of shares of ourauthorized common stock from 500,000,000 to 2,000,000,000 shares, and grantingour board of directors authority to determine, in whole or in part, thepreferences, limitations, and relative rights, within the limits set forth inNew Hampshire Revised Statutes Annotated, Section 293-A:6.01, of: 

-  Any class of sharesbefore the issuance of any shares of that class; or  
-  One or more serieswithin a class before the issuance of any shares of that series. 

**Patentsand Trademarks**

We have patent protection, under a license agreement,for an Automated Railway Crossing.  The patent was granted in June 2001.

 

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A patent has been granted for the Refilter product.  Aspart of the acquisition of Refilter in April, we acquired the intellectualproperty.

**Employees**

As of March 31, 2004, weemployed 3 persons under consulting contracts and 3 under employmentagreements. 

**Risk Factors**

***Risks Relating to Our Business***

**Future capitalrequirements; uncertainty of future funding.**

Our plan ofoperation calls for additional capital to facilitate growth and support ourlong-term development and marketing programs.  It is likely that we will have toseek additional financing through future public or private sales of oursecurities, including equity securities.  We may also seek funding for thedevelopment and marketing of our products through strategic partnerships andother arrangements with investment partners.  There can be no assurance,however, that such collaborative arrangements or additional funds will beavailable when needed, or on terms acceptable to us, if at all.  Any suchadditional financing may result in significant dilution to existingstockholders.  If adequate funds are not available we may be required tocurtail one or more of our future programs.

**Substantial doubt that wecan continue as a going concern.**

We expect toincur significant capital expenses in pursuing our plans to increase salesvolume, expanding our product lines and obtaining additional financing throughstock offerings, or licensing agreements or other feasible financingalternatives.  In order for us to continue our operations, we will requireadditional funds over the next 12 months.  While we hope we will be able togenerate funds necessary to maintain our operations, without additional fundsthere will be a reduction in the number of new projects that we could take on,which may have an effect on our ability to maintain our operations.  Additionalfinancing may not be available on terms favorable to us, or at all. Ifadditional funds are not available, we may not be able to execute our businessplan or take advantage of business opportunities.  Our ability to obtain suchadditional financing and to achieve our operating goals is uncertain.  In theevent that we do not obtain additional capital or are not able to increase cashflow through the increase of sales, there is a substantial doubt of our beingable to continue as a going concern.

Additionally, itshould be noted that our independent auditors have included a substantial doubtparagraph and related discussion in the notes to our financial statements.  Theauditors have included the going concern provision because we have incurredsignificant and recurring losses and have a large working capital deficit thatthe auditors believe raises substantial doubt about our ability to continue asa going concern.  Until such time we receive additional debt or equity financing,there is a risk that our auditors will continue to include a going concernprovision in the notes to our financial statements.

**Proprietary rights.**

We rely oncontractual rights, trade secrets, trademarks, and copyrights to establish andprotect our proprietary rights in our products and our components.  We intendto closely monitor competing product introductions for any infringement of ourproprietary rights.  We believe that, as the demand for products such as thosedeveloped by us increase, infringement of intellectual property rights may alsoincrease.  If certain industry competitors infringe on our proprietary rights,they may have substantially greater financial, technical, and legal resourcesthan we, which could adversely affect our ability to defend our rights.  Inaddition, we could incur substantial costs in defending our rights.

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**Dependence on keyemployees.**

Our business isdependent upon our senior executive officers, principally, Mr. Sydney Harland,our chief executive officer, president and director, who is responsible for ouroperations, including marketing and business development.  We have anemployment agreement with Mr. Harland, and he has indicated a desire tocontinue his employment with us for the long term.  Nevertheless, should Mr.Harland leave our employ, our business may be adversely affected.  In the eventof future growth in administration, marketing, manufacturing and customersupport functions, we may have to increase the depth and experience of ourmanagement team by adding new members.  Our success will depend to a largedegree upon the active participation of our key officers and employees.  Lossof services of any of the current officers and directors, especially Mr.Harland, could have a significant adverse effect on our operations andprospects.  There can be no assurance that we will be able to employ qualifiedpersons on acceptable terms to replace officers who become unavailable.

**Need for additionalspecialized personnel.**

Although we arecommitted to the continued development and growth of our business, the additionof specialized key personnel and sales persons to assist us in our expansion ofour national operations will be necessary.  There can be no assurance that wewill be able to locate and hire such specialized personnel on acceptable terms.

**We may face significantcompetition.**

There arenumerous corporations, firms and individuals that are engaged in the type ofbusiness activities in which we engage.  Many of those entities are moreexperienced and enjoy substantially greater financial, technical and personnelresources than we possess.  While we hope to be competitive with other similarcompanies, there can be no assurance that such will be the case.

**Dependence on ability tomarket products and services.**

Due to ourlimited resources, the sales and marketing of our products has been limited todate.  Our success is dependent upon our ability to market and sell ourproducts and services with such limited resources.

**Lackof Independent Directors**

We cannot guarantee that our board of directors willhave a majority of independent directors in the future.  In the absence of amajority of independent directors, our executive officers, who are alsoprincipal stockholders and directors, could establish policies and enter intotransactions without independent review and approval thereof.  This couldpresent the potential for a conflict of interest between us and ourstockholders generally and the controlling officers, stockholders or directors.

**Limitationof Liability and Indemnification of Officers and Directors**

Our officers and directors are required to exercisegood faith and high integrity in our management affairs.  Our articles of incorporationprovide, however, that our officers and directors shall have no liability toour shareholders for losses sustained or liabilities incurred which arise fromany transaction in their respective managerial capacities unless they violatedtheir duty of loyalty, did not act in good faith, engaged in intentionalmisconduct or knowingly violated the law, approved an improper dividend orstock repurchase, or derived an improper benefit from the transaction.  Our articlesand bylaws also provide for the indemnification by us of the officers anddirectors against any losses or liabilities they may incur as a result of themanner in which they operate our business or conduct the internal affairs,provided that in connection with these activities they act in good faith and ina manner that they reasonably believe to be in, or not opposed to, our bestinterests, and their conduct does not constitute gross negligence, misconductor breach of fiduciary obligations.  To further implement the permittedindemnification, we have entered into indemnity agreements with our officersand directors. 

 

 

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***Risks Relating to Our Stock***

**Wemay need to raise additional capital.  If we are unable to raise necessaryadditional capital, our business may fail or our operating results and ourstock price may be materially adversely affected.**

Because we are a newly operational company, we need tosecure adequate funding.  If we are unable to obtain adequate funding, we maynot be able to successfully develop and market our products and services andour business will most likely fail.  We do not have commitments for additionalfinancing.  To secure additional financing, we may need to borrow money or sellmore securities, which may reduce the value of our outstanding securities.  Wemay be unable to secure additional financing on favorable terms or at all.

Selling additional stock, either privately orpublicly, would dilute the equity interests of our stockholders.  If we borrowmore money, we will have to pay interest and may also have to agree torestrictions that limit our operating flexibility.  If we are unable to obtainadequate financing, we may have to curtail business operations which would havea material negative effect on operating results and most likely result in alower stock price.

**Ourcommon stock has experienced in the past, and is expected to experience in thefuture, significant price and volume volatility, which substantially increasesthe risk that you may not be able to sell your shares at or above the pricethat you pay for the shares.**

Because of the limited trading market for our commonstock, and because of the possible price volatility, you may not be able tosell your shares of common stock when you desire to do so.  During 2002 and2003, and through the date of this Annual Report, our common stock was sold andpurchased at prices that ranged from a high of $11.00 to a low of $0.0041 pershare.  The inability to sell your shares in a rapidly declining market maysubstantially increase your risk of loss because of such illiquidity becausethe price for our common stock may suffer greater declines due to its pricevolatility.

The price of our common stock that will prevail in themarket may be higher or lower than the price you pay.  Certain factors, some ofwhich are beyond our control, that may cause our share price to fluctuatesignificantly include, but are not limited to, the following:

-  Variations in our quarterlyoperating results; 
-  Our ability to complete theresearch and development of our technologies; 
-  The development of a market ingeneral for our products and services; 
-  Changes in market valuations ofsimilar companies; 
-  Announcement by us or ourcompetitors of significant contracts, acquisitions, strategic partnerships,joint ventures or capital commitments; 
-  Loss of a major customer orfailure to complete significant transactions; 
-  Additions or departures of keypersonnel; and 
-  Fluctuations in stock market priceand volume. 

Additionally, in recent years the stock market ingeneral, and the OTC Bulletin Board in particular, have experienced extremeprice and volume fluctuations.  In some cases, these fluctuations are unrelatedor disproportionate to the operating performance of the underlying company. These market and industry factors may materially and adversely affect our stockprice, regardless of our operating performance.

 

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Over the past few months, there have been periods ofsignificant increases in trading volume of our common stock during which theprice of our stock has both increased and decreased.  The historical trading ofour common stock is not necessarily an indicator of how it will trade in thefuture and our trading price as of the date of this Annual Report does notnecessarily portend what the trading price of our common stock might be in thefuture.

Moreover, class action litigation has often beenbrought against companies following periods of volatility in the market priceof the common stock of those companies.  If we become involved in this type oflitigation in the future, it could result in substantial costs and diversion ofmanagement attention and resources, which could have a further negative effecton your investment in our stock.

**Ourdirectors have the right to authorize the issuance of preferred stock andadditional shares of our common stock.**

Our directors, within the limitations and restrictionscontained in our articles of incorporation and without further action by ourstockholders, have the authority to issue shares of preferred stock from timeto time in one or more series and to fix the number of shares and the relativerights, conversion rights, voting rights, and terms of redemption, liquidationpreferences and any other preferences, special rights and qualifications of anysuch series.  We have no intention of issuing preferred stock at the presenttime.  Any issuance of preferred stock could adversely affect the rights ofholders of our common stock.

Should we issue additional shares of our common stockat a later time, each investor's ownership interest in our stock would beproportionally reduced.  No investor will have any preemptive right to acquireadditional shares of our common stock, or any of our other securities.

**Ourdirectors have been granted discretionary authority to amend our articles ofincorporation to effect a reverse stock split of our common stock.**

Our directors have been granted discretionary authorityto amend our articles of incorporation to effect a reverse stock split of ourcommon stock on the basis of one post-consolidation share for each 50pre-consolidation shares to occur at some time within 12 months of the date ofour 2004 Annual Meeting (March 23, 2004), with the exact time of the reversesplit to be determined by the directors.  The effect of the reverse split uponthe market price for our common stock cannot be accurately predicted.  Inparticular, there is no assurance that prices for shares of our common stockafter a reverse split will be 50 times greater than the price for shares of ourcommon stock immediately prior to the reverse split.  Furthermore, there can beno assurance that the market price of our common stock immediately after areverse split will be maintained for any period of time.  Moreover, becausesome investors may view the reverse split negatively, there can be no assurancethat the reverse split will not adversely impact the market price of our commonstock or, alternatively, that the market price following the reverse split willeither exceed or remain in excess of the current market price.

**If we fail to remain current on our reportingrequirements, we could be removed from the OTC Bulletin Board which would limitthe ability of broker-dealers to sell our securities and the ability ofstockholders to sell their securities in the secondary market.**

Companies trading on the OTC Bulletin Board, such aswe, must be reporting issuers under Section 12 of the Securities Exchange Actof 1934, as amended, and must be current in their reports under Section 13, inorder to maintain price quotation privileges on the OTC Bulletin Board.  If wefail to remain current on our reporting requirements, we could be removed fromthe OTC Bulletin Board.  As a result, the market liquidity for our securitiescould be severely adversely affected by limiting the ability of broker-dealersto sell our securities and the ability of stockholders to sell their securitiesin the secondary market.

**Our common stock is subject to the "penny stock" rulesof the SEC and the trading market in our securities is limited, which makestransactions in our stock cumbersome and may reduce the value of an investmentin our stock.**

The Securities and Exchange Commission has adoptedRule 15g-9 which establishes the definition of a "penny stock," for thepurposes relevant to us, as any equity security that has a market price of lessthan $5.00 per share or with an exercise price of less than $5.00 per share,subject to certain exceptions.  Inasmuch as that the current bid and ask priceof common stock is less than $5.00 per share, our shares are classified as"penny stock" under the rules of the SEC.  For any transaction involving apenny stock, unless exempt, the rules require:

 

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-  That a broker or dealer approve aperson's account for transactions in penny stocks; and 
-  The broker or dealer receives fromthe investor a written agreement to the transaction, setting forth the identityand quantity of the penny   

In order to approve a person's account fortransactions in penny stocks, the broker or dealer must:

-  Obtain financial information andinvestment experience objectives of the person; and 
-  Make a reasonable determinationthat the transactions in penny stocks are suitable for that person and theperson has sufficient knowledge and experience in financial matters to becapable of evaluating the risks of transactions in penny stocks. 

The broker or dealer must also deliver, prior to anytransaction in a penny stock, a disclosure schedule prescribed by theCommission relating to the penny stock market, which, in highlight form:

-   Sets forth the basis on which thebroker or dealer made the suitability determination; and 
-  That the broker or dealer receiveda signed, written agreement from the investor prior to the transaction. 

Generally, brokers may be less willing to executetransactions in securities subject to the "penny stock" rules.  This may makeit more difficult for investors to dispose of our common stock and cause adecline in the market value of our stock.

Disclosure alsohas to be made about the risks of investing in penny stocks in both publicofferings and in secondary trading and about the commissions payable to boththe broker-dealer and the registered representative, current quotations for thesecurities and the rights and remedies available to an investor in cases offraud in penny stock transactions.  Finally, monthly statements have to be sentdisclosing recent price information for the penny stock held in the account andinformation on the limited market in penny stocks. 

**Item 2.            Description ofProperty.**

Our principalexecutive offices are located at 1207  Delaware Avenue Buffalo, New York 14209.  Thecurrent facility in Buffalo is leased on a month-to-month basis, at anapproximate annual rental rate of $1,800 plus expenses for services performed. We believe our current premises are adequate for current purposes and ifnecessary would be able to obtain alternative or additional space.

**Item 3.            Legal Proceedings.**

In the ordinary course of business we maybecome subject to litigation and claims on various matters.  There existsthe possibility that we will not prevail in all cases.  However, barringunanticipated adverse final determination in these litigation and claims, we donot believe that such litigation and claims would have a material adverseeffect on our financial condition. There is currently no litigation against theCompany.

**Item 4.            Submission of Matters to a Vote ofSecurity Holders.**

None.

 

 

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**PART II**

**Item 5.            Market forCommon Equity and Related Stockholder Matters.**

Our common stock is quoted on the OTC Bulletin Boardunder the symbol "ARSW" since March 26, 2003.  From April 7, 2000 to March 26, 2003, ourcommon stock has been quoted under the symbol "ARSN."  The following table setsforth, for the fiscal quarters indicated, the high and low sales prices.  Thesequotations reflect inter-dealer prices, without mark-up, mark-down orcommission, and may not represent actual transactions.

| **Calendar Year 2002**                                        | **High**                  | **Low**                   |
|---------------------------------------------------------------|---------------------------|---------------------------|
| First  Quarter  Second Quarter  Third Quarter  Fourth Quarter | $0.14  $0.04  $0.01  None | $0.14  $0.03  $0.01  None |
| **Calendar Year 2003**                                        | **High**                  | **Low**                   |
| First  Quarter  Second Quarter  Third Quarter  Fourth Quarter | $0.55  $0.02  $0.01  None | $0.05  $0.02  $0.01  None |
| **Calendar Year 2004**                                        | **High**                  | **Low**                   |
| First  Quarter                                                | None                      | None                      |

We currentlyhave 473,133,884 shares of our common stock outstanding.  Our shares of commonstock are held by approximately 125 stockholders of record.  The number ofrecord holders was determined from the records of our transfer agent and doesnot include beneficial owners of common stock whose shares are held in thenames of various security brokers, dealers, and registered clearing agencies.

**Securities Authorized forIssuance under Equity Compensation Plans**

The followingtable provides information as of the end of the most recently completed fiscalyear with respect to compensation plans (including individual compensationarrangements) under which our equity securities are authorized for issuance,aggregated as follows:

-  All compensation plans previously approved by security holders;and 
-  All compensation plans not previously approved by securityholders. 

| **Plan Category**                                           | **Number of securities to be issued upon exercise of  outstanding options, warrants and rights(a)** | **Weighted-average exercise price of outstanding  options, warrants and rights(b)** | **Number of securities remaining available for future  issuance under equity compensation plans (excluding securities reflected in  column (a))(c)** |
|-------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| Equity compensation plans  approved by security holders     | 200,000,000                                                                                         | $0.01                                                                               | 11,500,000                                                                                                                                           |
| Equity compensation plans  not approved by security holders | 80,000,000                                                                                          | $0.0625                                                                             | 6,850,000                                                                                                                                            |
| Total                                                       | 280,000,000                                                                                         | $0.036                                                                              | 18,350,000                                                                                                                                           |

** **

**Recent Sales ofUnregistered Securities**

In June 2003 weissued 300,000 shares to three directors as a retainer for their services.

10

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In April 2003, weissued 2,000,000 shares to the 26 shareholders and option holders of MajesticRefilter, Ltd. as consideration for the merger of Majestic Refilter and ARSProducts Inc.  Also in April 2003, we issued 10,000,000 shares to the eight shareholdersof HMM Capital Holdings Inc. as consideration for the merger between HMM andARS Products Inc. 

With respect tothe sale of unregistered securities referenced above, all transactions wereexempt from registration pursuant to Section 4(2) of the Securities Act of 1933(the "1933 Act"), and Regulation D promulgated under the 1933 Act. 

**Section15(g) of the Exchange Act**

The shares of our common stock are covered by Section15(g) of the Exchange Act, and Rules 15g-1 through 15g-6 promulgatedthereunder, which impose additional sales practice requirements onbroker-dealers who sell our securities to persons other than establishedcustomers and accredited investors.

Rule 15g-2 declares unlawful any broker-dealertransactions in "penny stocks" unless the broker-dealer has first provided tothe customer a standardized disclosure document.

Rule 15g-3 provides that it is unlawful for abroker-dealer to engage in a "penny stock" transaction unless the broker-dealerfirst discloses and subsequently confirms to the customer the current quotationprices or similar market information concerning the penny stock in question.

Rule 15g-4 prohibits broker-dealers from completing"penny stock" transactions for a customer unless the broker-dealer firstdiscloses to the customer the amount of compensation or other remunerationreceived as a result of the penny stock transaction.

Rule 15g-5 requires that a broker-dealer executing a"penny stock" transaction, other than one exempt under Rule 15g-1, disclose toits customer, at the time of or prior to the transaction, information about thesales person's compensation.

Our common stock may be subject to the foregoingrules.  The application of the "penny stock" rules may affect our stockholders'ability to sell their shares because some broker-dealers may not be willing tomake a market in our common stock because of the burdens imposed upon them bythe "penny stock" rules.

**Item 6.            Management's Discussion and Analysis orPlan of Operation.**

Statementsincluded in this Management' Discussion and Analysis or Plan of Operation, andin future filings by us with the Securities and Exchange Commission, in ourpress releases and in oral statements made with the approval of an authorizedexecutive officer which are not historical or current facts are"forward-looking statements" made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995 and are subject to certainrisks and uncertainties that could cause actual results to differ materiallyfrom historical earnings and those presently anticipated or projected.  We wishto caution readers not to place undue reliance on any such forward-lookingstatements, which speak only as of the date made.  The following importantfactors, among others, in some cases have affected and in the future couldaffect our actual results and could cause our actual financial performance todiffer materially from that expressed in any forward-looking statement: (i) theextremely competitive conditions that currently exist in the market for "blankcheck" companies similar to us, and (ii) lack of resources to maintain our goodstanding status and requisite filings with the Securities and ExchangeCommission.  The foregoing list should not be construed as exhaustive and wedisclaim any obligation subsequently to revise any forward-looking statementsto reflect events or circumstances after the date of such statements or toreflect the occurrence of anticipated or unanticipated events.

Because we lackcapital, an investment in us involves a very high degree of risk.

 

11

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**CriticalAccounting Policies**

The preparation of our consolidated financialstatements in conformity with accounting principles generally accepted in the United Statesrequires us to make estimates and judgments that affect our reported assets,liabilities, revenues, and expenses, and the disclosure of contingent assetsand liabilities. We base our estimates and judgments on historical experienceand on various other assumptions we believe to be reasonable under thecircumstances. Future events, however, may differ markedly from our currentexpectations and assumptions. While there are a number of significantaccounting policies affecting our consolidated financial statements; we believethe following critical accounting policies involve the most complex, difficultand subjective estimates and judgments:

**Stock-BasedCompensation**

In December2002, the FASB issued SFAS No. 148 - Accounting for Stock-Based Compensation -Transition and Disclosure.  This statement amends SFAS No. 123 - Accounting forStock-Based Compensation, providing alternative methods of voluntarilytransitioning to the fair market value based method of accounting for stockbased employee compensation.  FAS 148 also requires disclosure of the methodused to account for stock-based employee compensation and the effect of themethod in both the annual and interim financial statements.  The provisions ofthis statement related to transition methods are effective for fiscal yearsending after December 15, 2002, while provisions related to disclosure requirementsare effective in financial reports for interim periods beginning after December 31, 2002.

We elected tocontinue to account for stock-based compensation plans using the intrinsicvalue-based method of accounting prescribed by APB No. 25, "Accounting forStock Issued to Employees," and related interpretations.  Under the provisionsof APB No. 25, compensation expense is measured at the grant date for thedifference between the fair value of the stock and the exercise price.

**Year 2003 Costs andChanges in Financial Conditions**

As of the dateof this report, we have not engaged in any business activities which providecash flow, and have not recorded any revenues from operations.

**Resultsof Operations**

**TwelveMonths Ended January 31, 2004 Compared To TwelveMonths Ended January 31, 2003**

*Revenues*.  Wehad revenues of $40,000 in the 12 months ended January 31, 2004 versus $31,500in revenue for the 12 months ended January 31, 2003. These revenues were from licensing agreements related to Crosslogix.

*Total Operating Expenses*.  Our total operating expenses increased from$949,585 to $2,980,775 in the 12 months ended January 31, 2003 and 2004respectively.  The increase in operating expenses is principally due toimpairment of goodwill charge of $1,198,650 taken in the second quarter of thepast fiscal year and professional fees and marketing contracts entered into inorder to refocus our business plan during this period. 

*Net Loss*.  Wehad a net loss of $2,942,383 or $0.05 per share, in the 12 months ended January 31, 2004compared to a net loss of $1,256,394, or $2.09 per share, in the comparableperiod in the prior year.  The increase in net loss is due to increase in totaloperating expenses as noted above.

**Liquidity and CapitalResources**

As discussed byour accountants in the audited financial statements included in Item 7 of thisAnnual Report on Form 10-KSB, our revenue is currently insufficient to coverour costs and expenses.

12

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We anticipatethat our current financing strategy of private debt and equity offerings willmeet its anticipated objectives and business operations for the next 12months.  We continue to evaluate opportunities for corporate development. Subject to our ability to obtain adequate financing at the applicable time, wemay enter into definitive agreements on one or more of those opportunities.

Our independentauditor's report on our January 31, 2004 financial statements included in thisAnnual Report states that our lack of sources of revenues raise substantialdoubts about our ability to continue as a going concern.

As of  January 31, 2004, we had a working capitaldeficit of $ 660,072. As a result of our operating losses for the year ended January 31, 2004 wegenerated a negative cash flow from operating activities of $641,388 We met ourcash requirements during this period through the sale of our common stock.

While we have raised capital to meet our workingcapital and financing needs in the past, additional financing is required inorder to meet our current and projected cash flow deficits from operations anddevelopment. We are seeking financing in the form of equity in order to providethe necessary working capital. We currently have no commitments for financing.There is no guarantee that we will be successful in raising the funds required.

At a shareholders' meeting on March 23, 2004, theshareholders approved two amendments to our capital structure to increase theauthorized common share capital to two billion shares from 500 million sharesand also to authorize the board of directors to add additional share classes withthe terms approved by the board.  We believe that these amendments will affordto us additional options to provide funding requirements. 

By adjusting our operations and development to thelevel of capitalization, our management believes that it has sufficient capitalresources to meet projected cash flow deficits through the next twelve months.However, if thereafter, we are not successful in generating sufficientliquidity from operations or in raising sufficient capital resources, on termsacceptable to us, this could have a material adverse effect on our business,results of operations liquidity and financial condition.

**Recent AccountingPronouncements**

In June 2002, the FASB issued Statement No. 146, "Accountingfor Costs Associated with Exit or Disposal Activities." This Statementaddresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.94-3, "Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring)." The provisions of this Statement are effective for exitor disposal activities that are initiated after December 31, 2002, with earlyapplication encouraged. The adoption of this statement did not have a materialimpact on the Company's financial position or results of operations.

In October 2002, the FASB issued Statement No. 147,"Acquisitions of Certain Financial Institutions-an amendment of FASBStatements No. 72 and 144 and FASB Interpretation No. 9", which removes acquisitionsof financial institutions from the scope of both Statement 72 andInterpretation 9 and requires that those transactions be accounted for inaccordance with Statements No. 141, Business Combinations, and No. 142,Goodwill and Other Intangible Assets. In addition, this Statement amends SFASNo. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, toinclude in its scope long-term customer relationship intangible assets offinancial institutions such as depositor- and borrower-relationship intangibleassets and credit cardholder intangible assets. The requirements relating toacquisitions of financial institutions are effective for acquisitions for whichthe date of acquisition is on or after October 1, 2002. The provisions related toaccounting for the impairment or disposal of certain long-termcustomer-relationship intangible assets are effective on October 1, 2002. TheCompany completed its impairment tests and recorded goodwill impairment chargeof $1,198,350 and $264,868 (cumulative effect of accounting changes) for theyears ended January 31, 2004 and 2003. 

In December 2002, the FASB issued Statement No. 148,"Accounting for Stock-Based Compensation-Transition and Disclosure",which amends FASB Statement No. 123, Accounting for Stock-Based Compensation,to provide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, this Statement amends the disclosure requirements of Statement 123 torequire prominent disclosures in both annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the method used on reported results. The transition guidance andannual disclosure provisions of Statement 148 are effective for fiscal yearsending after December 15, 2002, with earlier application permitted in certaincircumstances. The interim disclosure provisions are effective for financialreports containing financial statements for interim periods beginning afterDecember 15, 2002. The adoption of this statement did not have a materialimpact on the Company's financial position or results of operations as theCompany has not elected to change to the fair value based method of accountingfor stock-based employee compensation.

13

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In January 2003, the FASB issued Interpretation No. 46,"Consolidation of Variable Interest Entities." Interpretation 46changes the criteria by which one company includes another entity in itsconsolidated financial statements. Previously, the criteria were based oncontrol through voting interest. Interpretation 46 requires a variable interestentity to be consolidated by a company if that company is subject to a majorityof the risk of loss from the variable interest entity's activities or entitledto receive a majority of the entity's residual returns or both. A company thatconsolidates a variable interest entity is called the primary beneficiary ofthat entity. The consolidation requirements of Interpretation 46 applyimmediately to variable interest entities created after January 31, 2003. Theconsolidation requirements apply to older entities in the first fiscal year orinterim period beginning after June 15, 2003. Certain of the disclosurerequirements apply in all financial statements issued after January 31, 2003,regardless of when the variable interest entity was established. The Companydoes not expect the adoption to have a material impact to the Company'sfinancial position or results of operations.

In April 2003, the FASB issued Statement No.149, "Amendment ofStatement of 133 on Derivative Instruments and Hedging Activities ", whichamends Statement 133, Accounting for Derivative Instruments and HedgingActivities. The adoption of this statement did not have a material impact onthe Company's financial position.

In May 2003, the FASB issued Statement No. 150, "Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity. The adoption of this statement did not have a material impact on theCompany's financial position.

In December2003, the FASB issued SFAS No. 132 (revised), EMPLOYERS' DISCLOSURES ABOUTPENSIONS AND OTHER POSTRETIREMENT BENEFITS - AN AMENDMENT OF FASB STATEMENTSNO. 87, 88, AND 106. This statement retains the disclosure requirementscontained in FASB statement no. 132, Employers' Disclosures about Pensions andOther Postretirement Benefits, which it replaces. It requires additionaldisclosures to those in the original statement 132 about the assets,obligations, cash flows, and net periodic benefit cost of defined benefitpension plans and other defined benefit postretirement plans. The requiredinformation should be provided separately for pension plans and for otherpostretirement benefit plans. The revision applies for the first fiscal orannual interim period ending after December 15, 2003 for domestic pension plansand June 15, 2004 for foreign pension plans and requires certain newdisclosures related to such plans. The adoption of this statement did not havea material impact on the Company's results of operations or financial positions

 

14

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**Recent Developments**

On   March 26,2004 we filed an amendment to our certificate of incorporation with theSecretary of State of New Hampshire increasing the number of shares of ourauthorized common stock from 500,000,000 to 2,000,000,000 shares, and grantingour board of directors authority to determine, in whole or in part, the preferences,limitations, and relative rights, within the limits set forth in New HampshireRevised Statutes Annotated, Section 293-A:6.01, of: 

-  Any class of shares before theissuance of any shares of that class; or  
-  One or more series within a classbefore the issuance of any shares of that series. 

**Off-Balance SheetArrangements**

We do not haveany off-balance sheet arrangements.

**Item 7.            FinancialStatements.**

The financialstatements and related notes are included as part of this Annual Report asindexed in the appendix on page F-1 through F-18.

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

On December 2, 2002, LougenValenti Bookbinder & Weintraub LLP ("Lougen Valenti") , resigned as ourcertifying accountant.  Lougen Valenti's reports on our financial statementsfor the years ended January 31, 2002 and 2001 did not contain an adverse opinion ordisclaimer of opinion; however, the audit report for the years ended January 31, 2002 and2001 contained an explanatory paragraph regarding the substantial doubt about ourability to continue as a going concern.  

The decision tochange accountants was approved by our board of directors.

During the yearsended January 31, 2002  and  2001 , and the subsequent interim periodthrough December  2, 2002 there were no disagreements with Lougen Valenti onany matter of accounting principles or practices, financial statementdisclosure or auditing scope or procedure which disagreements, if not resolvedto the satisfaction of Lougen Valenti, would have caused it to make referenceto the subject matter of the disagreements in connection with its reports onthe financial statements for such periods.

Regulation S-KItem 304(a)(1)(v) is not applicable.

We engagedRussell Bedford Stefanou Mirchandani LLP (Russell Bedford Stefanou Mirchandani)as our certifying accountant as of  December  2, 2002for our fiscal year ending January 31, 2003and going forward.  Prior to the engagement of Russell Bedford StefanouMirchandani we had not consulted with Russell Bedford Stefanou Mirchandani on (i)the application of accounting principles to a specified transaction, eithercontemplated or proposed, or the type of audit opinion that might be renderedon our financial statements or (ii) any matter that was either the subject of a"disagreement" or a "reportable event."

15

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The decision toappoint Russell Bedford Stefanou Mirchandani was approved by our board ofdirectors.

We haverequested the former accountants to furnish us with a letter addressed to theCommission stating whether it agrees with the statements made by us, and, ifnot, stating the respects in which they do not agree.  We included the formeraccountant's letter as Exhibit 16 of our Form 8-K filed with the SEC on December 9, 2002.

**Item 8A.         Controls andProcedures.**

Disclosurecontrols and procedures are controls and other procedures that are designed toensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission's rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and communicated to our management, including our principalexecutive and financial officers, as appropriate to allow timely decisionsregarding required disclosure.

*Evaluation ofdisclosure and controls and procedures.* As of the end of the period covered by this Annual Report, we conducted anevaluation, under the supervision and with the participation of our chiefexecutive officer and chief financial officer, of our disclosure controls andprocedures (as defined in Rules 13a-15(e) of the Exchange Act).  Based on thisevaluation, our chief executive officer and chief financial officer concludedthat our disclosure controls and procedures are effective to ensure that informationrequired to be disclosed by us in reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules and forms.

*Changes ininternal controls over financial reporting.*  There was no change in our internal controls, which are includedwithin disclosure controls and procedures, during our most recently completedfiscal quarter that has materially affected, or is reasonably likely to materiallyaffect, our internal controls.

**PART III**

**Item 9.            Directors,Executive Officers, Promoters and Control Persons; Compliance With Section16(a) of the Exchange Act.**

Ourdirector and executive officers are as follows:

| **Name**               | **Age** | **Position**                                    | **Director Since** |
|------------------------|---------|-------------------------------------------------|--------------------|
| Sydney A. Harland      | 53      | Chief Executive Officer, President and Director | May 1998           |
| Ronald A. Moodie       | 68      | Corporate Secretary, Controller and Director    | February 2003      |
| Richard D. Mangiarelli | 60      | Director                                        | February 2003      |
| Andrew E. Mercer       | 55      | Director                                        | February 2003      |
| Arthur N. Kelly        | 43      | Director                                        | March 2004         |
| Larry M. Ricci         | 52      | Director                                        | March 2004         |
| Mark  P. Miziolek      | 47      | Vice President and Chief Financial Officer      | May 1998           |

Our executiveofficers are elected annually by our board of directors.  There are no familyrelationships among our directors and executive officers.

Sydney A.Harland has served as our chief executive officer and president and a directorsince inception.  From 1987 to 2002, Mr. Harland was president, founder andsole shareholder of American Equipment Sales and Leasing Inc., a productdevelopment and sales company.  From 1995 to December 2000, he was a consultantto Ontario Hydro Technologies.  Mr. Harland has over 20 years of businessexperience, primarily in sales and marketing, in the railway, telecommunications,nuclear utility and mining industries.

16

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Ronald A. Moodiehas been an advisor to us since June 5, 1998 and was appointed our controller inJune 2000.  In February 2003, Mr. Moodie was elected our corporate secretary. From 1989 to present, Mr. Moodie has been president of Moodie Consulting,providing management and investment services to commercial real estatedevelopers and heavy equipment suppliers to the railway and constructionindustries.

Richard D.Mangiarelli was elected to our board of directors in February 2003.  He hasserved as president, chief executive officer and director of CybertelCommunications Corporation, a publicly-traded company, since 1996.  Prior,thereto, Mr. Mangiarelli served as president and director of United StatesAlternate Energy Corporation, a publicly-traded company and as president anddirector of Dynasty Resources, a publicly-traded company.

Andrew E. Mercerwas elected to our board of directors in February 2003.  He has served aschairman, chief executive officer and president of The Mercer Group, Inc. since1997.  The Mercer Group is a privately held corporation offering businessmanagement and consulting services to companies which have not filedregistration statements covering the initial public offerings of their securities. Mr. Mercer is also chairman, president, and chief executive officer of CommerceDevelopment Corporation, Ltd.

Arthur N. Kellyhas 18 years of marketing, sales and management experience and is currentlyvice president of sales-North America for ELTEK Energy where he is responsible for thedevelopment and growth of all ELTEK Energy sales in the United Statesand Canadian markets.  Mr. Kelly held various sales and management positionswith Marconi Communications from 1988 to 2001 where he was responsible forsales of power generation and communication supplies to major North Americancommunications companies.  Mr. Kelly was sales manager for S.N.P. Associates inFrancefrom 1986 to 1988 and also district sales manager for Pylon Electronics in Montreal from1985 to 1986.

Larry Ricci hasbeen the owner of Kia West Edmonton, the largest volume Kia dealership in Western Canada,since 2000.  From 1993 to 2000, Mr. Ricci was vice president of sales forVision R.V. and continues as a shareholder and advisor to that company.  He waspresident and general manager of Brampton Suzuki from 1987 to 1993.  Mr. Ricciis chairman of the Dealer Council of Kia Canada and a member of the Kia Canada Presidents Club.

Mark P. Miziolekhas been our vice president finance, chief financial officer and treasurersince May 20, 1998 and was appointed a director in September 2002.  From1994 to 1998, Mr. Miziolek became the treasurer and chief financial officer andlater the president, treasurer and chief financial officer of ThornmarkHoldings Inc./Thornmark Corporation, a privately held investment holdingcompany with interests in industrial and residential real estate developmentand Great Lakes and ocean shipping.  From 1981 to 1994, Mr. Miziolekwas first the assistant controller and then the controller of Upper LakesGroup, Inc., one of Canada's largest dry bulk shipping companies with 21 vesselsoperating on the Great Lakes and four vessels in ocean trades.  Mr. Miziolek isnot a nominee for a director of ARS Networks and will not be seeking electionas director at the time of the 2004 Annual Meeting of Shareholders.

**Section 16(a)Beneficial Ownership Reporting Compliance**

Under Section16(a) of the Exchange Act, our directors and certain of our officers, andpersons holding more than 10 percent of our common stock are required to fileforms reporting their beneficial ownership of our common stock and subsequentchanges in that ownership with the Securities and Exchange Commission.  Suchpersons are also required to furnish us with copies of all forms so filed.

Based solelyupon a review of copies of such forms filed on Forms 3, 4, and 5, andamendments thereto furnished to us, we believe that during the year ended January 31, 2004, ourexecutive officers, directors and greater than 10 percent beneficial ownerscomplied on a timely basis with all Section 16(a) filing requirements.

17

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**Committees of theBoard of Directors**

*Compensation Committee.*  Our board of directors has created a compensationcommittee.  However, no members of the committee have been appointed and thecommittee has not been formally organized.  The compensation committee willmake recommendations to the board of directors concerning salaries andcompensation for our executive officers and employees.  We have adopted a charterfor the compensation committee.

*AuditCommittee.*  Our board of directorshas created an audit committee which is directly responsible for theappointment, compensation, and oversight of the work of any registered publicaccounting firm employed by us (including resolution of disagreements betweenour management and the auditor regarding financial disclosure) for the purposeof preparing or issuing an audit report or related work.  The audit committeewill also review and evaluate our internal control functions.  However, nomembers of the committee have been appointed and the committee has not beenformally organized.  We have adopted a charter for the audit committee.

**Code of Ethics**

We have adopteda code of ethics that applies to our principal executive officer, principalfinancial officer, principal accounting officer or controller, or personsperforming similar functions.  The code of ethics is designed to deterwrongdoing and to promote:

-  Honest and ethical conduct, including the ethical handling ofactual or apparent conflicts of interest between personal and professionalrelationships; 
-  Full, fair, accurate, timely, and understandable disclosure inreports and documents that we file with, or submits to, the SEC and in otherpublic communications made by us; 
-  Compliance with applicable governmental laws, rules andregulations; 
-  The prompt internal reporting of violations of the code to anappropriate person or persons identified in the code; and 
-  Accountability for adherence to the code. 

A copy of ourcode of ethics that applies to our principal executive officer, principalfinancial officer, principal accounting officer or controller, or personsperforming similar functions is attached to this Annual Report as an exhibit. We have filed with the SEC a copy of the code of ethics attached hereto.  Wehave posted a copy of the code of ethics on our website at www.arsnetworks.com.

We will provideto any person without charge, upon request, a copy of our code of ethics.  Anysuch request should be directed to our corporate secretary at 1207 Delaware Avenue, Buffalo, New York 14209, telephone number (716) 332-6143.

**Item 10.         ExecutiveCompensation.**

**Summary of Cash andCertain Other Compensation**

 

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| **Name and Principal Position**                                                                                                                                      | **Year ended Jan. 31**                               | **Annual Compensation**                                                                  | **Long Term Compensation**                      | **All Other Compensation ($)** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------|------------------------------------------------------------------------------------------|-------------------------------------------------|--------------------------------|
| **Salary ($)**                                                                                                                                                       | **Bonus ($)**                                        | **Other Annual Compensation ($)**                                                        | **Awards**                                      | **Payouts**                    |
| **Restricted Stock Award(s) ($)**                                                                                                                                    | **Securities Underlying Options/SARs (#)**           | **LTIP Payouts ($)**                                                                     |
| Sydney A. Harland,  President, CEO and Director (1)  Mark P. Miziolek,  Vice President, CFO and Director (2)   

  Ronald A. Moodie  Secretary and Director (3) | 2004  2003  2002  2004  2003  2002  2004  2003  2002 | $150,000  $180,000  $180,000  $56,000  $84,000  $84,000 

$35,000  $60,000  $60,000 | $90,000  -

 

$42,000  -

 

$20,000 | $10,000 (1)                    |  | 44,538

 

19,385

 

13,846 |  |  $80,400 (5)  $86,795(4)   

  $4,400(6)  $40,504(4)

  $4,400(6)  $28,932(4) |

(1)   Mr. Harland's management contract commenced inMay 1999 and was renewed in April 2003 and includes an automobile allowance of$1,000 per month

(2)   Mr. Miziolek's management contract commenced inMay 1999 and was renewed in May 2003

(3)   Mr. Moodie's employment commenced in May 2000 andwas renewed in May 2003

(4)   Settlement of management contracts to January 31, 2003

(5)    Restructuring fee paid to Mr.Harland of $60,000 plus board of director fees in the amount of $20,400

(6)    Board of directors' fees for theyear ended January 31, 2004

InJanuary 2004, Messrs. Harland, Miziolek and Moodie surrendered 429,629, 196,494and 80,000 shares respectively issued in previous years in exchange for preferredshares with 200:1 voting rights.

**Employment Agreements**

On April 1, 2003 weentered into a management agreement with Ameri-can Equipment Sales andLeasing.  Under the terms of the agreement, Mr. Harland, president of Ameri-canEquipment Sales and Leasing, will provide employment services as our presidentand chief executive officer.  The agreement has a five year term expiring April 1, 2008 andpays Mr. Harland $180,000 per year, subject to an annual review by our board ofdirectors.  Mr. Harland is also entitled to a bonus of up to 50% of his basecompensation based on annual performance criteria established annually by the boardof directors.  In addition, Mr. Harland will receive a monthly automobileallowance of $1,000.  We can terminate this agreement at any time upon thepayment of two times Mr. Harland's then-existing compensation, plus $1,000,000.

On June 1, 2003 weentered into a management agreement with Mark Miziolek.  Under the terms of theagreement, Mr. Miziolek will serve as our vice president of finance and chieffinancial officer.  The agreement has a one year term expiring June 1, 2004 and paysMr. Miziolek $84,000 per year, subject to an annual review by our board of directors. Mr. Miziolek is also entitled to a bonus based on annual performance criteriaestablished annually by our board of directors.  We can terminate this agreementat any time upon the payment of three months of Mr. Miziolek's then-existingcompensation.

On June 1, 2003 weentered into a management agreement with Ronald Moodie.  Under the terms of theagreement, Mr. Moodie will serve as our corporate secretary.  The agreement hasa one year term expiring June 1, 2004 and pays Mr. Moodie $60,000 per year, subject to anannual review by our board of directors.  Mr. Moodie is also entitled to abonus of up to 50% of his base compensation based on annual performancecriteria established annually by our board of directors.  We can terminate thisagreement at any time upon the payment of three months of Mr. Moodie'sthen-existing compensation

In January 2003,we settled all obligations under previous contracts with the issuance of stock. We had approved a transaction that would have changed control of our Company.  Assuch, our board of directors and management were terminated and their contractspaid out.  Subsequent to these actions, the other party terminated thetransaction.

 

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**Item 11.         Security Ownershipof Certain Beneficial Owners and Management and Related Stockholder Matters.**

**Security Ownership ofCertain Beneficial Owners and Management**

The following table sets forth, as of the date of thisReport, information concerning ownership of our securities by:

-  Each person who owns beneficiallymore than five percent of the outstanding shares of our common stock; 
-  Each director; 
-  Each named executive officer; and 
-  All directors and officers as agroup. 

| **Name and Address of Beneficial Owner (1)**                             | **Common Stock Beneficially       Owned (2)         Number**                  **Percent** | **Preferred Stock Beneficially       Owned (2)           Number**                  **Percent** |
|--------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                     |                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                 |   |   |
| Sydney A. Harland (3)................................................... | 861,269                                                                                                                                                                                                                                    | 0.19                                                                                                                                                                                                                                                 | 1,521,085
60.84Mark P. Miziolek (4).......................................................  1,208,0660.26
695,678
27.83Ronald A. Moodie (5)....................................................  1,395,5320.30
283,237
11.33Andrew E. Mercer (6).....................................................  100,0000.02-0--0-Richard D. Mangiarelli (7).............................................    100,0000.02  -0--0-Arthur N. Kelly (8)..........................................................  -0-
-0-

-0-

-0-
Larry M. Ricci (9)............................................................  
-0-

-0-

-0-
-0-
All directors and officers as a group (seven persons)  
3,664,867

0.79

2,500,000

100.00
                              

(1)   Unless otherwise indicated, the address for eachof these shareholders is c/o ARS Networks, Incorporated, 1207 Delaware Avenue, Suite 410, Buffalo, New York 14209.  Also, unless otherwise indicated, each person namedin the table above has the sole voting and investment power with respect to hisshares of our common stock beneficially owned.

(2)   Beneficial ownership is determined in accordancewith the rules of the SEC.

(3)   Mr. Harland is president and chief executiveofficer, a director and a founder.

(4)   Mr. Miziolek is our vice president and chieffinancial officer.

(5)   Mr. Moodie is the corporate secretary and adirector.

(6)   Mr. Mercer is a director.

(7)   Mr. Mangiarelli is a director.

(8)   Mr. Kelly is a director.

(9)   Mr. Ricci is a director.

There are noarrangements, known to us, including any pledge by any person of oursecurities, the operation of which may at a subsequent date result in a changein control of ARS Networks, Incorporated.

There are noarrangements or understandings among members of both the former and the newcontrol groups and their associates with respect to election of directors orother matters.

**Item 12.         CertainRelationships and Related Transactions.**

We have entered into management agreements with Messrs. Harland,Miziolek and Moodie.  See "Management Agreements."

On July 31, 2000, Mr.Harland's wife loaned to us a total of $100,000 Canadian dollars.  This loanwas due in July 2001 and bears interest at 8.5% per year.  We repaid $50,000 ofthe loan in January 2003 from the proceeds on the sale of T&T and alsoassigned the note receivable in the amount of $47,000 (cdn) to Mrs. Harland.  Thisloan was fully repaid in the last fiscal year.

20
**During thefiscal year ended January 31, 2003, three of our officers advanced funds totaling$54,117 to us in order to meet certain obligations.  These loans were repaidduring 2003.

We entered intoa License Agreement dated as of May 20, 1998with Mr. Sydney A. Harland, our president and chief executive officer.  Underthe terms of this agreement, Mr. Harland has granted to us a non-exclusivelicense to certain intellectual property, a trade name and patents owned anddeveloped by Mr. Harland.  In exchange for this license, we issued a total of90,405 shares of common stock to Mr. Harland.

We entered intoa license agreement with Eveready Closure dated March 2003. Mr. Harland is theprincipal shareholder of Eveready.  Under this agreement, we are to pay aminimum royalty of $100,000 for the first year.  At the reporting date, $50,000of the royalty was paid.  Also, as of January 31, 2004,$50,000 has been accrued towards minimum royalty expenses.

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

(a)           Financial Statement Schedules.

                None.

(b)           Exhibits

**Exhibit No.**

**Identification of Exhibit**

2.1*

Share Purchase Agreement  dated as of July 31, 2000 among the former shareholders of T & T Diesel  Power, Ltd. and the Company.

2.2*

Escrow Agreement dated as  of July 31, 2000 among the Pallet Valo, the former shareholders of T  & T Diesel Power, Ltd. and the Company.

2.3*

Promissory Note dated as of  July 31, 2000 given by the Company to the former shareholders of  T & T Diesel Power, Ltd.

3.1*

Certificate of  Incorporation. 

3.2*

Articles of Amendment to the  Certificate of Incorporation.

3.2  *

Bylaws. 

10.1*

Consulting Agreement dated  as of February 9, 2001 between National Financial Communications Corp. and  the Company.

10.2*

Equity Line of Credit  Agreement dated as of March 22, 2001 between Cornell Capital Partners, L.P.  and the Company.

10.3*

Escrow Agreement dated as of  March 22, 2001 among Butler Gonzalez LLP, First Union National Bank and the  Company.

10.4*

Registration Rights  Agreement dated as of March 22, 2001 between Cornell Capital Partners LP and  the Company.

10.5*

Consulting Services  Agreement dated as of March 22, 2001 between Yorkville Advisors Management,  LLC and the Company.

10.6*

Management Agreement for  Vice President Finance and Chief Financial Officer dated as of January 1, 2001 between Mark P. Miziolek and the Company.

10.7*

Management Agreement for  President and Chief Executive Officer dated as of January 1, 2001 between Sydney Harland and the Company.

10.8*

License Agreement dated as  of May 20, 1998 between Sydney Harland and the Company.

10.9*

Promissory Note dated as of July 31, 2001 in the original principal amount of $100,000 Canadian Dollars given by the  Company to Betty Harland.

 

21
** 
10.10*

Consulting services contract  with Inc. Financial Group LLC dated January 29, 2002.
   
10.11*

Share Purchase Agreement  regarding the sale of T&T Diesel Power Limited.
   
10.12*

Plan and Agreement of Reverse  Triangular Merger.
   
10.13*

Plan and Agreement of  Reverse Triangular Merger.
   
  23.1**Consent of Certified Public Accountants   
  23.2**Consent of Certified Public Accountants   
  23.3**Consent of Certified Public Accountants   
  23.4**Consent of Certified Public Accountants   
14**

Code of Ethics.
   
31.1**

Certification of Sydney A. Harland, president  and chief executive officer of ARS Networks, Incorporated, pursuant to 18  U.S.C. §1350, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
   
31.2**

Certification of Mark P. Miziolek, chief financial  officer and treasurer of ARS Networks, Incorporated, pursuant to 18 U.S.C.  §1350, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
   
32.1**

Certification of Sydney A. Harland,  president and chief executive officer of ARS Networks, Incorporated, pursuant  to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of  2002.
   
32.2**

Certification of Mark P. Miziolek, chief  financial officer and treasurer of ARS Networks, Incorporated, pursuant to 18  U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.

               

* Previously Filed**Filed Herewith

(c)                Reports on Form 8-K.

                None.

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

**Audit Fees and audit related expenses**

Theaggregate fees billed by Russell Bedford Stefanou Mirchandani LLP forprofessional services rendered for the audit of our annual financial statementsfor fiscal year ended January 31, 2004 were $57,500. Forthe year ended January 31, 2003, aggregate fees for professional servicesbilled by Russell Bedford Stefanou Mirchandani LLP and Lougen ValentiBookbinder and Weintraub LLP with regard to the audit of the annual financialstatements was $57,825. 

**All Other Fees**

Therewere no other fees billed by Russell Bedford Stefanou Mirchandani LLP or Michaelson& Co, P.A. for professional services rendered, other than as stated underthe captions Audit and Audit-Related Fees.

 

 

 

 

22

**SIGNATURES**

In accordancewith Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended,the registrant has duly caused this Annual Report to be signed on its behalf bythe undersigned, thereunto duly authorized.

ARS NETWORKS, INCORPORATED

Date: April 30, 2004

By/s/ Sydney Harland                                                      Sydney Harland,    President, ChiefExecutive Officer

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, this AnnualReport has been signed by the following persons on behalf of the registrant andin the capacities and on the dates indicated.

**Signature**

**Title**

**Date**

/s/ Sydney Harland

President, Chief Executive Officer and Director  

April 30, 2004

Sydney Harland
         
/s/ Ronald A. MoodieRonald A. Moodie

Corporate Secretary and Director

April 30, 2004
       
/s/ Richard MangiarelliRichard Mangiarelli

Director

April 30, 2004
         
/s/ Andrew MercerAndrew Mercer

Director

April 30, 2004
         
/s/ Arthur KellyArthur Kelly

Director

April 30, 2004
         
/s/ Larry RicciLarry Ricci

Director

April 30, 2004

 

 

 

 

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**CONSOLIDATED FINANCIAL STATEMENTS ANDSCHEDULES**

** **

**JANUARY 31, 2004 AND 2003**

** **

**FORMING A PART OF ANNUAL REPORT**

**PURSUANT TO THE SECURITIES EXCHANGE ACTOF 1934**

**ARS NETWORKS, INCORPORATED.**

 

 

 

 

 

 

 

 F-1

**ARS NETWORKS, INCORPORATED. INDEX TO FINANCIAL STATEMENTS**

Page No.Reports of    Independent Certified Public Accountants
F-3    Consolidated Balance Sheets at    January 31, 2004 and 2003
F-4    Consolidated Statement of Losses    For the Years Ended January 31, 2004 and 2003
F-5        Consolidated Statement of Deficiency in Stockholders' Equity For the Years    Ended January 31, 2004 and 2003
F-6    Consolidated Statement of    Cash Flows For the Years Ended January 31, 2004 and 2003
F-7    Notes to Consolidated Financial    Statements
F-9 to F-21
** **

** **

 

** **

** **

** **

** **

F-2

** **

**RUSSELL BEDFORD STEFANOU MIRCHANDANILLPCERTIFIED PUBLIC ACCOUNTANTSREPORT OFINDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS**

** **

To the Board of DirectorsARS Networks, IncorporatedChamplain, New York

We have audited the accompanyingconsolidated balance sheets of ARS Networks, Incorporated ("Company") as ofJanuary 31, 2004 and 2003 and the related consolidated statements of losses,(deficiency) in stockholders' equity and cash flows for each of the years in thetwo year period ended January 31, 2004..  These financial statements are theresponsibility of the Company's management. Our responsibility is to express anopinion on these financial statements based upon our audits.

               We conducted our audits in accordance with auditing standards generally acceptedin the United States of America. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as wellas evaluating the overall consolidated financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.

          In our opinion, the financial statements referred to above present fairly, inall material respects, the consolidated  financial position of ARS Networks,Incorporated at January 31, 2004 and 2003, and the consolidated results of theiroperations and their cash flows for each of the years in the two year period ended January 31, 2004 in conformity with accounting principles generallyaccepted in the United States of America.

        The accompanying financial statements have been prepared assuming that theCompany will continue as a going concern. As shown in the financial statements,the Company has incurred net losses since its inception. This raises substantialdoubt about the Company's ability to continue as a going concern. Management'splans in regard to this matter are described in Note J. The financial statementsdo not include any adjustments that might result from the outcome of thisuncertainty.

                                                         /s/ RUSSELL BEDFORD STEFANOU MIRCHANDANILLP                                                                          Russell Bedford Stefanou Mirchandani LLP                                                              Certified Public Accountants

New York, New YorkMarch 10, 2004

 

 

 

F-3

**ARS NETWORKS, INCORPORATEDCONSOLIDATED BALANCE SHEETSJANUARY 31, 2004 AND 2003**
 
2004 
2003ASSETS CURRENT ASSETS: Cash
 $     94,728 
 $            5,612 Other current assets
5,000 
                     -   Note receivable (Note B)
         - 
29,610  Total Current Assets
             99,728  
             35,222  Other Assets
646 
646  Total Assets
 $   100,374  
 $     35,868         LIABILITIES AND (DEFICIENCY) IN      STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued      expenses
 $   137,600  
 $   167,900 Accrued management compensation      (Note F)
           622,200  
           456,800 Related party advances (Note F)
           -              
   85,917                     Total Current Liabilities
           759,800  
      710,617    (DEFICIENCY) IN STOCKHOLDERS'      EQUITY: (Note E) Preferred stock, par value, $0.0001      per share; authorized 25,000,000 shares; 2,500,000 and 0, issued and outstanding at      January 31, 2004 and 2003, respectively
                  250  
                     -   Common stock, par value, $0.0001 per      share, authorized 500,000,000 shares; 222,133,884 and 2,500,006 shares      issued & outstanding at January 31, 2004 and 2003, respectively
             22,213  
                  250 Additional paid in capital
   7,806,177  
   4,853,150 Subscription receivable
            (17,534) 
                     -   Accumulated deficit
(8,470,532) 
(5,528,149)  Total (Deficiency) in Stockholders'      Equity
     (659,426) 
     (674,749)
** ** 
** **Total Liabilities and (Deficiency)      in stockholders' equity
 $   100,374  
 $     35,868        
 

 

(See accompanying notes to consolidatedfinancial statements)

F-4

 

**ARS NETWORKS, INCORPORATEDCONSOLIDATED STATEMENT OF LOSSESFOR THE YEARS ENDED JANUARY 31, 2004 AND 2003**

 
2004
2003Revenues
 $                  40,000 
 $                  31,500 Cost of Revenue
                            -   
                            -    Gross Margin
                     40,000 
                     31,500 Operating Expenses:General and administrative expenses
                1,782,125 
                   949,585 Impairment of goodwill
                1,198,650 
                            -    Total Operating Expenses
                2,980,775 
                   949,585 
** **
** **Loss from Continuing Operations      Before Interest And Income Taxes
              (2,940,775)
                 (918,085)Interest expenses
                     ( 1,608) 
                      ( 7,018) Income (taxes) benefit
                            -   
                            -    Net Loss From Continuing Operations
              (2,942,383)
                 (925,103)Loss from discontinued operations
                            -   
                   (66,423) Net Loss
              (2,942,383)
                 (991,526)Cumulative effect of accounting      change (Note D)
-
                 (264,868) Net Loss Applicable to Common      Shareholders
 $           (2,942,383)
 $           (1,256,394) 
   Loss per common share (basic and      assuming dilution), as restated for 
 $                    (0.05)
 $                    (2.09)Continued Operations
 $                    (0.05)
 $                    (1.54)Discontinued Operations
$                            -   
 $                    (0.11)Loss related to accounting changes
$                            -   
 $                    (0.44)Weighted average shares outstanding      (Basic and Diluted), as restated forreverse stock split
              56,488,846 
                   601,040  
(See accompanying notes to consolidatedfinancial statements)

F-5

 

 

**ARS NETWORKS, INCORPORATEDCONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITYFOR THE TWO  YEARS ENDED JANUARY 31, 2004**

Preferred Stock
Common stock
Number of
Number of
Additional Paid
Subscription
Accumulated
Total (Deficiency) 
Shares
Amount
Shares
Amount
In Capital
Receivable
 Deficit
in stockholders' Equity Balance, January 31, 2002, as      restated
                       -   
 $              -   
                   379,900 
 $            38 
 $ 3,890,247 
 $            -  
 $(4,271,755)
 $  (381,470) Net loss for the year
                       -   
                 -   
                            -   
                            -   
                            -   
                            -   
              (1,256,394)
              (1,256,394) Issuance of common stock
                       -   
                 -   
                       1,852 
                            -   
10,000
                            -   
                            -   
10,000 Common stock issued for services
                       -   
                 -   
                   328,089 
                            33 
143,186
                            -   
                            -   
143,219 Common stock issued for directors'      and officers' compensation
                       -   
                 -   
                1,700,978 
                          170 
757,962
                            -   
                            -   
758,132 Common stock issued to settle      accounts payable
                 -        
                 -   
                     96,687 
                            10 
76,524
                            -   
                            -   
76,534 Common stock issued in connection      with financing activities
                 -        
                 -   
                          500 
                            -   
3,250
                            -   
                            -   
3,250           Common stock cancelled
                 -        
                 -   
                     (8,000)
                            (1)
                   (28,019)
                            -   
                            -   
(28,020)   Balance, January 31, 2003
                 -        
                 -   
                2,500,006 
                          250 
                4,853,150 
                            -   
              (5,528,149)
                 (674,749) 
Net      loss for the year
                -   
                 -   
                            -   
                            -   
                            -   
                            -   
              (2,942,383)
              (2,942,,383) 
Common      stock issued for officers' compensation
                 -        
                 -   
                   300,000 
                            30 
                     29,970 
                            -   
                            -   
                     30,000  
Common      stock issued for consulting services
                      -   
                 -   
              26,540,000 
                       2,654 
                   671,286 
                            -   
                            -   
                   673,940  
Common      stock issued for acquisition activities
                 -        
                 -   
              12,000,000 
                       1,200 
                1,222,800 
                            -   
                            -   
                1,224,000  
Common      stock issued under ESIP
                 -        
                 -   
            181,500,000 
                     18,150 
                   1,029,150
                   (17,534)
                            -   
                   1,029,766  
      Preferred shares issued in lieu of Common stock
     2,500,000      
               250 
                        (250)
                            -    Common stock cancelled for      preference shares
            -        
            -
                 (706,122)
                          (71)
71
            -  
            -  
            -      
      Balance, January 31, 2004
     2,500,000      
 $    250 
222,133,884 
 $ 22,213 
 $ 7,806,177 
 $ (17,534)
 $ (8,470,532)
 $  (659,426)             
(See accompanying notes to consolidatedfinancial statements)

F-6

 

**ARS NETWORKS, INCORPORATEDCONSOLIDATED STATEMENT OF CASHFLOWSFOR THE YEARS ENDED JANUARY 31, 2004 and 2003**

For the Years Ended January 31,
2004
2003Cash Flows From Operating      Activities:Net loss for the year from      continuing operations
 $           (2,942,383)
 $              (925,103)Loss from discontinued operations
                            -   
                   (66,423)Cumulative effect of accounting      change (Note D)
                            -   
                 (264,868)Adjustments to reconcile net loss to      net cash used in operating activities:Write off of intangible asset
                     25,000 Impairment of goodwill
                1,198,650 
                            -   Professional fees settled in stock
                   673,940 
                   143,219 Common stock issued to settle      accounts payable
                            -   
                     76,534 Common stock issued in connection      with financing expenses
                            -   
                       3,250 Common stock cancelled
                            -   
                   (28,020)Employee compensation settled in      stock - ESIP
                     213,345 
                            -   Officers' and directors'      compensation settled in stock
                     30,000 
                   758,131 Depreciation and amortization
                            -   
                       2,198 OtherChanges in assets and liabilities:Decrease in accounts receivable
                            -   
                     80,809 Decrease in inventories
                            -   
                     45,628 Decrease in prepaid expenses
                            -   
                   143,818 Increase in other current assets
                     (5,000)
                            -   Decrease in due from officer
                            -   
                       6,499 Decrease (increase) in note      receivable
                     29,610 
                   (29,610)Increase (decrease) in accounts      payable and accrued expenses
                   135,450 
                   (48,373) Net Cash Used in Operating      Activities
                 (641,388)
                 (102,311)Cash Flows From Investing      Activities:Proceeds from sale of T&T
                            -   
                     33,390 Proceeds from sale of property and      equipment, net
                            -   
                       8,967  Cash Provided by Investing      Activities
                            -   
                     42,357 Cash Flows From Financing      Activities:Proceeds from sale of common stock,      net
                   816,421 
                     10,000 Payments of long-term debt
                            -   
                     (1,258)Payment of note payable - related      party
                   (31,800)
                   (32,000)(Payments to) proceeds from advances      - related parties
                   (54,117)
                     54,117  Net Cash Provided By Financing      Activities
                   730,504 
                     30,859 Net Increase (Decrease) In Cash
                     89,116 
                   (29,095)Cash, beginning of year
                       5,612 
                     34,707  Cash, end of year
 $                  94,728 
 $                    5,612  
               (See accompanying notes to consolidated financial statements)

F-7

 

 

**ARS NETWORKS, INCORPORATEDCONSOLIDATED STATEMENT OF CASH FLOWSFOR THE YEARS ENDED JANUARY 31, 2004 and 2003(CONTINUED)**
SUPPLEMENTAL DISCLOSURE OF NON-CASH      TRANSACTIONSNon Cash Investing and Financing      Activities:Acquisition of Majestic RefuterAssets acquired
$25,000 
 -Goodwill
$179,000 
 -Common stock issued for acquisition
$204,000 
 -Acquisition of HMM capital      HoldingsAssets acquired
$900 
 -Liabilities acquired
$550 
 -Goodwill
$1,019,650 
 -Common stock issued for acquisition
$1,020,000 
 -Impairment of goodwill
$1,198,650 
 -Common stock issued for services
$673,940 
$143,219 Compensation settled in common stock
$243,345 
$758,131 Common Stock cancelled 
-
$(28,020)Common stock issued in connection      with financing activities
- 
$3,250 Common stock issued in exchange for      previously incurred debt
-
$76,534 Preference shares issued in exchange      for common stock cancelled
-
-
 

 

 

 

 

(See accompanying notes to consolidatedfinancial statements)

F-8

** **
****ARS NETWORKS INCORPORATEDNOTES TO FINANCIAL STATEMENTSJANUARY 31, 2004 and 2003**

** **

** NOTE A - SUMMARY OF ACCOUNTINGPOLICIES**

A summary ofthe significant accounting policies applied in the preparation of theaccompanying financial statements follows. These accounting policies conform toaccounting principles generally accepted in the United States of America andhave been consistently applied in the preparation of the financial statements.

**BUSINESS AND BASIS OF PREPARATION**

ARSNetworks, Incorporated ("Company"), was formed on May 4, 1998 under the laws ofthe state of New Hampshire to design and develop advanced railway communicationsand data management systems.

On January10, 2003, the Company sold its wholly-owned subsidiary, T & T Diesel Power, Ltd("T & T") to the former managers of T&T, (the " Purchasers") through anAgreement of Purchase and Sale ("Agreement").  The T & T business segmentis accounted for as a discontinued operation, and accordingly, amounts in thefinancial statements, and related notes for all periods shown have been restatedto reflect discontinued operations accounting.  Summarized results of thediscontinued business are further described in Note B.

In February2003, the Board of Directors recommended and shareholders approved a reversesplit of the Company's common stock at the ratio of one (1) post consolidationshare for each fifty (50) pre consolidation shares held by each shareholder. Thereverse split was effective on March 26, 2003. As a result, the Company'strading symbol was changed to ARSW. The resulting number of outstanding sharesas at January 31, 2003 was 2,500,006. Accordingly, all historical weightedaverage share and per share amount have been restated to reflect the reversestock split.

Liquidity

As shown inthe accompanying financial statements, the Company incurred a net loss of$2,942,383 and $1,256,394 from operations during the years ended January31, 2004and 2003, respectively.  The Company's current liabilities exceed itscurrent assets by $660,072 and $675,395 at January 31, 2004 and 2003,respectively.

Stock Based Compensation

In December2002, the FASB issued SFAS No. 148, "Accounting for Stock-BasedCompensation-Transition and Disclosure-an amendment of SFAS 123." This statementamends SFAS No. 123, "Accounting for Stock-Based Compensation," to providealternative methods of transition for a voluntary change to the fair value basedmethod of accounting for stock-based employee compensation. In addition, thisstatement amends the disclosure requirements of SFAS No. 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect of themethod used on reported results. The Company has chosen to continue to accountfor stock-based compensation using the intrinsic value method prescribed in APBOpinion No. 25 and related interpretations. Accordingly, compensation expensefor stock options is measured as the excess, if any, of the fair market value ofthe Company's stock at the date of the grant over the exercise price of therelated option. The Company has adopted the annual disclosure provisions of SFASNo. 148 in its financial reports for the year ended January 31, 2004.

Hadcompensation costs for the Company's stock options been determined based on thefair value at the grant dates for the awards, the Company's net loss and lossesper share would have been as follows (transactions involving stock optionsissued to employees and Black-Scholes model assumptions are presented in NoteH):

F-9

**ARS NETWORKS INCORPORATEDNOTES TO FINANCIAL STATEMENTSJANUARY 31, 2004 and 2003**

**NOTE A - SUMMARY OF ACCOUNTINGPOLICIES (continued)**

2004
2003Net loss, as reported
$ (2,942,383)
$  (1,256,394)Add: Total stock based employee      compensation expense as reported under intrinsic value method (APB. No.      25)
-Deduct: Total stock based employee      compensation expense as reported under fair value based method (SFAS No.      123)
-
-Net loss - Pro Forma
$(2,942,383)
 $(1,256,394)   Basic (and assuming dilution) loss      per share - as reported
$      (0.05)
$     (0.04)Basic (and assuming dilution) loss      per share - Pro forma
(0.05)
(0.04) After giving effect to the 1:50      reverse splitBasic (and assuming dilution) loss per      share - as reported
(0.05)
(2.09)Basic (and assuming dilution) loss per      share - Pro forma
(0.05)
(2.09)
Cash and cash equivalents

For purposesof reporting cash flows, the Company considers all highly liquid instrumentspurchased with and initial maturity of three months or less to be cashequivalents. The Company maintains, at financial institutions, cash and cashequivalents, which, at times exceed federally insured amounts.

Property and Equipment

Property andequipment is stated at cost. Depreciation is calculated using the straight-linemethod over the estimated useful lives of the assets.

Long-Lived Assets

The Companyhas adopted Statement of Financial Accounting Standards No. 144 (SFAS 144). TheStatement requires that long-lived assets and certain identifiable intangiblesheld and used by the Company be reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. Events relating to recoverability may include significantunfavorable changes in business conditions, recurring losses, or a forecastedinability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based uponforecasted undiscounted cash flows. Should impairment in value be indicated, thecarrying value of intangible assets will be adjusted, based on estimates offuture discounted cash flows resulting from the use and ultimate disposition ofthe asset.  SFAS No. 144 also requires assets to be disposed of be reportedat the lower of the carrying amount or the fair value less costs to sell.

Revenue Recognition

Revenue fromthe sale of products is recorded at the time the goods are shipped. Revenueunder License Agreements is recorded when payment for services is due under suchcontract. For revenue from product sales, theCompany recognizes revenue in accordance with SEC Staff Accounting Bulletin No.101, "Revenue Recognition in Financial Statements" ("SAB101").  SAB 101 requires that four basic criteria must be met beforerevenue can be recognized: (1) persuasive evidence of anarrangement exists; (2) delivery has occurred; (3) the selling price is fixedand determinable; and (4) collectibility is reasonably assured. Determinationof criteria (3) and (4) are based on management'sjudgments regarding the fixed nature of the selling prices of the productsdelivered and the collectibility of those amounts.  Provisions for discountsand rebates to customers, estimated returns and allowances, and otheradjustments are provided for in the same period the related sales are recorded.The Company defers any revenue for which the product has not been delivered oris subject to refund until such time that the Company and the customer jointlydetermine that the product has been delivered or no refund will be required.

Foreign Currency Translation

The Companytranslates the foreign currency financial statements in accordance with therequirements of Statement of Financial Accounting Standards No. 52, "ForeignCurrency Translation."  Assets and liabilities are translated at currentexchange rates in effect during the period.

 

F-10

**ARS NETWORKS INCORPORATEDNOTES TO FINANCIAL STATEMENTSJANUARY 31, 2004 and 2003**

**  **

**NOTE A - SUMMARY OF ACCOUNTINGPOLICIES (continued)**

Resultingtranslation adjustments, if any, are recorded as a separate component instockholder's equity. Foreign currency transaction gains and losses are includedin the statement of operations.

Income Taxes

The Companyhas implemented the provisions on Statement of Financial Accounting StandardsNo. 109, "Accounting for Income Taxes" (SFAS 109).  SFAS 109 requires thatincome tax accounts be computed using the liability method. Deferred taxes aredetermined based upon the estimated future tax effects of differences betweenthe financial reporting and tax reporting bases of assets and liabilities giventhe provisions of currently enacted tax laws.

Net Loss per Common Share

The Companycomputes earnings per share under Financial Accounting Standard No. 128,"Earnings per Share" (SFAS 128). Net loss per common share is computed bydividing net loss by the weighted average number of shares of common stock anddilutive common stock equivalents outstanding during the year. Dilutive commonstock equivalents consist of shares assumable upon conversion of convertiblepreferred shares and the exercise of the Company's stock options and warrants(calculated using the treasury stock method). During the years ended January 31,2004 and 2003, common stock equivalents are not considered in the calculation ofthe weighted average number of common shares outstanding because they would beanti-dilutive, thereby decreasing the net loss per common share.

** **Use of Estimates

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions thataffect certain reported amounts and disclosures.  Accordingly, actualresults could differ from those estimates.

Concentrations of Credit Risk

Financialinstruments and related items, which potentially subject the Company toconcentrations of credit risk, consist primarily of cash, cash equivalents andrelated party receivables.  The Company places its cash and temporary cashinvestments with credit quality institutions.  At times, such investmentsmay be in excess of the FDIC insurance limit. 

Comprehensive Income

Statement ofFinancial Accounting Standards No. 130 ("SFAS 130"), "Reporting ComprehensiveIncome," establishes standards for reporting and displaying of comprehensiveincome, its components and accumulated balances.  Comprehensive income isdefined to include all changes in equity except those resulting from investmentsby owners and distributions to owners.  Among other disclosures, SFAS 130requires that all items that are required to be recognized under currentaccounting standards as components of comprehensive income be reported in afinancial statement that is displayed with the same prominence as otherfinancial statements. 

The Companydoes not have any items of comprehensive income in any of the periods presented.

F-11

**ARS NETWORKS INCORPORATEDNOTES TO FINANCIAL STATEMENTSJANUARY 31, 2004 and 2003**

** **

**NOTE A - SUMMARY OF ACCOUNTINGPOLICIES (continued)**

SegmentInformation

Statement ofFinancial Accounting Standards No. 131, "Disclosures about Segments of anEnterprise and Related Information" ("SFAS 131") establishes standards forreporting information regarding operating segments in annual financialstatements and requires selected information for those segments to be presentedin interim financial reports issued to stockholders.  SFAS 131 alsoestablishes standards for related disclosures about products and services andgeographic areas. Operating segments are identified as components of anenterprise about which separate discrete financial information is available forevaluation by the chief operating decision maker, or decision-making group, inmaking decisions how to allocate resources and assess performance.  Theinformation disclosed herein materially represents all of the financialinformation related to the Company's principal operating segments.

Reclassifications

Certainreclassifications have been made in prior year's financial statements to conformto classifications used in the current year.

**EFFECT OFRECENT ACCOUNTING PRONOUNCEMENTS**

In June2002, the FASB issued Statement No. 146, "Accounting for Costs Associated withExit or Disposal Activities." This Statement addresses financial accounting andreporting for costs associated with exit or disposal activities and nullifiesEmerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring)." The provisions of thisStatement are effective for exit or disposal activities that are initiated afterDecember 31, 2002, with early application encouraged. The adoption of thisstatement did not have a material impact on the Company's financial position orresults of operations.

In October2002, the FASB issued Statement No. 147, "Acquisitions of Certain FinancialInstitutions-an amendment of FASB Statements No. 72 and 144 and FASBInterpretation No. 9", which removes acquisitions of financial institutions fromthe scope of both Statement 72 and Interpretation 9 and requires that thosetransactions be accounted for in accordance with Statements No. 141, BusinessCombinations, and No. 142, Goodwill and Other Intangible Assets. In addition,this Statement amends SFAS No. 144, Accounting for the Impairment or Disposal ofLong-Lived Assets, to include in its scope long-term customer relationshipintangible assets of financial institutions such as depositor- andborrower-relationship intangible assets and credit cardholder intangible assets.The requirements relating to acquisitions of financial institutions areeffective for acquisitions for which the date of acquisition is on or afterOctober 1, 2002. The provisions related to accounting for the impairment ordisposal of certain long-term customer-relationship intangible assets areeffective on October 1, 2002. The Company completed its impairment tests andrecorded goodwill impairment charge of $1,198,350 and $264,868 (cumulativeeffect accounting changes) for the years ended January 31, 2004 and 2003. (NoteD)  

F-12

 

 

**ARS NETWORKS INCORPORATEDNOTES TO FINANCIAL STATEMENTSJANUARY 31, 2004 and 2003**

** **

**NOTE A - SUMMARY OF ACCOUNTINGPOLICIES (continued)**

**EFFECT OFRECENT ACCOUNTING PRONOUNCEMENTS (continued)**In December 2002, the FASB issued Statement No. 148, "Accounting forStock-Based Compensation-Transition and Disclosure", which amends FASB StatementNo. 123, Accounting for Stock-Based Compensation, to provide alternative methodsof transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation. In addition, this Statementamends the disclosure requirements of Statement 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results. The transition guidance and annual disclosureprovisions of Statement 148 are effective for fiscal years ending after December15, 2002, with earlier application permitted in certain circumstances. Theinterim disclosure provisions are effective for financial reports containingfinancial statements for interim periods beginning after December 15, 2002. Theadoption of this statement did not have a material impact on the Company'sfinancial position or results of operations as the Company has not elected tochange to the fair value based method of accounting for stock-based employeecompensation.

In January2003, the FASB issued Interpretation No. 46, "Consolidation of Variable InterestEntities." Interpretation 46 changes the criteria by which one company includesanother entity in its consolidated financial statements. Previously, thecriteria were based on control through voting interest. Interpretation 46requires a variable interest entity to be consolidated by a company if thatcompany is subject to a majority of the risk of loss from the variable interestentity's activities or entitled to receive a majority of the entity's residualreturns or both. A company that consolidates a variable interest entity iscalled the primary beneficiary of that entity. The consolidation requirements ofInterpretation 46 apply immediately to variable interest entities created afterJanuary 31, 2003. The consolidation requirements apply to older entities in thefirst fiscal year or interim period beginning after June 15, 2003. Certain ofthe disclosure requirements apply in all financial statements issued afterJanuary 31, 2003, regardless of when the variable interest entity wasestablished. The Company does not expect the adoption to have a material impactto the Company's financial position or results of operations.

In April2003, the FASB issued Statement No.149, "Amendment of Statement of 133 onDerivative Instruments and Hedging Activities ", which amends Statement 133,Accounting for Derivative Instruments and Hedging Activities. The adoption ofthis statement did not have a material impact on the Company's financialposition.

In May 2003,the FASB issued Statement No. 150, "Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity. The adoption of thisstatement did not have a material impact on the Company's financial position.

In December2003, the FASB issued SFAS No. 132 (revised), EMPLOYERS' DISCLOSURES ABOUTPENSIONS AND OTHER POSTRETIREMENT BENEFITS - AN AMENDMENT OF FASB STATEMENTS NO.87, 88, AND 106. This statement retains the disclosure requirements contained inFASB statement no. 132, Employers' Disclosures about Pensions and OtherPostretirement Benefits, which it replaces. It requires additional disclosuresto those in the original statement 132 about the assets, obligations, cashflows, and net periodic benefit cost of defined benefit pension plans and otherdefined benefit postretirement plans. The required information should beprovided separately for pension plans and for other postretirement benefitplans. The revision applies for the first fiscal or annual interim period endingafter December 15, 2003 for domestic pension plans and June 15, 2004 for foreignpension plans and requires certain new disclosures related to such plans. Theadoption of this statement did not have a material impact on the Company'sresults of operations or financial positions.

F-13

 

 

**ARS NETWORKS INCORPORATEDNOTES TO FINANCIAL STATEMENTSJANUARY 31, 2004 and 2003**

**NOTE B - DISCONTINUED OPERATIONS**

OnJanuary10, 2003, the Company sold its wholly-owned subsidiary, T & T DieselPower, Ltd ("T & T") to the former management of T&T, ("The Purchasers") throughan Agreement of Purchase and Sale ("Agreement").  The T & T businesssegment is accounted for as a discontinued operation, and accordingly, amountsin the financial statements, and related notes for all periods shown have beenrestated to reflect discontinued operations accounting

Inconnection with the disposition of T & T, the Purchasers acquired 100% of theoutstanding common stock of T&T and assumed all T & T liabilities for a totalpurchase price of $63,000.   ARS received gross proceeds of $63,000 US fromthe sale, comprised of $33,390 in cash and a non interest bearing notereceivable in the amount of $29,610 which was paid in July 2003.

The notereceivable has been assigned to a related party in order partially to repay thenote payable due to this related party. (Note F)

As a resultof the sale of the T & T business segment, the Company accounted for the segmentas a discontinued operation, and accordingly, the amounts in the financialstatements and related notes for all periods shown have been restated to reflectdiscontinued operations accounting.** **

Thefinancial statements reflect the operating results and balance sheet items ofthe discontinued operations separately from continuing operations.  Prioryears have been restated. Operating results for the discontinued operations forthe year ended January 31, 2004 and 2003 were:

2004
             2003Revenues
-
  
 $     228,092Expenses
            -          
  
  (294,515)Net Loss
             -         
  
$    (66,423)
The following summarizes the loss onthe disposition of the T & T business segment during the year ended January 31,2003.

** **

     2004
     2003Cash
$     -
$   33,390Note receivable
-
29,610Gain (loss) on disposition
                        -                            -    Net assets disposed of
                   $     -           $   63,000
** **

On April 25,2003, ARS Products Inc., a wholly owned subsidiary of ARS Networks Incorporatedmerged with HMM Capital Holdings Inc., a Nevada Corporation. The stockholders ofHMM Capital Holdings Inc. received 10 million shares of common stock of ARSNetworks par value $ 0.0001 per share in exchange of their common stock parvalue of $0.001 per share. This stock has a value of $1,020,000 at the time ofthe transaction. Through this merger, ARS acquired the distribution rights for apatented retrofit fire retardant door kit that meets new fire door regulationsin North America. ARS has also entered into marketing and distributionagreements with a third party that will result in a royalty payment to ARS foreach door sold by the licensee. HMM had no operating history at the time ofacquisition.  At January 31, 2004, the Company has discontinued its efforts tomarket this product as of January 31, 2004. For the year ended January 31, 2004,the Company did not have any revenue, expenses, assets or liabilities relatingto this segment of the business.

F-14

** **

**ARS NETWORKS INCORPORATEDNOTES TO FINANCIAL STATEMENTSJANUARY 31, 2004 and 2003**

** NOTE C - ACQUISITIONS**

** **On April 22, 2003, ARS ProductsInc., a wholly owned subsidiary of ARS Networks Incorporated merged withMajestic Refilter Ltd. The stockholders of Majestic Refilter Ltd. received 2million shares of common stock of ARS Networks par value $ 0.0001 per share inexchange of their common stock par value of $0.001 per share. This stock has avalue of $204,000 at the time of the transaction. Through this merger, ARSacquired the patent for a diesel emissions filters developed by MajesticRefilter. The product requires additional development by ARS. Majestic Refilterwas non-operational at the time of the acquisition.

On April 25,2003, ARS Products Inc., a wholly owned subsidiary of ARS Networks Incorporatedmerged with HMM Capital Holdings Inc., a Nevada Corporation. The stockholders ofHMM Capital Holdings Inc. received 10 million shares of common stock of ARSNetworks par value $ 0.0001 per share in exchange of their common stock parvalue of $0.001 per share. This stock has a value of $1,020,000 at the time ofthe transaction. Through this merger, ARS acquired the distribution rights for apatented retrofit fire retardant door kit that meets new fire door regulationsin North America. ARS has also entered into marketing and distributionagreements with a third party that will result in a royalty payment to ARS foreach door sold by the licensee. HMM had no operating history at the time ofacquisition.  At January 31, 2004, the Company has discontinued its efforts tomarket this product as of January 31, 2004. For the year ended January 31, 2004,the Company did not have any revenue, expenses, assets or liabilities relatingto this segment of the business.

Thefollowing is the summary of acquisition related transactions:
**Majestic****HMM****Total**Assets
$ 25,000
$ 900
$25,900Liabilities
-
550
550Net
25,000
350
25,350Consideration paid
$204,000
$1,020,000
$1,224,000Goodwill recognized
$179,000
$1,019,650
$1,198,650Goodwill impaired
$179,000
$1,019,650
$1,198,650
**NOTE D - GOODWILL AND OTHERINTANGIBLE ASSETS - ADOPTION OF SFAS 142**

The Companyhas adopted Statement of Financial Accounting Standards No. 142 "Goodwill andOther Intangible Assets" (SFAS No. 142) effective August 1, 2002. SFAS No. 142addresses how intangible assets that are acquired individually or with a groupof other assets should be accounted for in financial statements upon theiracquisition. This statement requires goodwill amortization to cease and forgoodwill to be periodically reviewed for impairment.

Under SFASNo. 142, goodwill impairment occurs if the net book value of a reporting unitexceeds its estimated fair value. The Company's goodwill asset was with regardto the acquisitions of Majestic Refilter and HMM Capital Holdings Inc. of$179,000 and $1,019,650, respectively. The test completed in the second quarterended on July 31, 2003 indicated that the recorded book value of reporting unitexceeded its fair value, as determined by discounted cash flows.  Thedecrease in fair value is a result of:
-  Significant operating losses during the  past six months
-  Unanticipated decline in revenues and  profitability
-  Loss of key personnel

F-15

 

**ARS NETWORKS INCORPORATEDNOTES TO FINANCIAL STATEMENTSJANUARY 31, 2004 and 2003**

**NOTE D - GOODWILL AND OTHERINTANGIBLE ASSETS - ADOPTION OF SFAS 142 (Continued)**

As a resultof these events and circumstances, Company management believes that more likelythan not the fair value of the reporting unit's goodwill has been reduced belowits carrying value. As a result, management performed an evaluation of thereporting unit's tangible and intangible assets for purposes of determining theimplied fair value of goodwill at July 31, 2003. Upon completion of theassessment, management recorded a non-cash impairment charge of $(1,198,650),net of tax, or $(0.02) per share during the quarter ended July 31, 2003, toreduce the carrying value of goodwill in this reporting unit to its estimatedvalue of $ 0.

 Considerable management judgment is necessary to estimate fair value.Accordingly, actual results could vary significantly from managements'estimates. 

Thefollowing table presents, in accordance with SFAS 142, the adjustment to thereported income exclusive of amortization expense recognized related to goodwilland intangible assets that are subject to impairment test and are no longerbeing amortized, for the years ended January 31, 2004 and 2003:

                                 2004
                                  2003Net Loss
               $(2,942,383)
 $ (1,256,394)Adjustments:Cumulative effect of accounting    changes: impairment of goodwill
                -
  264,868Adjusted net (loss)
              $(2,942,383)
 $ (991,526)Shares used to compute basic and    diluted net loss per common share
56,488,846
 601,040 Adjusted basic and diluted net loss    per common share
               $                   (0.05)
 $                (1.65)Reported basic and diluted net loss    per common share               $                   (0.05)
 $                (2.09)
**NOTE E -CAPITAL STOCK**

CommonStock

On April 22,2003, the Company issued 2 million shares of common stock of ARS Networks parvalue $ 0.0001 per share to the stockholders of Majestic Refilter Ltd inexchange of their common stock par value $ 0.001 per share. This stock had avalue of $204,000 at the time of the transaction.

On April 25,2003, in connection with the merger with HMM Capital Holdings, the Companyissued 10 million shares of common stock of ARS Networks to the stockholders ofHMM Capital Holdings, Inc received with par value of $ 0.0001 per share. Thestock had a value of $1,020,000 at the time of the transaction.

In June2003, The Company issued 300,000 restricted shares of common stock at $0.10 pershare to the new members of the Board of Directors under board contracts. TheCompany has recorded compensation expenses of $30,000. (Note F)

During theyear ended January 31, 2004, the Company issued an aggregate of 26,540,000shares of common stock in exchange for services provided to the Company valuedat $673,940. The Company valued the shares based upon the market value of theCompany's stock at the date of issuance, which did not differ materially fromthe value of the services rendered. These shares were valued at a range of ratebetween $.004 to $.15 per share which represents the fair value of the servicesreceived which did not differ materially from the value of the stock issued.

During theyear ended January 31, 2004, the Company issued an aggregate of 181,500,000shares of common stock under the Company's Employee Stock Incentive Plan in exchange for $816,421 of cash and a subscription receivable of $17,534.The Company recorded employee compensation expenses of $213,345 for the yearended January 31, 2004.

Allvaluations of the above shares are based on the stock price at the date ofissue, which did not differ materially from the value of the services that wererendered by the consultants under the contracts.

F-16

 

**ARS NETWORKS INCORPORATEDNOTES TO FINANCIAL STATEMENTSJANUARY 31, 2004 and 2003**

** **

** NOTE E - CAPITAL STOCK (Continued)**

PreferredStock 

The Company is authorized to issue up to25,000,000 shares of Preferred Stock with par value of $.0001 per share. Theholders of the shares of preferred stock are entitled to vote at the rate of200:1 versus common shares for each share held of record on all matterssubmitted to a vote of the stockholders. 

The preferred shares are not subject toredemption and have no conversion rights or rights to participate in dividendpayments. In the event of any voluntary or involuntary liquidation, dissolutionor winding up of the affairs of the Company, each share of preferred stock has aliquidation preference of $.0001 per share. 

In July2003, the Board of Directors authorized the issuance of 2,500,000 preferredshares at $0.0001 per share to three officers of the Company. These shares wereissued in January 2004 to three officers of the Company in exchange for thereturn of 706,122 common shares previously issued. (Note F)

**NOTE F - RELATED PARTY TRANSACTIONS**

The notepayable - related party was for $63,800.  The note was due July 31, 2001and bears interest at 8.5% per annum.  The Company repaid $32,000 of thisNote In January 2003 and assigned the proceeds of the note receivable from thesale of T&T to the related party.  The Company repaid the balance of theNote plus interest in 2003. In January 2002, the Company issued options topurchase 2,000 shares and in February 2002 issued 25,000 common shares to therelated party in connection with the note payable. At January 31, 2004 and 2003,the balance of the note payable outstanding was $0 and $31,800, respectively.

In August2002, the Board of Directors authorized the issuance of 276,950 common shares tothree officers of the Company in lieu of compensation due in the amount of$138,500.

During theyear ended January 31, 2003, officers of the Company advanced an aggregate of$54,117 to the Company. These advances were repaid as the Company raisedadditional capital. As of January 31, 2004, the Company had repaid the entireamount advanced by its officers.

During theperiod ended January 31, 2003, management exercised stock options for 22,000shares at a price of $6.50 per share for a total of $143,000 which was recordedas a reduction in accrued management compensation.

In January2003, the Board of Directors authorized the issuance of 1,174,304 shares tomanagement in lieu of foregone compensation and settlement of managementcontracts. Management contracts were bought out due to an agreement to sell theCompany. Subsequent to the approval of the settlements, the purchaser withdrewfrom the sale.

In January2003, the Company issued 24,726 shares to the Board of Directors as compensationunder pre approved contracts.

The Companyhas a license agreement with a company owned by a stockholder of the Company.Under this agreement, The Company is to pay a minimum royalty of $100,000 forthe first year. During the year ended January 31, 2004, $50,000 of the royaltywas paid.  Also, as of January 31, 2004, $50,000 has been accrued towardsminimum royalty expenses.

F-17

** **

** ARS NETWORKS INCORPORATEDNOTES TO FINANCIAL STATEMENTSJANUARY 31, 2004 and 2003**

** **

**NOTE F - RELATED PARTY TRANSACTIONS(Continued)**

In June2003, The Company issued 300,000 restricted shares at $0.10 per share to the newmembers of the Board of Directors under board contracts. The Company hasrecorded compensation expenses of $30,000 in relation to the issue. (Note E)

In July2003, the Board of Directors authorized the issuance of 2,500,000 preferredshares at $0.0001 per share to three officers of the Company. These preferredshares will have cumulative voting rights of 200:1 versus common shares. Theseshares were issued in January 2004 to three officers of the Company in exchangefor the return of 706,122 common shares previously issued. 

** NOTE G - INCOME TAXES**

The Companyhas adopted Financial Accounting Standards No. 109, which requires therecognition of deferred tax liabilities and assets for the expected future taxconsequences of events that have been included in the financial statement or taxreturns. 

Under thismethod, deferred tax liabilities and assets are determined based on thedifference between financial statements and tax bases of assets and liabilitiesusing enacted tax rates in effect for the year in which the differences areexpected to reverse.  Temporary differences between taxable income reportedfor financial reporting purposes and income tax purposes are insignificant. At January 31, 2004, the Company has available for federal income tax purposes anet operating loss carry forward of approximately $8,000,000, expiring in theyear 2020, that may be used to offset future taxable income.  Due tosignificant changes in the Company's ownership, the Company's future use of itsexisting net operating losses may be limited.

Components of deferred tax assets as ofJanuary 31, 2004 are as follows:
Non current:Net operating loss carry forward
 $    2,720,000 Valuation allowance
$  (2,720,000)Net deferred tax asset
$                  -    
Therealization of this net operating loss carry forwards is dependent upongenerating taxable income prior to the related year of expiration. The amount ofcarry forward that may be utilized in any future tax year may also be subject tocertain limitations, including limitations as a result of certain stockholderownership changes in which may be beyond the control of the Company.

**NOTE H - NON QUALIFIED STOCKCOMPENSATION PLAN**

In May 2002,the Board of Directors authorized the 2002 Non- Qualified Stock CompensationPlan which reserves 5,000,000 shares for employees, directors, officers,consultants, advisors and other persons associated with the Company and isintended to advance the best interests of the Company by providing those personswho have a substantial responsibility for its management and growth withadditional incentive by increasing their proprietary interest in the success ofthe Company. In December 2002, the Board of Directors modified the plan andincreased the number of shares reserved under the plan to 100,000,000.

In June2003, the company authorized the Employee Stock Incentive Plan ("ESIP") for 2003as well as the Non-Employee Director and Consultant's Retainer Plan ("NDCRP")for 2003. The purpose of the ESIP is to provide stock incentive to employees ofthe company. Under the ESIP plan, employees are entitled to purchase shares forno less than 85% of the market price of the company's common stock. Sharesissued under the plan are approved by the company's Board of Directors.

F-18

**ARS NETWORKS INCORPORATEDNOTES TO FINANCIAL STATEMENTSJANUARY 31, 2004 and 2003**

**NOTE H - NON QUALIFIED STOCKCOMPENSATION PLAN (Continued)**

The purposeof the NDCRP is to attract non-employee directors and consultants who capable ofimproving the success of the Company by providing a direct economic interest toCompany performance. Under the terms of this plan, non employee directors orconsultants may be compensated through the issuance of Company stock at a deemedvalue of $0.10 per share. The plan is administered by the Company's Board ofDirectors.

The initialplan was filed in June 2003 with shares available under the ESIP and NDCRP of 18million and 2 million shares respectively. These plans were amended August 1,2003 to provide for additional 50 million and 10 million shares, respectivelyand were further amended October 20, 2003 to provide for an additional 185million and 15 million shares respectively.

In January2004, the company authorized the Employee Stock Incentive Plan ("ESIP") NO. 1for 2004 and the Non-Employee Director and Consultant's Retainer Plan ("NDCRP")No. 1 for 2004. The purpose of the ESIP is to provide stock incentive toemployees of the company. Under the ESIP plan, employees are entitled topurchase shares for no less than 85% of the market price of the company's commonstock. Shares issued under the plan are approved by the company's Board ofDirectors.

The purposeof the NDRCP is to attract non-employee directors and consultants who capable ofimproving the success of the Company by providing a direct economic interest toCompany performance. Under the terms of this plan, non employee directors orconsultants may be compensated through the issuance of Company stock at a deemedvalue of $0.0065 per share. The plan is administered by the Company's Board ofDirectors.

a) A summaryof the status of the Company's stock option plans for options held by officersand directors as of January 31, 2004 and 2003 and changes during the yearsending on those dates. 

** ******** |