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Item 7. Management’s Discussion and Analysis

2004-06-29 compared with 2003-06-30 · 289 added, 720 removed, 42 unchanged (96% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS.

The following discussion should be read in conjunction with the attached

financial statements and notes thereto.

Except for the historical information

contained herein, the matters discussed below are forward-looking statements

that involve certain risks and uncertainties, including, among others, the risks

and uncertainties discussed below.

At the end of the fiscal year 2002 and continuing through fiscal year 2003,

Semotus determined that the economy would continue in a weak recovery and that

the market for technology products would stay anemic.

Accordingly, the Company

has continued to centralize and consolidate its organization and its operations.

The headcount has been reduced 50% since March 31, 2002 and as a result,

engineering, sales and marketing and administrative costs have been reduced and

The overall Semotus organization has eliminated redundant positions

and functions while improving the sales effort through utilizing existing

customer relationships to shorten the sales cycle.

Semotus has organized its operations around two core lines of businesses, while

maintaining but de-emphasizing its other operations:

i) financial services with

the Global Market Pro and Equity Market Pro products and services and ii)

workforce automation with the HiplinkXS family of products and services.

products maintain high gross and operating margins and form the core of the

enterprise software marketing strategy with wireless and mobile features

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

The following discussion should be read in conjunction with the attached financial statements and notes thereto.

Except for the historical information contained herein, the matters discussed

below are forward-looking statements that involve certain risks and

uncertainties, including, among others, the risks and uncertainties discussed

At the end of fiscal year 2003 we had completed our Centralization and Consolidation Plan.

Through fiscal year 2004 to present, we have focused on growing revenues within our two core product lines:

i) financial services with the Global Market Pro and Equity Market Pro products and services and ii) enterprise wireless messaging and communications with the HiplinkXS family of products and services.

These products maintain high gross and operating margins and form the core of

the enterprise software marketing strategy with wireless and mobile features

available in the software.

Logistic systems, comprised largely of ADA's products and services, has been

sold as of May 6, 2003 and is presented in discontinued operations.

to Global Beverage Group (GBG), a Canadian-based direct store delivery

consortium and a 49% shareholder in ADA, exercising its option to purchase the

remaining 51% of ADA from Semotus.

In January 2002, GBG completed a strategic

investment in ADA and became a 49% shareholder in ADA (see "Significant Events"

and see Note 26 to the Financial Statements, "Strategic Investment in ADA").

develops and licenses proprietary software that gives enterprises a total

solution for automation

of customer call centers, dispatching, equipment deployment, servicing and

invoicing while interfacing with existing corporate business functions and ERP

Certain professional services have been de-emphasized.

In this fiscal year,

Simkin's Kinetidex 2.0 product was sold to the joint developer and exclusive

distributor of the product, Micromedex, Inc.

Wireless medical software products

have been slow to penetrate the market and therefore have been eliminated by

Other unprofitable professional service contracts at Wares On the Web

have been eliminated and Wares was closed in August 2002.

M-commerce initiatives have been reduced.

The e-commerce economy has contracted

and m-commerce is not expected to make a significant contribution in the market

in the near future.

Consequently, Semotus has reduced its e-commerce and

m-commerce presence with the closure of the Wares' and Five Star businesses, and

elimination of unprofitable products and services in that segment.

the operations have been largely consolidated into Semotus' other divisions and

subsidiaries.

At the end of June, FiveStar's operations were closed as the

market for e-fulfillment is currently unprofitable, and in August, Wares'

operations were closed.

(See "Significant Events".)

FACTORS AFFECTING COMPARABILITY;

Semotus has transitioned its business from consumer driven wireless products and

services to enterprise-based application software products and services with

emphasis in the mobile and wireless software markets.

This transition has mostly

taken place since March 2000.

As part of the transition, Semotus acquired six

Subsequently, as the technology economy has declined since January

2001, Semotus has centralized and consolidated its operations and has closed

Five Star and Wares, sold ADA, and consolidated Simkin and WizShop.

STRATEGIC REPOSITIONING

In FY 2000, the Company announced a strategic repositioning as an enterprise

application software company emphasizing mobile and wireless solutions that

deliver end-to-end wireless data solutions to enterprises and custom data

applications to their customers utilizing its patented Xpresslink(TM)

application server.

This repositioning involved major infrastructure changes,

which continued throughout FY 2001.

Semotus is concentrating on providing consulting and engineering services and

turnkey applications for enterprise application software.

Further, with its

recently acquired subsidiaries, Semotus provides software and consulting

products and services and marketing, sales, customer service and logistics

management to existing customers in the targeted vertical markets.

provides additional service through wirelessly enabling those customers.

As part of the Company's previous growth strategy, Semotus acquired six

Cross, Simkin, Wares, Five Star, WizShop and ADA.

information concerning the acquired companies see Note 4 to the Financial

Statements, "Acquisitions".

Each provided revenues and a significant customer

base to allow the Company to add to its technology, expand its product offerings

and penetrate targeted vertical markets.

However, due to the continued economic

recession and limited capital spending, the Company began and is currently

continuing with its Centralization and Consolidation Plan.

As part of that

effort, Semotus decided to reduce its e-commerce operations, to close the

FiveStar business as of the end of June 2002 and to close the Wares' business as

of August 2002.

Both Simkin's and WizShop's operations have been consolidated,

and as of May 6, 2003, ADA has been sold.

CENTRALIZATION AND CONSOLIDATION PLAN

In May 2002, the Board of Directors of Semotus determined that the Company

needed to focus its operations on its core enterprise software products.

We have transitioned our business from consumer driven wireless products and services to enterprise-based application software products and services with emphasis in the mobile and wireless software markets.

This transition has mostly taken place since March 2000.

As part of the transition, we acquired six companies Cross, Simkin, Wares, Five Star, WizShop and ADA.

For specific information concerning the acquired companies see Note 4 to the Financial Statements, "Acquisitions".

Each subsidiary provided revenues and a significant customer base to allow us to add to our technology, expand our product offerings and penetrate targeted vertical markets.

However, due to the continued economic recession and limited capital spending, we centralized and consolidated our operations and closed Five Star and Wares, sold ADA, discontinued WizShop and consolidated Simkin and Cross (See the "Centralization and Consolidation Plan"

After the Centralization and Consolidation Plan was largely completed by March 31, 2003, we determined that our ongoing operations were in one segment, wireless and mobile enterprise software.

Through fiscal year 2004 to the present, we have been focused on growing revenues within our two core product lines:

These products maintain high gross and operating margins and form the core of

the enterprise software marketing strategy with wireless and mobile features

available in the software.

CENTRALIZATION AND CONSOLIDATION PLAN

Given the continued economic recession

and limited capital spending, as well as the reduced access to capital, the

Company must economically utilize its limited resources towards those products

with the best margins and cash flow generation.

As part of that effort, Semotus

has decided to reduce its e-commerce operations and to close the FiveStar

business as of the end of June 2002 and to close the Wares' business as of

While maintaining a reduced m-commerce and e-commerce presence,

Semotus has de-emphasized the e-fulfillment portion of that business as the

e-fulfillment markets have declined dramatically over the past year and are not

expected to recover significantly in the near future.

Additionally, the

remaining 51% of ADA was purchased by GBG on May 6, 2003.

Accordingly, Semotus

is redirecting its human and capital resources towards more profitable products

and services.

In May 2002, the Board of Directors determined that we needed to focus our operations on our core enterprise software products.

Given the continued economic recession and limited capital spending, as well as the reduced access to capital, we economically utilized our limited resources on those products with the best margins and cash flow generation.

As part of that effort, we reduced our e-commerce operations and closed the FiveStar

business as of the end of June 2002 and closed the Wares' business as of August

WizShop was discontinued as of September 2003.

Both Simkin's and Cross' business operations were also consolidated.

Additionally, we reflected ADA as a discontinued operation as of March 31, 2003, and in May 2003, GBG purchased the remaining 51% ownership of ADA.

Accordingly, we redirected our human and capital resources towards more profitable products and services.

(See "Factors Affecting Comparability;

Strategic Repositioning").

IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL

Semotus' management performs an on-going analysis of the recoverability of its

goodwill and other intangibles and the value of its investments in accordance

with SFAS 142, "Goodwill and Other Intangible Assets".

Based on quantitative and

qualitative measures,

the Company assesses the need to record impairment losses on long-lived assets

used in operations when impairment indicators are present.

A number of factors indicated that impairment may have arisen in the period

ended March 31, 2002 for certain amounts of goodwill related to the acquisitions

of Simkin, Wares and WizShop.

Also, an impairment may have arisen with the

recorded asset value of the Company's Global Market Pro intellectual property.

For Simkin, the analysis was to determine if a further reduction in goodwill was

Semotus had previously taken a $650,000 net impairment charge in the

quarter ended June 30, 2001.

See Note 7, "Sale of Technology and Net Impairment

of Goodwill".

For Wares and WizShop, Semotus analyzed the current carrying value

of the goodwill related to both acquisitions.

The result of this analysis has necessitated charges to income of certain

intangible assets which include goodwill, GMP intellectual property and acquired

Those charges total approximately $7 million for the fiscal year ended

March 31, 2002.

See Notes 6 and 7 to the Financial Statements, "Impairment of

Long-Lived Assets and Goodwill" and "Sale of Technology and Net Impairment of

Goodwill" respectively.

No further impairment charges in continuing operations

have been taken in fiscal year ended March 31, 2003, although a net loss from

discontinued operations of $799,090 was taken for the operations of Five Star,

Wares and ADA, mostly comprised of an impairment to goodwill of $635,724 at ADA.

Management has determined that the remaining goodwill of $1,430,141 (net of

accumulated amortization of $727,058) is fairly valued using the impairment

tests as described in SFAS 144 and SFAS 142, which includes discounted cash flow

analysis and comparable company analysis.

This remaining amount of goodwill

consists entirely of one of the Company's wireless enterprise application

software product lines, the HipLink family of software products, which is

generating current revenue and cash flow.

Our management performs an on-going analysis of the recoverability of our goodwill and other intangibles and the value of our investments in accordance with SFAS 144 and SFAS 142, "Goodwill and Other Intangible Assets".

Based on quantitative and qualitative measures, we assess the need to record

impairment losses on long-lived assets used in operations when impairment

indicators are present.

A number of factors indicated that impairment may have arisen in the period ended March 31, 2002 for certain amounts of goodwill related to the acquisitions of Simkin, Wares and WizShop.

Also, an impairment may have arisen with the recorded asset value of our Global

Market Pro intellectual property.

For Simkin, the analysis was to determine if a further reduction in goodwill was necessary.

We had previously taken a $650,000 net impairment charge in the quarter ended June 30, 2001.

See Note 7 to the Financial Statements, "Sale of Technology and Net Impairment of Goodwill".

For Wares and WizShop,

we analyzed the current carrying value of the goodwill related to both

acquisitions.

The result of this analysis necessitated charges to income of certain intangible assets which include goodwill, GMP intellectual property and acquired software.

Those charges total approximately $7 million for the fiscal year ended March 31, 2002.

See Notes 6 and 7 to the Financial Statements, "Impairment of Long-Lived Assets and Goodwill" and "Sale of Technology and Net Impairment of Goodwill" respectively.

No further impairment charges in continuing operations have been taken in fiscal year ended March 31, 2004 and 2003, although a net loss from discontinued operations of $799,090 was taken for the operations of Five Star, Wares and ADA, mostly comprised of an impairment to goodwill of $635,724 at ADA.

Management has determined that the remaining goodwill of $1,430,141 (net of accumulated amortization prior to the adoption of SFAS 142, of $727,058) is fairly valued using the impairment tests as described in SFAS 144 and SFAS 142, which includes discounted cash flow analysis and comparable company analysis.

This remaining amount of goodwill consists entirely of one of our wireless enterprise application software product lines, the HipLink

family of software products, which is generating current revenue and cash flow.

CRITICAL ACCOUNTING POLICIES

The critical accounting policies are revenue recognition, cost allocation to

revenue and valuation of intangible assets.

The critical accounting policies are revenue recognition,

cost allocation to revenue and valuation of intangible assets.

REVENUE RECOGNITION

The Company recognizes revenues in each of its lines of business based upon

contract terms and completion of the sales process.

Wireless services:

revenue is generated from wireless services provided to

enterprises and consumers.

The revenue is from recurring monthly charges based

on utilization fees, transaction fees, and maintenance and service charges.

the financial consumer business, the Company also receives a small revenue

stream from pager rentals.

Revenues are recognized over the service period and

any revenue that relates to more than one service period is recognized ratably

over those service periods.

In the premise-based business, wireless software is

delivered to the customer and revenue is recognized upon shipment, assuming no

significant obligations remain.

Enterprise and commerce sales and service:

revenue is generated from online

sales, advertising, sponsorships and hosting fees and other services.

recognized upon a completed sale and shipment of a product and for advertising

and sponsorships, revenue is recognized when payment is received.

and other services, such as licensing, are recognized ratably over the service

Professional and related services:

revenue is generated from software

engineering and sales and from training and consultation.

Revenue is recognized

when the engineering, training or consultation work has been performed in

accordance with the contract.

We recognize revenues based upon contract terms and completion of the sales process.

Revenue is generated from one-time software licensing fees, annual maintenance fees and monthly wireless services fees provided to enterprises and consumers.

We also receive a small revenue stream from pager rentals.

Revenues are recognized over the service period and any revenue that relates to more than one service period is recognized ratably over those service periods.

In the premise-based business, wireless software is delivered to the customer and revenue is recognized upon shipment, assuming no significant obligations remain.

The revenue for the maintenance fees received through the Hiplink contracts are recognized ratably over the life of the maintenance contract.

In the financial services, the monthly wireless services are billed in arrears and are recognized upon invoicing.

For any professional or related services, revenue is generated from software engineering, training and consultation services;

revenue is recognized when the engineering, training or consultation work has been performed in accordance with the contract.

For consumer wireless services and pager rentals, revenue is recognized monthly

upon credit card billing as the monthly service is delivered.

COST OF REVENUE

The cost of revenue for the wireless services line of business principally

includes costs to obtain data feeds from various exchanges, costs of engineering

development directed to specifically identified products, costs of servicing and

hosting customer products, costs for pager rental or depreciation and pager

airtime for those customers without their own pagers, and certain telephone,

computer and other direct operational costs.

The cost of revenue for the enterprise and commerce sales and service line of

business includes the purchase cost of the products, advertising, costs of

servicing and hosting and shipping.

Any engineering costs directly related to

the products offered are also included as a cost of revenue.

The cost of revenue for professional and related services is primarily personnel

costs for engineering, training and consulting.

The cost of revenue principally includes costs to obtain

data feeds from various exchanges, costs of engineering development directed to

specifically identified products, costs of servicing and hosting customer

products, costs for pager rental or depreciation and pager airtime for those

customers without their own pagers, and certain telephone, computer and other

direct operational costs.

VALUATION OF LONG-LIVED ASSETS

Semotus' management performs an on-going analysis of the recoverability of its

goodwill and other intangibles and the value of its investments in accordance

with SFAS No.

144 and SFAS 142.

Based on quantitative and qualitative measures,

the Company assesses

the need to record impairment losses on long-lived assets used in operations

when impairment indicators are present.

In accordance with SFAS No.

144 and SFAS 142, the Company performs an

undiscounted cash flow analysis of its acquisition to determine whether an

impairment existed.

When the undiscounted cash flows are less than the carrying

value of the net assets, management determines a range of fair values using a

combination of valuation methodologies.

Our management performs an on-going analysis of the recoverability of our goodwill and other intangibles and the value of our acquired net assets in accordance with SFAS 144 and SFAS 142.

Based on quantitative and qualitative measures, we assess the need to record

impairment losses on long-lived assets used in operations when impairment

indicators are present.

In accordance with SFAS 144 and SFAS 142, we perform an undiscounted cash flow analysis of the long-lived assets and acquired net assets to determine whether an impairment exists.

When the undiscounted cash flows are less than the carrying value of the net assets, management determines a range of fair values using a combination of valuation methodologies.

The methodologies include:

- Discounted cash flow analysis, which is based upon converting expected future

cash flows to present value.

- Changes in market value since the date of acquisition relative to the

Discounted cash flow analysis, which is based upon converting expected

future cash flows to present value.

Changes in market value since the date of acquisition relative to the following:

The Company's stock price;

Comparable companies;

- Contribution to the Company's market valuation and overall business prospects.

Long-term assets, such as intellectual property rights and goodwill are

amortized on a straight-line basis over the economic life of the assets.

expected useful life of those assets is currently five years.

adopted SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other

Intangible Assets" as of April 1, 2002.

Accordingly, Semotus no longer amortizes

intangible assets with an indefinite useful life and will begin assessing

potential future impairments of such intangible assets, but performs impairments

tests on a quarterly basis to analyze the current fair market value of the

intangible assets in relation to the carrying value of the assets.

In prior years, Semotus had capitalized the fair value of contracts acquired in

business combinations as required by APB 16 "Business Combinations".

was determined by estimating the cost expected to be incurred in order to

perform the obligations under the contract plus adding a reasonable profit

associated with the performance effort.

The capitalized cost was amortized into

cost of revenue as revenues were recognized.

For other accounting policies see Note 3 to the Financial Statements, "Summary

of Significant Accounting Policies".

Contribution to the Company's market valuation and overall business

We adopted SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets" as of April 1, 2002.

Accordingly, we no longer amortize intangible assets with an indefinite useful

life or goodwill, but instead will assess potential future impairments of such

intangible assets and goodwill by performing impairments tests on a quarterly

basis to analyze the current fair market value of the intangible assets and

goodwill in relation to the carrying value of the assets.

In prior years, we had capitalized the fair value of contracts acquired in business combinations as required by APB 16 "Business Combinations".

Fair value was determined by estimating the cost expected to be incurred in order to perform the obligations under the contract plus adding a reasonable profit associated with the performance effort.

The capitalized cost was amortized into cost of revenue as revenues were

recognized and was fully amortized as of March 31, 2003.

For other accounting policies see Note 3 to the Financial

Statements, "Summary of Significant Accounting Policies".

RESULTS OF OPERATIONS

All financial results for the fiscal years ended March 31, 2003, 2002 and 2001

have been restated for the discontinued operations of Five Star, Wares and ADA.

Revenues for the years ended March 31, 2003, 2002 and 2001 were $2,344,251,

$2,531,418 and $1,910,194, respectively.

The 7% decrease in overall revenues for the fiscal year ended March 31, 2003

versus 2002 was due to the continuation of the technology recession as the

enterprise and commerce sales and the professional services segments had

declines with fewer new customers and contracts.

Wireless Services generally

maintained its level of revenues.

The overall increase in revenues at March 31, 2002 from March 31, 2001 is due to

the revenues associated with a significant contract at the WizShop subsidiary in

the enterprise and commerce segment, which was started in April 2002.

there was some small growth in the professional services business.

offset somewhat by the decline in sales in the wireless segment as corporations

reduced their capital spending at the onset of the recession.

WIRELESS SERVICES

The revenues in this segment were essentially the same in the years ended March

31, 2003 versus 2002.

While there has been some variability in the number of

customers, the overall revenue level has not changed as corporate capital

spending has stabilized although it is at a modest level of spending.

The 25% decline in revenues from March 31, 2001 to 2002 is the result of two

opposite trends that have continued from the year ended March 31, 2000.

there was an approximate 14% increase in revenues in the enterprise application

software business from the sales of HiplinkXS and GMP and EMP financial

This has been more than offset by the 66% decline in the Company's

financial consumer software products.

The Company has emphasized its enterprise

products, which continue to sell well in the economic recession.

ENTERPRISE AND COMMERCE SALES

The 10% decline in revenues from March 31, 2002 to March 31, 2003 is due to the

smaller amortization into revenue of the WizShop customer loyalty contract.

contract is completely amortized as of March 31, 2003.

The increase in revenues from March 31, 2001 to March 31, 2002 is due to the

revenues associated with the WizShop customer loyalty contract, which began in

PROFESSIONAL AND RELATED SERVICES

The 59% decrease in revenues from March 31, 2002 to March 31, 2003 is due to the

decline in new professional services contracts, mainly from the Simkin

Wireless medical software products have been slow to penetrate the

market and therefore have been eliminated by Semotus.

Other unprofitable

professional service contracts have also been eliminated.

The 37% decrease in revenues from March 31, 2001 to 2002 is largely the result

of the decline in new professional services contracts, mainly from the Simkin

All financial results for the fiscal years ended March 31, 2004, 2003 and 2002 have been restated for the discontinued operations of Five Star, Wares, ADA and WizShop.

Revenues for the years ended March 31, 2004, 2003 and 2002

were $1,338,373, $1,339,190 and $1,416,940, respectively.

Revenues for the fiscal year ended March 31, 2004 versus 2003 remained essentially the same.

While there has been some variability in the number of customers, the overall revenue level has not changed.

This is due to the fact that corporate capital spending has remained fairly

constant through these last two fiscal years.

The 5% decrease in revenues for the fiscal year ended March 31, 2003 versus 2002 was due to the continuation of the technology recession as the enterprise and commerce sales and the professional services segments had declines with fewer new customers and contracts.

Wireless services generally maintained its level of revenues.

COST OF REVENUES AND GROSS MARGIN

The overall gross profit margin increased by 7% in March 31, 2003 to 60%, due

largely to the higher margin wireless services segment which is a larger

component of the overall revenue mix and from the improved margins with the

Centralization and Consolidation Plan implementation.

The overall gross profit margin increased by 7% to 53% in the fiscal year ended

March 31, 2002.

The wireless services business gross profit margin improved to

60% as more of the enterprise application software was sold versus the consumer

financial software, which has a lower margin.

Further , the addition of the

WizShop contract, in the enterprise and commerce segment, with a higher margin

added to the increase in the overall company gross profit margin.

WIRELESS SERVICES

The 73% gross profit margin for the wireless segment for the fiscal year ended

March 31, 2003 is the result of Semotus is selling more of the enterprise

application software, which carries higher gross margins than the consumer

financial software.

Further, through the Centralization and Consolidation Plan,

Semotus has become more efficient in all of its business which has improved

gross and operating margins.

The 60% gross profit margin for the wireless segment for the fiscal year ended

March 31, 2002 is the result of the continuing trends in this business.

is selling more of the enterprise application software, which carries higher

gross margins than the consumer financial software.

Further, the consumer

business is continuing to decline as a percentage of wireless revenues, as fewer

individuals maintain their subscriptions.

Cost of revenues in this segment principally includes costs to obtain data feeds

from various exchanges, costs of engineering development directed to

specifically identified products, costs of servicing and hosting customer

products, costs for pager rental or depreciation and pager airtime for those

customers without their own pagers, and certain telephone, computer and other

direct operational costs.

ENTERPRISE AND COMMERCE SALES

The gross profit margin in this segment increased to 43% in the fiscal year

ended March 31, 2003 as the initial costs associated with the WizShop contract

were absorbed in fiscal year 2002;

the contract began in April 2001.

The gross profit margin in this segment was 41% in the fiscal year ended March

PROFESSIONAL AND RELATED SERVICES

The gross profit margin increased to 89% in the fiscal year ended March 31, 2003

due to the elimination of unprofitable contracts and services.

professional services business has declined, the remaining contracts have the

highest margins.

The gross profit margin slightly increased by 2% to 74% in the fiscal year ended

March 31, 2002, which is largely due to the mix of contracts serviced in the

Many of the unprofitable contracts with lower margins in this segment were

eliminated through the Centralization and Consolidation Plan.

The gross profit margin increased by 2% to 76% for the fiscal year ended March 31, 2004, due to the fact that we are continuing to sell our enterprise application software and wireless financial software and services, which have a high gross profit margin.

Additionally, we continued to be more efficient in all of our business

operations, which improved gross and operating margins.

The gross profit margin increased by 12% in the fiscal year ended March 31, 2003 to 74%, due largely to the higher margin enterprise application software and wireless financial software and services, which was a much larger component of the overall revenue mix in the fiscal year ended March 31, 2003 as compared to fiscal year 2002.

Further, through the Centralization and Consolidation Plan, we have become more

efficient in all of our business operations, which improved gross and operating

OPERATING EXPENSES

Operating expenses decreased in the fiscal year ended March 31, 2003, due to the

continued reduction in overall expenses through the Centralization and

Consolidation Plan.

Further, there were not any impairment charges taken in the

fiscal year ended March 31, 2003.

Although operating expenses increased in the fiscal year ended March 31, 2002,

this was substantially all the result of impairment charges to goodwill and

intangible assets and to increased depreciation and amortization expense.

and marketing expenses and general and administrative expenses declined in the

fiscal year as Semotus installed a corporate-wide cost reduction and cash

management program, which has significantly reduced these expenses.

The Company categorizes operating expenses into five major categories:

and development, sales and marketing, general and administrative, depreciation

and amortization and stock, option and warrant expense.

For the fiscal year

ended March 31, 2002, there are two categories of impairment charges:

and intangible assets.

For the fiscal year ended March 31, 2003, there were not

any impairment charges from continuing operations.

The table below summarizes

the changes in these categories of operating expenses:

Operating expenses decreased by 33% in the fiscal year ended

March 31, 2004, mainly due to the continued reduction in general and

administrative expenses as described below.

Operating expenses decreased by 59% in the fiscal year ended March 31, 2003, due to the continued reduction in overall expenses through the Centralization and Consolidation Plan.

Further, there were not any impairment charges taken in continuing operations in

the fiscal year ended March 31, 2003.

We categorize operating expenses into five major categories:

research and development, sales and marketing, general and administrative, depreciation and amortization and stock, option and warrant expense.

For the fiscal year ended March 31, 2002, there are two categories of impairment charges that are categorized as operating expenses:

goodwill and intangible assets.

For the fiscal years ended March 31, 2003 and 2004, there were not any impairment charges from continuing operations.

The table below summarizes the changes in these categories of operating expenses during the past three fiscal years:

Year Ended March 31,

----------------------------------------------------

DESCRIPTION 2003 2002 2001

----------- ---- ---- ----

Research and development

5 unchanged sentences

Stock, option and warrant expense

Totals $ 5,352,207 $ 16,676,960 $ 11,892,246

Research and development expenses are expenses incurred in developing new

products and product enhancements for current products.

These expenditures are

charged to expense as incurred.

These costs are due principally for the

development of updates to existing products and new products, such as Futures

Market Pro, Equity Market Pro, Global Market Pro, and the new release of the

Company's enterprise application products, HiplinkXS, OpenLink, IQLink, RemLink.

Much of the development work for these products has been completed and

currently, research and development expenses have been reduced as part of the

Centralization and Consolidation Plan.

Sales and marketing expenses consist of costs incurred to develop and implement

marketing and sales programs for the Company's product lines.

These include

costs required to staff the marketing department and develop a sales and

marketing strategy, participation in trade shows, media development and

advertising, and web site development and maintenance.

These costs also include

the expenses of hiring sales personnel and maintaining a customer support call

These costs have declined principally due to the reduction in general

advertising and non-sales supported marketing.

There has been a reduction in

marketing personnel as the Company has shifted to emphasizing marketing and

sales support for its existing products.

General and administrative expenses include senior management, accounting, legal

and consulting.

This category also includes the costs associated with being a

publicly traded company, including the costs of the Nasdaq and AMEX listings,

investor and public relations, rent, administrative personnel, and other

overhead related costs.

These costs declined during the fiscal year ended March 31, 2002 and March 31,

Research and development expenses are expenses incurred in developing new products and product enhancements for current products.

These expenditures are charged to expense as incurred.

These costs are principally for the development of updates to existing products, such as Futures Market Pro, Equity Market Pro and Global Market Pro, and for releases of new versions of our enterprise application products, HiplinkXS, OpenLink, IQLink and RemLink.

These expenses have declined over the past three fiscal years because the major

development work for these products has been completed, and research and

development expenses were reduced as part of the Centralization and

Consolidation Plan.

Sales and marketing expenses consist of costs incurred to develop and implement marketing and sales programs for our product lines.

These include costs required to staff the marketing department and develop a sales and marketing strategy, participation in trade shows, media development and advertising, and web site development and maintenance.

These costs also include the expenses of hiring sales personnel and maintaining a customer support call center.

These costs have declined principally due to the reduction in general advertising and non-sales supported marketing.

There has been a reduction in marketing personnel as we have shifted our

emphasis to marketing and sales support for our existing products.

General and administrative expenses include senior management, accounting, legal and consulting expenses.

This category also includes the costs associated with being a publicly traded company, including the costs of the Nasdaq and AMEX listings, investor and public relations, rent, administrative personnel, and other overhead related costs.

These costs declined during the fiscal years ended March 31, 2003 and March 31,

2004 as personnel and offices were reduced and operating functions were

consolidated.

This trend should continue as Semotus continues to implement its

Centralization and Consolidation Plan.

In the prior year, Semotus' management performed an on-going analysis of the

recoverability of its goodwill and other intangibles and the value of its

investments in accordance with SFAS No.

121, "Accounting for the Impairment of

Long-Lived Assets and For Long-Lived Assets to be Disposed Of," and in

accordance with SFAS 142, goodwill and other intangible assets.

quantitative and qualitative measures, the Company assessed the need to record

impairment losses on long-lived assets used in operations when impairment

indicators were present.

As a result of Semotus' review, management determined

that the carrying value of goodwill and recorded asset value were not fully

recoverable and an impairment charge of $3,617,283 was taken comprised of an

impairment charge to Simkin's goodwill of $909,272 and $2,708,011 for WizShop's

goodwill in fiscal year 2002.

Furthermore, Semotus took an impairment charge of

$3,420,000 for GMP in the quarter ended March 31, 2002.

See Notes 6 and 7,

"Impairment of Long-Lived Assets and Goodwill" and "Sale of Technology and Net

Impairment of Goodwill" respectively, to the Financial Statements in this 10K.

There were no impairment charges from continuing operations in the fiscal year

ended March 31, 2003, although an impairment

charge of $635,724 was taken in the discontinued operations of ADA.

has determined that the remaining goodwill of $1,430,141 (net of accumulated

amortization of $727,058) is fairly valued using the impairment tests as

described in SFAS 144 and SFAS 142, which includes discounted cash flow analysis

and comparable company analysis.

This remaining amount of goodwill consists

entirely of one of the Company's wireless enterprise application software

product lines, the HipLink family of software products, which is generating

current revenue and cash flow.

In accordance with SFAS 144, Semotus has presented the operations of FiveStar,

Wares and ADA as discontinued operations.

In the net loss from discontinued

operations for 2002 and 2003, impairment charges were taken against the goodwill

of both Wares (fiscal year 2002) and ADA (fiscal year2003).

As discussed in Note

6, "Impairment of Long-Lived Assets and Goodwill," Semotus performed the

impairment tests and determined that impairment charges were required.

impairment expense for the Wares goodwill was $1,156,587 and for the ADA

goodwill was $635,724.

Depreciation and amortization expense includes depreciation of computers and

other related hardware and certain fixtures.

Amortization includes goodwill

costs and certain intellectual property costs.

The increase in this expense from

March 31, 2001 to 2002 is primarily the result of the amortization of goodwill

from the Company's acquisitions and the amortization associated with the

warrants awarded to Chase in connection with Global Market Pro (GMP).

decline in this expense through fiscal 2003 is as a result of the impairment

charges in fiscal 2002 which reduced the asset balances to be amortized and from

the decline in capital spending at Semotus.

The non-cash charges for compensation consists mainly of grants of stock,

options and warrants for services provided to the Company.

Such services include

financial, marketing and public relations consulting.

Additionally, common stock

was issued for certain accrued liabilities.

The decline in non-cash charges for

compensation is due mainly to the termination of contracts with service

providers, which called for stock or warrant compensation, as well as the

decline in the stock and option grants to service providers, in the fiscal years

ended March 31, 2003 and 2002.

The common stock issued was valued at the fair market value of stock issued, or

in the instance of common stock purchase warrants, in accordance with the

Black-Scholes pricing guidelines.

Certain employee stock options, which have

been repriced, are subject to the variable plan requirements of APB No.

requires the Company to record compensation expense for changes in the fair

value of the Company's common stock.

While no compensation expense was required

to be recognized in FY 2003, FY2002 or FY 2001, expense will be recognized in

the future if the stock price increases above the exercise price of the options.

In the fiscal year ended March 31, 2002, our management performed an on-going analysis of the recoverability of our goodwill and other intangibles and the value of our acquired net assets in accordance with SFAS No.

121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed Of" ("SFAS 121"), and, in the fiscal years ended March 31, 2004 and 2003, in accordance with SFAS 142.

Based on quantitative and qualitative measures, we assessed the need to record impairment losses on long-lived assets used in operations when impairment indicators were present.

As a result of our review, management determined that the carrying value of goodwill and recorded asset value were not fully recoverable and an impairment charge of $909,272 was taken, wholly comprised of an impairment charge to Simkin's goodwill in fiscal year 2002.

Furthermore, we took an impairment charge of $3,420,000 for GMP Intellectual Property in the quarter ended March 31, 2002.

See Notes 6 and 7, "Impairment of Long-Lived Assets and Goodwill" and "Sale of Technology and Net Impairment of Goodwill" respectively, to the Financial Statements in this Form 10K.

There were no impairment charges from continuing operations in the fiscal years ended March 31, 2003 or 2004, although an impairment charge of $635,724 was taken in the discontinued operations of ADA.

Management has determined that the remaining goodwill of $1,430,141 (net of accumulated amortization of $727,058) is fairly valued using the impairment tests as described in SFAS 144 and SFAS 142, which includes discounted cash flow analysis and comparable company analysis.

This remaining amount of goodwill consists entirely of the HipLink

family of software products, which is generating current revenue and cash flow.

Depreciation and amortization expense includes depreciation of computers and other related hardware and certain fixtures.

Amortization includes goodwill costs and certain intellectual property costs.

The decline in this expense through fiscal year 2003 is as a result of the impairment charges in fiscal 2002 which reduced the asset balances to be amortized and from our decline in capital spending.

The decline in this expense from fiscal year 2003 to fiscal year 2004 is due to the final amortization of GMP

in fiscal year 2003, and the fact that there were no acquisitions of property,

plant or equipment in fiscal year 2004.

The non-cash charges for compensation consists mainly of grants of stock, options and warrants for services.

Such services include financial, marketing and public relations consulting.

Additionally, common stock was issued for settlement of certain accrued liabilities.

The decline in non-cash charges for compensation in fiscal year 2003 was due mainly to the termination of contracts with service providers, which called for stock or warrant compensation, as well as the decline in the stock and option grants to service providers, in the fiscal years ended March 31, 2003 and 2002.

The increase in non-cash charges for compensation in fiscal 2004 is due to new contracts for services being entered into, an increase in stock and option grants to service providers, and variable accounting charges for repriced

The common stock issued was valued at the fair market value of stock issued, or in the instance of common stock purchase warrants, in accordance with the Black-Scholes pricing guidelines.

Certain employee stock options, which have been repriced, are subject to the variable plan requirements of APB No.

25, that requires us to record compensation expense for changes in the fair value of our common stock.

While no compensation expense was required to be recognized in fiscal year 2003 or fiscal year 2002, in fiscal year 2004 there was a stock compensation expense recognized in the amount of $894,409, due to the compensation expense adjustment for the repriced stock options based on the increase in the common stock price in fiscal year 2004.

Compensation expense will be recognized in the future if the stock price increases above the exercise price of the repriced

NON-OPERATING INCOME AND EXPENSES

Non-operating income and expenses are primarily made up of interest income from

invested cash, interest expense from a note payable and retired bank lines of

credit, amortization of advances from technology sales received in previous

periods, and the owner's fees and offsetting interest income recognized, related

to the technology sales.

The following tables reflect the changes in other

income (expense).

Non-operating income and expenses are primarily made up of interest income from invested cash, interest expense from a note payable and retired bank lines of credit, amortization of advances from technology sales received in previous periods, and the owner's fees and offsetting interest income recognized, related to the technology sales.

The following tables reflect the changes in non-operating income and expenses:

Year Ended March 31,

------------------------------------------------

DESCRIPTION 2003 2002 2001

----------- ---- ---- ----

Net interest income

Owners fee sales of technology (1,176,750) (1,569,000) (1,569,000)

Owners fee on sales of technology

Interest on note from sales of technology

Amortization of technology advances

Gain from cancellation of sales of 628,927 -- --

technology contracts

Gain from cancellation of sales of technology contracts

Miscellaneous income (expenses)

------------ ------------ ------------

$ 1,175,357 $ 558,895 $ 1,103,440

============ ============ ============

Non-operating income, net of expenses, increased in the fiscal year ended March

31, 2003 versus 2002, due to the cancellation of the technology sales contracts,

of which the remaining deferred balances were recognized as income.

offset somewhat due to less cash available for investment during the year

resulting from the operating losses and the amortization of technology advances.

decreased somewhat due to the application of the effective interest method of

amortization on the balances.

Non-operating income, net of expenses, decreased in the year ended March 31,

2002 from the year ended March 31, 2001, due primarily to a decline in interest

income resulting from less cash during the year that was available for

The two major sources of cash in fiscal year 2001 were the private

placement of Series B Convertible Preferred Stock completed in February 2000 and

the exercise of common stock warrants.

Amortization of technology advances

decreased somewhat, due to the application of the effective interest method of

amortization on the balances.

Total non operating income, net

Non-operating income, net of expenses, decreased in the year

ended March 31, 2004 versus 2003, due to the cancellation of the technology

sales contracts at the end of fiscal year 2003;

no further income will be

amortized from those contracts.

Non-operating income, net of expenses, increased in the fiscal year ended March 31, 2003 versus 2002, due to the cancellation of the technology sales contracts, of which the remaining deferred balances were recognized as income.

This was offset somewhat due to less cash available for investment during the

year resulting from the operating losses and the decrease in the amortization of

technology advances amount.

COMPREHENSIVE LOSS

The decrease in the comprehensive loss for the fiscal year ended March 31, 2003

to $3,383,296 or $(0.19) per share was due to an improvement in the overall

operating efficiency of the Company as the consolidation and Centralization Plan

has been implemented.

The gross profit margin improved and the operating costs

were reduced.

Further, there were no impairment charges in the year ended March

The Company also disposed of the operations of Five Star, Wares and

The increase in the comprehensive loss for the fiscal year ended March 31, 2002

to $18,484,302 or $(1.09) per share compared to $11,314,517 or $(0.74) per share

for the fiscal year ended March 31, 2001 was due principally to a 511% increase

in non-cash charges to income from impairments of goodwill and intangible assets

and the amortization of intangible assets.

These costs were offset somewhat with

a 53% increase in gross profit dollars and reductions in sales and marketing

expenses and general and administrative expenses.

SEGMENT RESULTS

Semotus' business has evolved into three segments:

wireless services, enterprise

and commerce sales, and professional and related services.

See "Business

Description - Services and Products" for further information about each of the

As Semotus continues to centralize and consolidate its business, the

nature and structure of the business segments may change.

The Company intends to

consolidate all of its segments beginning in the first quarter of fiscal year

Specific results of the segments are discussed under "Revenues" and "Cost of

Revenues and Gross Margin" in this section titled "Management's Discussion and

Analysis of Financial Condition and Results of Operations".

and Professional

Wireless commerce and related Corporate and

Services sales services other Total

------------ ------------ ------------ ------------ ------------

As of and for the Year Ended March 31, 2003:

Revenue from continuing operations $ 1,293,801 $ 1,005,060 $ 45,390 -- $ 2,344,251

Gross profit from continuing operations $ 946,489 $ 428,101 $ 40,418 -- $ 1,415,008

Operating loss from continuing operations* $ (1,254,049) $ 308,775 $ 21,846 $ (3,013,771) $ (3,937,199)

Net loss from discontinued operations -- -- -- $ (799,090) $ (799,090)

Depreciation and amortization from continuing $ 251,262 $ 60,454 $ 1,880 $ 1,000,000 $ 1,313,596

Capital expenditures $ 16,949 -- -- -- $ 16,949

Total assets from discontinued operations -- -- -- $ 706,932 $ 706,932

Total assets, March 31, 2003 $ 3,027,947 $ 482,237 $ 265,613 $ 872,759 $ 4,648,556

As of and for the Year Ended March 31, 2002:

Revenue from continuing operations $ 1,305,347 $ 1,114,481 $ 111,590 -- $ 2,531,418

Gross profit from continuing operations $ 793,510 $ 459,595 $ 83,035 -- $ 1,336,140

Operating loss from continuing operations* $ (837,442) $ (75,944) $ (113,520) $(14,313,914) $(15,340,820)

Net loss from discontinued operations $ -- -- -- $ (3,662,553) $ (3,662,553)

Depreciation and amortization from continuing

operations $ 340,482 $ 42,291 $ 25,005 $ 2,672,285 $ 3,080,063

Capital expenditures $ 24,588 -- -- -- $ 24,588

Total assets from discontinued operations -- -- -- $ 1,600,341 $ 1,600,341

Total assets, March 31, 2002 $ 7,133,204 $ 1,272,567 $ 246,597 $ 1,684,695 $ 10,337,063

As of and for the Year Ended March 31, 2001:

Revenue from continuing operations $ 1,731,948 -- $ 178,246 -- $ 1,910,194

Gross profit from continuing operations $ 746,643 -- $ 128,948 -- $ 875,591

Operating loss from continuing operations* $ (3,016,513) -- $ (265,616) $ (7,734,526) $(11,016,655)

Net loss from discontinued operations -- -- -- $ (1,380,166) $ (1,380,166)

Depreciation and amortization from continuing $ 282,832 -- $ 9,208 $ 1,494,474 $ 1,786,514

Capital expenditures $ 223,231 -- -- $ 203,208 $ 426,439

Total assets from discontinued operations -- -- -- $ 2,419,982 $ 2,419,982

Total assets, March 31, 2001 $ 8,894,324 -- $ 1,461,401 $ 11,414,236 $ 21,769,961

* Certain corporate marketing, research and development and general and

administrative costs have not been allocated to the segments and have been

included in "Corporate and other".

The decrease in the comprehensive loss for the fiscal year ended March 31, 2004 to ($2,232,707) or $(0.11)

per share was due to a continued improvement in our overall operating

The decrease in the comprehensive loss for the fiscal year ended March 31, 2003 to ($3,383,296) or $(0.19) per share was due to an improvement in our overall operating efficiency as the Consolidation and Centralization Plan was implemented.

The gross profit margin improved and the operating costs were reduced.

Further, impairment charges decreased by approximately $3,600,000 in the year

ended March 31, 2003.

SEGMENT INFORMATION

After the Consolidation and Centralization Plan was largely completed by March 31, 2003, we determined that our ongoing operations were in one segment, wireless and mobile enterprise software.

Our products consist mainly of the Global Market Pro family of products and the Hiplink family of products.

Utilizing the definitions described in SFAS 131, "Disclosures about Segments of an Enterprise and Related Information", the nature of the products and services are all similar.

Accordingly, starting in the current fiscal year, we will report the single line of business of wireless and mobile enterprise software and will no longer report operations from three prior segments:

Enterprise and Commerce Sales, Professional and Related Services and Logistics.

Further, per SFAS

131, the corresponding information for the earlier period presented has been

reclassified accordingly to conform to the single segment current year

presentation.

LIQUIDITY AND CAPITAL RESOURCES

Although the cash position of Semotus has decreased at March 31, 2003 due to the

continued operating losses at the Company, this cash loss has been reduced

through the Company's Centralization and Consolidation Plan.

Semotus believes

the cash loss will continue to be reduced through its Centralization and

Consolidation Plan.

The overall decrease in the cash position of Semotus at March 31, 2002 is due to

the continued operating losses at the Company.

Cash continued to be spent on

operating resources and upgrading wireless products although a cash management

and cost reduction program has been implemented and has reduced the overall cash

Our cash flow position has improved at March 31, 2004, due

to the continued improvement in operations and due to the cash received from the

private placement financing and exercise of stock options.

Although our cash position had decreased at March 31, 2003 due

to our continued operating losses, this cash loss was reduced through our

Centralization and Consolidation Plan.

The overall decrease in our cash position at March 31, 2002 was due to our continued operating losses.

Cash continued to be spent on operating resources and upgrading wireless

products although a cash management and cost reduction program was implemented

and reduced the overall cash loss.

The sources and uses of cash are summarized as follows:

Year Ended March 31,

Net cash used in operating activities of continuing operations

$ (1,384,379)

1 unchanged sentence

$ (4,493,464)

Net cash used in operating activities of continuing operations $(2,021,665) $(4,332,467) $(8,507,433)

Net cash provided by (used in) investing activities (15,889) 1,388,983 (558,941)

Net cash provided by (used in) financing activities (210,941) (195,450) 1,279,762

Net cash provided by (used in) discontinued operations 166,749 (134,007) (1,243,415)

Net increase (decrease) in cash and cash equivalents (2,081,746) (3,272,941) (9,030,027)

Cash used in operating activities at March 31, 2003 consisted principally of a

net loss of $3,432,350 offset somewhat by non-cash charges of $1,313,596 for

depreciation and amortization, $593,259 for the amortization of a note

receivable, and $119,862 for a non-cash legal settlement.

Further there was a

non-cash charge for the net loss from discontinued operations of $799,090 and a

gain on the cancellation of technology contracts of $628,927.

Other operating

activities that used cash were reductions in accounts payable and accrued

liabilities of $190,008 and $130,361, respectively.

Cash used in operating activities at March 31, 2002 consisted principally of a

net loss of $18,444,478 offset somewhat by non-cash charges of $7,037,283 of

impairment charges, depreciation and amortization of $3,080,063 and stock based

compensation of $471,181.

Other operating activities that provided cash were a

reduction in accounts receivable of $358,073, and an increase in deferred

revenue of $162,651 offset by a reduction in accounts payable of $86,816.

Cash used in the investing activities of $15,889 at March 31, 2003 resulted

principally from $16,949 of capital expenditures offset somewhat by $1,060 from

the sale of assets.

Cash provided from investing activities in 2003 of $1,388,983 at March 31, 2002

resulted principally from $1,063,571 of cash received, net of assets acquired

from the two companies acquired in the fiscal year, and $350,000 from the sale

of the Kinetidex technology.

Cash flows from financing activities produce a net decrease in cash of $210,941.

This resulted from the repurchase of preferred stock for $100,000 and from the

$122,479 of repayments of notes payable and capital leases offset slightly by

$11,538 in cash received from the exercise of warrants.

Cash flows provided by financing activities at March 31, 2002 produced a net

decrease in cash of $195,450 which resulted from $207,118 of repayments on notes

payable and capital leases offset slightly by $11,668 in cash received from the

exercise of stock options.

As of March 31, 2003, the Company had cash and cash equivalents of $1,976,062 a

decrease of $2,081,746 from the prior year.

Working capital decreased to

$1,464,645 from the fiscal year ended March 31, 2002.

As of March 31, 2002, the Company had cash and cash equivalents of $4,057,808

(exclusive of restricted cash of $693,286), a decrease of $3,272,941 from the

Working capital decreased to $2,064,396 from the fiscal year ended

March 31, 2001.

The continued decrease in working capital is from the resources used in the

operations of Semotus as explained above, somewhat offset by cash produced by

the conversion of warrants and options into common stock.

The Company has not

yet generated sufficient revenues to cover the costs of continued product

development and support, sales and marketing efforts and general and

Net cash provided by (used in) investing activities of continuing operations

Net cash provided by (used in) financing activities of continuing operations

Net decrease in cash and cash equivalents

Cash used in operating activities at March 31, 2004 consisted principally of a net loss of $2,251,685 offset somewhat by non-cash charges of $201,181 for depreciation and amortization, $77,783 for the amortization of notes receivable, a stock and option compensation expense of $952,473, and a charge of $105,834 for the net income from discontinued operations.

Further, there was a non-cash charge of $44,578 for a non-cash settlement of liabilities.

Other operating activities that used cash were accounts payable and accrued

liabilities in the amounts of $296,978 and $40,345, respectively.

Cash used in operating activities at March 31, 2003 consisted principally of a net loss of $3,432,350 offset somewhat by non-cash charges of $1,255,635 for depreciation and amortization, $593,259 for the amortization and forgiveness of notes receivable, net, and $176,346 for a non-cash legal settlement.

Further there was a charge for the net loss from discontinued operations of $403,698 and a gain on the cancellation of technology contracts of $628,927.

Other operating activities that used cash were accrued liabilities of $116,603.

Cash used in operating activities at March 31, 2002 consisted principally of a net loss of $18,444,478 offset somewhat by non-cash charges of $4,329,272 of impairment charges, depreciation and amortization of $2,360,771 and stock based compensation of $471,181.

Other operating activities that provided cash were a reduction in accounts

receivable of $250,365, and an increase in deferred revenue of $162,651 offset

by a reduction in accounts payable of $104,559.

During the fiscal year ended March 31, 2004, there was no cash used in investing activities.

Cash used in investing activities of $15,889 at March 31, 2003 resulted principally from $16,949 of capital expenditures offset somewhat by $560 from the sale of assets and $500 from cash received from certain acquisitions during the fiscal year.

Cash provided by investing activities in 2002 of $1,388,983 resulted principally from $1,063,571 of cash provided by discontinued operations, net of assets acquired of $24,588, and $350,000 from the sale of the Kinetidex

Cash flows from financing activities during the fiscal year ended March 31, 2004 produced a net increase in cash of $1,112,543.

This resulted from net proceeds from a private placement of $977,474, and from the proceeds from the exercise of stock options and warrants for $211,584.

This was offset slightly by the repayments of notes payable and capital leases

by $56,224 and $20,291, respectively.

During fiscal year ended March 31, 2003, cash flows from financing activities produced a net decrease in cash of $210,941.

This resulted from the repurchase of preferred stock for $100,000, from the

$78,869 of repayments of notes payable and $33,792 of repayments of capital

leases, and from the $9,818 cash used in discontinued operations, offset

slightly by $11,538 in cash received from the exercise of warrants.

Cash flows used in financing activities at March 31, 2002 produced a net decrease in cash of $195,450.

This resulted from $154,398 of repayments of notes payable and $40,423 of

repayments of capital leases, and $12,297 in cash used in discontinued

operations, offset slightly by $11,668 in cash received from the exercise of

stock options.

As of March 31, 2004, we had cash and cash equivalents of $1,717,052, a decrease of $252,858 from the prior year.

Working capital increased to $1,682,495 from the fiscal year ended March 31,

2003 due to the cash received from the private placement financing and the

exercise of stock options, to the payoff of the notes payable and capital leases

and to the disposition of the discontinued operations.

As of March 31, 2003, we had cash and cash equivalents of $1,969,910 a decrease of $2,100,732 from the prior year.

Working capital decreased to $1,464,645 from the fiscal year ended March 31, 2002.

The decrease in working capital is from the resources used in our operations, as explained above, somewhat offset by cash produced by the conversion of warrants and options into common stock.

We have not yet generated sufficient revenues to cover the costs of continued

product development and support, sales and marketing efforts and general and

administrative expenses.

There are no material commitments for capital

expenditures at March 31, 2003.

Primary commitments in FY2004 are

repayment of notes payable ($56,224), capital lease obligations ($23,731) and

operating lease obligation ($87,697).

At March 31, 2003 and 2002, the Company had a deferred tax asset of

approximately $13,862,275 and $11,753,500, respectively, principally arising

from net operating loss carryforwards available to offset future taxable income.

As management cannot determine that it is more likely than not that the Company

will realize the benefit of this asset, a 100% valuation allowance has been

The following table discloses the Company's contractual commitments for future

Long term commitments are comprised solely of operating leases and

capital leases (See Notes 12 and 20).

As of March 31, 2002, we had cash and cash equivalents of $4,070,642 (exclusive of restricted cash of $693,286), a decrease of $3,260,107 from the prior year.

The continued decrease in working capital is from the resources used in our operations as explained above.

We have not yet generated sufficient revenues to cover the costs of continued

product development and support, sales and marketing efforts and general and

administrative expenses.

In the fiscal year ended March 31, 2004, we elected to pay off all of our outstanding capital leases.

There were no material commitments for capital expenditures at March 31, 2004 and we have no future capital lease payments.

Operating lease expenses were $124,917 in fiscal 2004 and will be $52,153 in

fiscal year 2005.

The following table discloses our contractual commitments for future periods.

Long term commitments are comprised solely of operating leases (See Note 20).

Year ending March 31,

---------------------

2004 $ 103,948

Management believes that it has adequate working capital for the next 12 months.

At March 31, 2004 and 2003, we had a deferred tax asset of approximately $15,032,000 and $13,862,000, respectively, principally arising from net operating loss carryforwards available to offset future taxable income.

As management cannot determine that it is more likely than not that we will

realize the benefit of this asset, a 100% valuation allowance has been

Management believes that it has adequate working capital for the

next 12 months.

RECENT PRONOUNCEMENTS:

In April 2002, the FASB issued SFAS No.

145, " Rescission of FASB Statements No.

4, 44, and 64, Amendment of FASB Statement No.

13, and Technical Corrections."

145 rescinded FASB No.

4 and 64 in relation to reporting gains and

losses from extinguishment of debt.

The Statement amended SFAS No.

requires gains and losses from extinguishment of debt to be classified as

extraordinary items only if they meet the criteria in Opinion 30.

provisions of Opinion 30 differentiates between normal recurring operations of a

company and transactions that are unusual or infrequent in nature.

also amended Statement No.

13, to the effect that sale-leaseback accounting for

certain lease modifications should be accounted for in the same manner as

sale-leaseback transactions.

In June 2002, the FASB issued SFAS No.

146, "Accounting for Costs Associated

with Exit or Disposal Activities" ("SFAS 146").

SFAS 146 addresses significant

issues regarding the recognition, measurement, and reporting of costs that are

associated with exit and disposal activities, including restructuring activities

that are currently accounted for under EITF No.

94-3, "Liability Recognition for

Certain Employee Termination Benefits and Other Costs to Exit and Activity

(including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146

also includes costs related to terminating a contract that is not a capital

lease and termination benefits that employees who are involuntarily terminated

receive under the terms of a one-time benefit arrangement that is not an ongoing

benefit arrangement or an individual deferred-compensation contract.

effective for exit or disposal activities that are initiated after December 31,

The Company's adoption of SFAS 146 on January 1, 2003 had no impact on the

Company's financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation No.

45 ("FIN 45"),

"GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING

INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB

STATEMENTS NO.

5, 57, AND 107 AND RESCISSION OF FASB INTERPRETATION NO.

45 clarifies the requirements of FASB Statement No.

5, "ACCOUNTING FOR

Contingencies" relating to the guarantor's accounting for, and disclosure of the

issuance of certain types of guarantees.

The disclosure provisions of the

Interpretation are effective for financial statements of interim or annual

reports that end after December 15, 2002, irrespective of the guarantor's

The Company's adoption of FIN 45 did not have a material impact in the

Company's financial position or results of operations.

In December 2002, the FASB issued SFAS No.

148, "Accounting for Stock-Based

Compensation, Transition and Disclosure." SFAS No.

148 amends SFAS No.

requires prominent disclosures in both annual and interim financial statements

about the method of accounting for stock-based employee compensation and the

effect of the method used on reported results.

148 is effective for

fiscal years ending after December 15, 2002 and is effective for interim periods

beginning after December 15, 2002.

The Company's adoption of SFAS NO.

January 1, 2003 did not have a material effect on the Company's financial

position or results of operations.

In November 2002, the Emerging Issues Task Force issued its final consensus on Revenue Arrangements with Multiple Deliverables.

This guidance is effective for revenue arrangements entered into in fiscal

periods beginning after June 15, 2003 or alternatively, entities may elect to

report the change in accounting as a cumulative-effect adjustment.

EITF 00-21 discusses criteria necessary to determine when an arrangement may be viewed to have separate units of accounting (and thus revenue) and when an arrangement should be viewed as a single unit of accounting.

As of March 31, 2004, we have not entered into any arrangements with multiple

deliverables, nor do we currently foresee doing so.

In January 2003, the FASB issued Interpretation No.

46, "Consolidation of

Variable Interest Entities, an interpretation of ARB No.

interpretation addresses the consolidation by business enterprises of variable

interest entities as defined in the interpretation.

The interpretation applies

immediately to variable interests in variable interest entities created or

obtained after January 31, 2003.

The interpretation is applied to the enterprise

no later than the end of the first reporting period beginning after June 15,

The application of this interpretation is not expected to have a material

effect on the Company's financial statements.

The interpretation requires

certain disclosures in financial statements issued after January 31, 2003 if it

is reasonably possible that the

Company will consolidate or disclose information about variable interest

entities when the interpretation becomes effective.

In November 2002, the Emerging Issues Task Force issued its final consensus on

Revenue Arrangements with Multiple Deliverables.

This guidance is effective for

revenue arrangements entered into in fiscal periods beginning after June 15,

2003 or alternatively, entities may elect to report the change in accounting as

a cumulative-effect adjustment.

EITF 00-21 discusses criteria necessary to

determine when an arrangement may be viewed to have separate units of accounting

(and thus revenue) and when an arrangement should be viewed as a single unit of

The Company is currently reviewing how this might affect revenue

recognition for arrangements the Company could enter into that have multiple

deliverables.

46, "Consolidation of Variable Interest Entities, an interpretation of ARB No.

51." This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation.

The interpretation applies immediately to variable interests in variable interest entities created or obtained after January 31, 2003.

The interpretation is applied to the enterprise no later than the end of the first reporting period beginning after June 15, 2003.

The application of this interpretation is not expected to have a material effect on our financial statements.

The interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that we will consolidate or disclose information about variable interest entities when the interpretation becomes effective.

As of March 31, 2004, we did not have any variable interest entities.

In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities".

This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities".

The Statement clarifies and creates more consistent reporting of contracts as either derivatives or hybrid financial instruments.

The Statement is effective for contracts entered into or modified after June 30, 2003.

We historically have not used derivatives or hedging instruments.

Currently, we do have a small exposure to the Canadian

dollar exchange rate, but at this time we have not deemed it necessary to hedge

this exposure.

In May 2003, the FASB issued SFAS No.

150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity."

150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective as of the beginning of the first interim period beginning after June 15, 2003.

We adopted SFAS No.

150 on June 1, 2003.

The adoption of SFAS No.

150 has not had a material impact on our results of operations or financial

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis