Edgar Filing: MEDCOM USA INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 2004

OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from N/A to N/A
Commission File Number: 0-25474

MEDCOM USA, INCORPORATED
(Name of small business issuer as specified in its charter)

DELAWARE 65-0287558
State of Incorporation IRS Employer Identification No.

7975 NORTH HAYDEN ROAD, SUITE D-333, SCOTTSDALE, AZ 85258
(Address of principal executive offices)

Registrant's telephone number, including Area Code: (480) 675-8865
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $.0001 PAR VALUE

Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.

YES _X__ NO ____

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

Registrant's revenues for the most recent fiscal year were $ 3,029,875.

The aggregate market value of the common stock held by non-affiliates computed
based on the closing price of such stock on June 30, 2004, was approximately
$79,928,446

PART I
________________________________________________________________

ITEM 1. Description of Business

ITEM 2. Description of Property

ITEM 3. Legal Proceedings

ITEM 4. Submission of Matters to a Vote of Security Holders

PART II
________________________________________________________________

ITEM 5. Market for Common Equity and Related Stockholder Matters

ITEM 6. Management's Discussion and Analysis or Plan of Operation

ITEM 7. Financial Statements

ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.

PART III
________________________________________________________________

ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act

ITEM 10. Executive Compensation

ITEM 11. Security Ownership of Certain Beneficial Owners and Management

ITEM 12. Certain Relationships and Related Transactions

ITEM 13. Exhibits and Reports

ITEM 14. Controls and Procedures

ITEM 15. Signatures

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

Except for historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements include, but are not limited to,
statements regarding future events and the Company's plans and expectations.
Actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed elsewhere in this Form 10-KSB or incorporated herein by
reference, including those set forth in Management's Discussion and Analysis or
Plan of Operation.

OVERVIEW

MedCom USA, Inc.(the "Company") a Delaware corporation was formed in August
1991 with the name Sims Communications, Inc. The Company's primary business was
providing telecommunications services. In 1996 the Company introduced four
programs to broaden the Company's product and service mix: (a) cellular
telephone activation, (b) sale of prepaid calling cards, (c) sale of long
distance telephone service and (d) rental of cellular telephones using an
overnight courier service. With the exception of the sale of prepaid calling
cards, these four programs were discontinued in December 1997. During the fiscal
year of 1998, the Company diversified its operations and moved into the area of
medical information processing.

The Company changed its name to MedCom USA, Inc. in October 1999. During
the fiscal years of 1999 and continuing through 2003, the Company directed its
efforts in medical information processing. As of June 30, 2004, the Company
currently operates the MedCard System (MedCard) that is deployed through a
point-of-sale terminal or personal computer offering electronic transaction
processing, as well as insurance eligibility verification. The Company has
aggressively focused on its primary operations in electronic data interchange
and core business in electronic medical transaction processing.

MEDCARD SYSTEM

The Company provides innovative technology-based solutions for the
healthcare industry that enable users to efficiently collect, use, analyze and
disseminate data from payers, health care providers and patients. The MedCard
System currently operates through a point-of-sale terminal or a personal
computer. The point-of-sale terminals are purchased from Hypercom Corporation
(Hypercom). The MedCard System also operates in a PC version and an on-line
version. The Company is in the process of assessing the feasibility of offering
a service bundled package that would have the capability of processing unlimited
claims and eligibility verification for monthly service fees.

FINANCIAL SERVICES

The Company's credit card center and check services, provides the
healthcare industry a combination of services designed to improve collection and
approvals of credit/debit card payments along with the added benefit and
convenience of personal check guarantee from financial institutions.

Flex-pay is an accounts receivable management program that allows a provider to
swipe a patient's credit card and store the patient's signature in the
terminals, and bill the patient's card at a later date when it is determined
what services rendered were not covered by the patient's insurance. Also, an
easy-pay option is offered which allows patient's the added benefit and
convenience of a one-time payment option or a recurring installment payments
that will be processed on a specified date determined by the provider and
patient. These options insure providers that payments are timely processed with
the features of electronic accounts receivable management. These services are
all deployed thorough point-of-sale terminals or a personal computer. Using the
MedCard system, medical providers are relieved of many of the problems
associated with billings and account management, and results in lower
administrative documentation and costs.

PATIENT ELIGIBILITY

The MedCard System is also an electronic processing system that
consolidates insurance eligibility verification, processes medical claims, and
monitors referrals. The MedCard System allows a patient's primary care physician
to request approval from the patient's insurance carrier or managed care plan
for a referral to a secondary physician or specialist. The secondary physician
or specialist can use the MedCard system to verify referrals are approved by the
patient's insurance carrier. The MedCard system's referral capabilities reduce
documentation and administrative costs which results in increased productivity
and greater patient information for the specialist, as well as a written record
of the referral authorization.

The MedCard System can record and track encounters between patients and
health care providers for performance evaluation and maintenance of records.
After examining a patient the physician enters a patient's name, procedure code
and diagnostic code at a nearby terminal. This information is then uploaded to
MedCom's computer network, processed and transmitted back to the provider
formatted in both summary and/or detailed reports, and as a result healthcare
providers' reimbursements are accelerated and account receivables are reduced.
The average time it takes the healthcare providers to collect payments from
insurance carriers and plans decreases from an average of 89 days to 7-21 days.
Health care providers will benefit from a 100% paperless claim processing
system.

As of June 30, 2004 the MedCard system was able to retrieve on-line
eligibility and authorization information from approximately 150 medical
insurance companies and electronically process and submit billings for its
healthcare providers to over 1,700 companies. These insurance providers include
CIGNA, Prudential, Oxford Health Plan, United Health Plans, Blue Cross,
Medicaid, Aetna, Blue Cross/Blue Shield, and Prudential.

COMPETITION

Competing health insurance claims processing and/or benefit verification
systems include WebMD(HLTH), NDCHealth(NDC), Per-se Technologies(PSTI). There
are similar companies that compete with the Company with respect to its
financial transaction processing services performed by the MedCard system. These
companies compete with the Company directly or to some degree. Many of these
competitors are better capitalized than the Company, and maintain a significant
market share in their respective industries.

REGULATORY COMPLIANCE

With the passage of the Health Insurance Portability and Accountability Act
(HIPAA) of 1996, the United States Congress has mandated the establishment of
standards for the privacy of individually identifiable health information.
Specifically, the regulation entitled, Standards for Privacy of Individually
Identifiable Health Information ("the Privacy Rule") promulgated by the
Department of Health and Human Services (HHS), provides for a comprehensive
federal protection for the privacy of health information. The Rule applies only
to health plans, health care clearinghouses, and certain health care providers,
which must comply with the new requirements. The Company's core operating
business is not subject to the Privacy Rule, which defines the Company as a
"business associate". A business associate is an entity that provides certain
functions, activities, or services for or to a covered entity. These covered
entities typically obtain contractual assurances that the business associate
will use the information only for the purposes for which they were contracted
and not for independent use by the business.

SERVICE AND PRODUCTS

The Company offers its healthcare providers, and health plan groups, a
simple solution to expedite its Healthcare and financial transactions
electronically through a processing terminal, and the Company maintains its
website www.MedCard.com. The features of the terminals are as follows:
---------------

Flex-pay is an accounts receivable management program that allows a
provider to swipe a patient's credit card and store the patient's signature in
the terminals, and bill the patient's card at a later date when it is determined
what services rendered were not covered by the patient's insurance. Also, an
easy-pay option is offered which allows patient's the added benefit and
convenience of a one-time payment option or a recurring installment payments
that will be processed on a specified date determined by the provider and
patient. These options insure providers that payments are timely processed with
the features of electronic accounts receivable management. These services are
all deployed thorough point-of-sale terminals or a personal computer. Using the
MedCard system, medical providers are relieved of the problems associated with
billings and account management, and results in lower administrative
documentation and costs.

LICENSING AGREEMENTS

In May 2000 the license agreement with Dream Technologies, LLC, was amended
whereby the Company acquired direct ownership of the MedCard System including
all software programs, intellectual property, trade names and existing
contracts. The amendment effectively terminated the original license agreement,
except for the royalty provisions of the original license agreement.
Subsequently, on January 14, 2002, the Company changed the terms of the
royalties included in the original agreement with Dream Technologies, and as a
result past royalties were waived in good faith, for the exception of $30,000,
which was agreed and payable in equal monthly installments. In connection with
the past royalties, Dream Technologies, LLC was issued a certificate
representing one-million unregistered shares of common stock with a par value of
$.001.

The Company is required to pay royalties to Dream equal to twenty percent
of the first $1,000,000 of net monthly revenue and ten percent of net monthly
revenue in excess of $1,000,000. The term net revenues is defined as gross
revenues received from the use of the MedCard software less (a) terminal lease
costs (b) commissions payable to agents that place terminals with end users (c)
network costs that include: i) claim fees payable to data vendors, ii) charges
for verification of insurance coverage iii) similar telecommunications charges
related to obtaining claims processing and/or benefits verification information;
and (d) cost of the terminal and shipping/handling.

SERVICE AGREEMENTS

During September 1998, the Company entered into a service agreement with
WebMD/Envoy. This agreement encompasses the process of electronic data
interchange and related services. The services provided are complimentary to the
Company's core business, and accomplishes transaction processing services that
allows healthcare providers and payers to process medical transactions quickly
and accurately, and results in reduced administrative costs with the benefit of
accelerated reimbursements to healthcare providers.

During January 2002, the Company has entered into a service agreement with
MedUnite. This alliance will encompass the utilization of proprietary
technologies and will enhance the existing network of healthcare constituents.
Strategically both companies share the same vision of transforming the
healthcare transactions systems affecting how healthcare providers, health
plans, and other groups transacting business with one another by significantly
reducing claim and payment processing time, and reducing healthcare
administrative costs.

During February 2003, the Company has entered into a service agreement with
HD Brous & Company. This agreement provides that HD Brous & Company act as
financial advisor and investment banking representative on the Company's behalf.
Upon the execution of the contract the Company granted to HD Brous & Company
warrants to purchase up to four hundred thousand shares of the Company's common
stock at an exercise price of $.50 per common share. The warrants will expire
five years from the date of issuance.

During February 2004, the Company entered into a service agreement with CDS
Capital. This agreement will enable eligible healthcare providers utilizing the
Medcom terminals to finance their accounts receivables. Health care providers
using the Medcom terminal to secure

patient eligibility and process claims will now be able to receive regular
payments for a large percentage of claims processed from the previous week. This
financial management service will decrease the time and costs associated with
accounts receivable collections.

PROCESSING TERMINAL LEASING AGREEMENTS

The Company has entered into leasing agreements with LADCO Financial Group
for the purpose of leasing processing terminals. The Company has pledged in
collateral in connection with the lease agreements one-million restricted common
shares of stock. These common stock shares would be surrendered upon the default
of such leasing agreements. This pledge and granting of security interest was
executed on January 3, 2002.

The Company has arranged its terms with this credit facility as an
equipment lessor whereby the Company sells terminals to the lessor when it has
obtained a service contract with a provider. Under these agreements, the Company
is leasing back the processing terminals from the lessor and in turn leases them
to the purchaser for a period of 48-60 months however; the customer may
terminate the agreement after 12 months. The Company is accounting for the
transactions as sale-leasebacks. The leases with the customers are inclusive
with the monthly service contracts and are effectively accounted for as
operating leases. Gains on terminal sales under sale-leaseback transactions are
deferred and are being amortized to income in proportion to amortization of the
assets, generally over the term of the lease with the credit facility generally
for a period of 48-60 months. At June 30, 2004, the remaining deferred equipment
gain of $3,295,610 is shown as "Deferred Revenues" in the Company's Balance
Sheet.

GROWTH STRATEGY

The Company's strategy is to become one of the dominant electronic
transaction processing vendors in the Healthcare markets. MedCom USA will focus
on providing health plan administrators, healthcare clearinghouses, and
healthcare providers, financial as well as verification electronic transaction
processing solutions. The Company's strategy to date has included large select
markets for its products and services, however the Company will work with
partners who will ensure national distribution of its products and services.

On January 14, 2003 the Company announced a partnering with Paymentech to
launch a national sales program for the Medcard system and Paymentech Financial
Services. Significant elements of the partnering include marketing the Medcard
system to Paymentech's existing healthcare customers, and also training to
market the Medcard system.

On June 3, 2003 the Company announced a service solutions partnering with
Global eTelecom a leader in the electronic check conversion industry. This
customized technology will enable subscribers of the Medcard system the ease and
convenience to accept and process paper checks electronically. This process is
similar to ease of processing of credit card transactions. Integrating this
enhancement increases efficiencies for healthcare providers and insurers
nationwide. Announced on June 4, 2003, LML Payment Systems in accord with Global
eTelecom the licensor for check services from LML Payment Systems is pleased to
accommodate this alliance.

On June 16, 2003 the Company announces a joint-service offering with
Moneris Solutions a comprehensive HIPAA-compliant solution for insurance
eligibility verification, electronic referrals and electronic claims transaction
processing. Moneris will integrate its bankcard platform with Medcom's POS
hardware and delivery will be provided by United Processing Corporation. Both
Moneris and United Processing Corporation are leaders in their respective
industries.

ADDITIONAL INFORMATION

The Company files reports and other materials with the Securities and
Exchange Commission. These documents may be inspected and copied at the
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.,
20549. You can obtain information on the operation of the Public Reference Room
by calling the Commission at 1-800-SEC-0330. You can also get copies of
documents that the Company files with the Commission through the Commission's
Internet site at www.sec.gov.
------------

ITEM 2. DESCRIPTION OF PROPERTY.

As of fiscal year end June 30, 2004, the Company maintains its corporate
executive offices in Scottsdale, Arizona. The Company leases 1,317 square feet
of office space for approximately $32,000 annually. The Company entered into a
three-year lease in May 2002 for the Scottsdale facility. The Company also
maintains an office in Irvine, California, for executive office space for
approximately $1,300 a month. The Company also leases 5,906 square feet of
office space in Islandia, New York, for approximately $104,389 annually; the
lease expires March 31, 2008.

As of fiscal year end June 30, 2004, the Company had 38 employees of which
approximately 37 are full-time equivalent employees.

ITEM 3. LEGAL PROCEEDINGS

Subsequent to June 30, 2001, several former employees filed complaints
against the Company alleging breach of employment agreements. The total known
claims being sought by the former employees at June 30, 2001 was approximately
$175,000. The Company believes that it has settled all former employee claims in
amounts aggregating to an amount approximating the accrued amount of $104,000. A
former officer has a claim remaining with the Company. The Company is attempting
to settle this claim. At June 30, 2004, there was $164,000 accrued relating to
this matter.

Several landlords are seeking damages from the Company due to the Company
defaulting on several lease agreements. Certain property management companies
have obtained legal judgments against the Company. The total amount of such
claims was $634,000. The Company and its legal counsel believe that ultimate
settlement will result in a much lower payout. The Company has accrued $208,000
associated with these claims at June 30, 2003. This amount was estimated on the
basis of advice from legal counsel whom has settled several similar suits.
However, the ultimate result of any settlement could vary significantly from
this estimate.

The Company had obligated shares of the Company's common stock and warrants
exercisable into common stock under numerous consulting and fund raising
agreements. Some such agreements obligated shares in cases of the occurrence of
substantial dilution or price drop in the trading value of the Company's common
stock. Management believes that it has fulfilled all such obligations. However,
the Company has received claims related to these matters. One such claim alleges
1,066,666 shares of the Company's common stock is owed. Management believes that
this claim has no merit.

The Company may be subject other unasserted claims associated with the
divesting of its unit operations. The Company is also involved in various claims
and legal actions arising in the ordinary course of business. In the opinion of
management, except as discussed above, the ultimate disposition of these matters
will not have a material adverse effect on the Company's financial position,
results of operations, or liquidity.

At June 30, 2004, there was approximately $372,000 estimated and accrued
for claims related to the litigation matters.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Company submitted no matters to a vote of its security holders during
the fiscal year ended June 30, 2004.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MedCom common stock is traded in the over-the-counter market, and quoted in
the National Association of Securities Dealers Inter-dealer Quotation System
("Electronic Bulletin Board) and can be accessed on the Internet at
www.otcbb.com under the symbol "EMED."
-------------

At June 30, 2004, there were 48,627,475 shares of common stock of MedCom
outstanding and there were approximately 546 shareholders of record of the
Company's common stock.

The following table sets forth for the periods indicated the high and low
bid quotations for MedCom's common stock. These quotations represent
inter-dealer quotations, without adjustment for retail markup, markdown or
commission and may not represent actual transactions.

FISCAL 2004 HIGH BID LOW BID
-------------------------------- --------- --------

Quarter Ended June 30, 2004 $ 2.70 $ 2.60

Quarter Ended March 31, 2004 2.85 2.65

Quarter Ended December 31, 2003 0.69 0.65

Quarter Ended September 30, 2003 0.78 0.66

FISCAL 2003 HIGH BID LOW BID
-------------------------------- --------- --------

Quarter Ended June 30, 2003 $ 1.05 $ 0.39

Quarter Ended March 31, 2003 0.50 0.14

Quarter Ended December 31, 2002 0.35 0.14

Quarter Ended September 30, 2002 0.35 0.19

MedCom has never paid dividends on any of its common stock shares. MedCom
does not anticipate paying dividends at any time in the foreseeable future and
any profits will be reinvested in MedCom's business. MedCom's Transfer Agent and
Registrar for the common stock is Corporate Stock Transfer located in Denver,
Colorado.

SALE OF UNREGISTERED SECURITIES

During the year ended June 30, 2004, the Company issued 7,144,973 shares of
its common stock for $5,877,106. Of that amount, 42,184 shares of the Company's
common stock were sold to an entity controlled by the Company's chief executive
officer and chairman. The remaining shares were issued to third parties in a
private placement of the Company's common stock. The shares were sold throughout
the year ended June 30, 2004, ranging from $0.50 per share at the beginning of
the year to $1.50 per share at the end of the year. Commissions of approximately
$426,000 are recorded as a charge in additional paid in capital as direct costs
associated with the raising of equity capital. In conjunction with the offering
of the common stock the Company issued and the investors received 1,332,199
warrants to purchase the Company's common stock. The warrants have exercise
prices ranging from $1.00 to $4.50 per share and expire three years from date of
issue.

The Company has issued shares of its common stock as consideration to
consultants for services rendered. The value of those shares is determined based
on the trading value of the stock at the dates on which the agreements were into
for the services. During the year ended June 30, 2004, the Company granted to
consultants, 910,000 shares of common stock valued in the aggregate at $567,800.
The value of these shares was expensed during the year.

During the year ended June 30, 2004, the Company settled a claim with an
investor. The investor had claimed that it was owed shares under the investment
agreement due to dilution of the stock price. The settlement required the
Company to issue an additional 298,866 shares of the Company's common stock to
the investor. The shares were valued at $657,505 on the basis of the trading
price on the date the settlement was entered into. In a separate settlement,
186,987 shares of the Company's stock was returned and placed in treasury. The
treasury shares are recorded at $0.20 per share, the trading price on the date
the settlement was entered into. The 186,987 shares remain as treasury stock at
June 30, 2004.

During the year ended June 30, 2004, the Company entered into an agreement
with a third party to sell 1,000,000 shares to the third party at $0.50 per
share. The shares were issued but the funds have not yet been received. The
transaction is reflected as a common stock subscription receivable of $500,000
at June 30, 2004.

An entity controlled by the Company's chief executive officer and chairman
advances funds to the Company to provide for short-term cash flow deficiencies.
During the year ended June 30, 2004, this affiliate converted advances of
$776,992 into 3,186,499 shares of the Company's common stock.

Common stock options for 508,941 shares were exercised during the year
ended June 30, 2004. A total of 607,800 options were exercised. Of that amount,
holders of 257,800 options performed a cashless exercise netting only 158,941
shares being issued in those exercises. The remaining 350,000 options were
exercised for cash of $296,984.

During the year ended June 30,2003, the Company issued 400,000 warrants at
a strike price of $0.50 as consideration to consultants for services to be
rendered. The value of these warrants was determined using the Black-Scholes
option pricing model and expensed when the warrants were granted.

STOCK SPLITS

Share data in this report have been adjusted to reflect the following stock
splits relating to the Company's common stock: June 1995: 2-for-1 forward split,
February 1996: 1-for-10 reverse split, February 1998: 1-for-4 reverse split, May
2001: 1-for-5 reverse split.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

Management's discussion and analysis contains statements that are
forward-looking and involve risks and uncertainties. Several factors could cause
actual results to differ materially from those described in such forward-looking
statements. This includes the Company's ability to manage growth, involvement in
litigation, competition in the health electronic transaction processing, ongoing
contractual relationships, dependence upon key personnel, changes in customer
demand for product and services, and the adoption of new, or changes in,
accounting policies, practices and estimates and the application of such
policies, practices, and estimates, and federal and state governmental
regulation, specifically in the areas of electronic transaction processing in
the health care industries.

The following financial data should be read in conjunction with the
consolidated financial statements of MedCom USA and related notes and other
financial information appearing elsewhere in this report.

Statement of Operations Data:
-------------------------------
Years Ended June 30,
--------------------------
2004 2003
------------ ------------

Revenues $ 3,029,875 $ 2,199,823
Cost of Sales and Services (458,656) (222,181)
Operating and other
Expenses (7,180,510) (5,701,779)
------------ ------------
Net Loss $(4,609,291) $(3,724,137)
============ ============

Balance Sheet Data:
--------------------
June 30,
--------------------------
2004 2003
------------ ------------

Current Assets $ 2,850,032 $ 443,222
Total Assets $ 7,466,668 $ 5,104,010
Current Liabilities $ 4,831,497 $ 4,706,744
Non-Current Liabilities $ 4,668,982 $ 5,960,775
Total Liabilities $ 9,500,479 $10,667,519
Working Capital (Deficit) $(1,981,465) $(4,263,522)
Shareholders' Equity (Deficit) $(2,033,811) $(5,563,509)

The Company has declared no common stock dividends since its inception.

FISCAL 2004 OPERATIONS
----------------------

General. As of June 30, 2004, the Company currently utilizes the MedCard System
that is deployed through a processing terminal, PC software, or online
processing, and offers electronic transaction processing to the health care
industries. MedCom USA continues to focus on its primary operations and core
business in medical transaction processing.

YEAR ENDED JUNE 30, 2004
------------------------

RESULTS OF OPERATIONS

FISCAL YEAR END JUNE 30, 2004, COMPARED TO FISCAL YEAR END JUNE 30, 2003.

Revenues for Fiscal 2004 increased to $3,029,875 from $2,199,823 during
Fiscal 2003. This increase in revenue is directly the result of changes in the
Company's strategic direction in core operations. This included discontinuing
declining or unprofitable business sectors and officer and management changes.
The Company continues to aggressively pursue and devote its resources and focus
its direction in electronic transaction processing. The Company's agreement with
its credit facility in connection with the sale-leaseback transactions
therewith, the Company must defer revenue gains on the sale of the terminals.
Those gains are generally recognized over a period of 48-60 months.

Selling expenses for Fiscal 2004 decreased to $1,043,634 from $1,135,364
during Fiscal 2003. This decrease is primarily the result of marketing efforts
and includes commissions paid to internal sales personnel to market the
Company's products and services. The Company is currently assessing if it will
continue with its outside independent sales organizations.

General and administrative expenses for Fiscal 2004 increased to $3,488,632
from $2,623,642 during Fiscal 2003. This increase is attributed to the Company's
hiring of additional employees as growth has occurred in the area of providing
technical support for our products and services in relation to the increases in
sales.

Professional and consulting expenses for Fiscal 2004 increased to $745,348
from $253,155 during Fiscal 2003. These expenses primarily are the result of the
recognition of stock/warrants granted for various services to the Company. The
expense recognized is determined from the bid and ask price of the common stock
at the date of the transaction.

Interest expense for Fiscal 2004 increased to $887,921 from $438,099 for
Fiscal 2003. This increase is a result of increased sales volume and
sales-leaseback transactions with the Company's credit facility. Also, expenses
were incurred and paid on notes the Company has outstanding.

TRADE VENDOR OBLIGATIONS

The Company had in the past incurred obligations in many business segments
that had been sold or divested several years ago. The Company has accruals of
approximately $1,065,000 since those business units were divested. These
obligations were due to trade vendors and property management companies.
Management believes that the statute of limitations for collecting on these
obligations has expired. Subsequently, the Company has removed approximately
$870,000 of these obligations during the year ended June 30, 2004. The Company
will maintain approximately $195,000 in accruals for these vendor obligations.
Although the Company believes that the possibility is remote, vendors associated
with these written-off obligations may make a claim against the Company.

The loss for Fiscal 2004 was ($4,609,291) from ($3,724,137) for Fiscal
2003. Sales and marketing expenses along with interest expenses have increased
for Fiscal 2003. The Company has incurred these marketing and sales expenses in
relation to increased demand for the Company's products and services.

As of June 30, 2004, MedCom had a federal net operating loss carry forward
of $51,189,000 expiring 2011 to 2023. MedCom had a state net operating loss
carry forward of $29,603,000 expiring from 2005 to 2008.

LIQUIDITY AND CAPITAL RESOURCES

The Company's operating requirements have been funded primarily on its
capital sale- leaseback transactions, and sales of the Company's common stock.
During the year ended June 30, 2004, the Company's net proceeds from the capital
sales leaseback transactions was approximately $609,000 and proceeds from the
sale of common stock were approximately $5,877,000. The Company believes that
the cash flows from its monthly service and transaction fees are adequate to
repay the capital sale-leaseback operations.

Cash used in operating activities for Fiscal 2004 was ($5,088,511) compared
to ($3,303,080) for Fiscal 2003. The Company's focus on core operations will
result in lower accounts receivable and inventory levels. The Company receives
payments from customers automatically through electronic fund transfers.
Collection cycles are generally less than thirty days.

Cash used in investing activities was ($1,662,735) for Fiscal 2004,
compared to cash used in investing activities of ($754,489) for Fiscal 2003.
Streamlining operations and capital budget curtailment practices promoted a
reduction in equipment purchases for the Company.

Cash provided by financing activities was $6,783,407 in Fiscal 2004,
compared to $2,575,623 for Fiscal 2003. Financing activities primarily consisted
of proceeds from the sale-leaseback transactions during the fiscal period.

The Company has advanced funds to an affiliated entity that is controlled
by the Company's chairman and chief executive officer. As of June 30, 2004 the
Company maintains an account receivable from this entity for the amount of
$1,420,229 including accrued interest.

The Company is delinquent on operating lease obligations; as well as
obligations to other creditors as of June 30, 2004. The Company is attempting to
settle or make counter claims for these creditors. There can be no assurances
that the Company will be successful in negotiating settlements and preventing
creditors from filing claims.

OTHER CONSIDERATIONS

There are numerous factors that affect the business and the results of its
operations. Sources of these factors include general economic and business
conditions, federal and state regulation of business activities, the level of
demand for product services, the level and intensity of competition in the
healthcare electronic transaction processing industry, and the ability to
develop new services based on new or evolving technology and the market's
acceptance of those new services, the Company's ability to timely and
effectively manage periodic product transitions, the services, customer and
geographic sales mix of any particular period, and our ability to continue to
improve our infrastructure including personnel and systems to keep pace with the
Company's anticipated rapid growth.

ITEM 7. FINANCIAL STATEMENTS

MEDCOM USA, INC.

TABLE OF CONTENTS PAGE
----------------- ----

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: F-2
Epstein, Weber & Conover, PLC

CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet at June 30, 2004 F-3

Consolidated Statements of Operations for the years ended
June 30, 2004 and 2003 F-4

Consolidated Statements of Stockholders' Equity for the years ended
June 30, 2004 and 2003 F-5

Consolidated Statements of Cash Flows for the years ended
June 30, 2004 and 2003 F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------

To the Stockholders and Board of Directors of
MedCom USA, Inc.:

We have audited the accompanying consolidated balance sheet of MedCom USA, Inc.
as of June 30, 2004 and the related statements of operations, stockholders'
equity and cash flows for the each of the two years in the period then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Standards Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MedCom USA, Inc. as of June 30,
2004, and the results of its operations and cash flows for each of the two years
in the period ended June 30, 2004, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company continues to incur
significant operating losses. The Company has begun to generate revenue from
its electronic transaction business but has continued to incur material
obligations under sale-leaseback transactions. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans with regard to these matters are discussed in Note 1. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.

/s/ Epstein, Weber & Conover, PLC
Scottsdale, Arizona
September 9, 2004

F-2

MEDCOM USA, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
--------------------------------------------------------------------------------------

ASSETS
CURRENT ASSETS

Cash $ 86,621
Accounts receivable, net of allowance of $24,742 283,303
Advances receivable - affiliate 1,420,229
Inventories 970,656
Prepaid expenses and other current assets 89,223
-------------
Total current assets 2,850,032

PROPERTY AND EQUIPMENT, net 339,569

PROCESSING TERMINALS, net 3,822,987

GOODWILL, net of accumulated amortization of $322,575 436,423

OTHER ASSETS 17,657
-------------
TOTAL ASSETS $ 7,466,668
=============

LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 343,425
Accrued expenses and other liabilities 586,606
Reserve sales returns 40,270
Deferred revenue 2,163,188
Dividend payable 23,750
Notes payable - current portion 109,437
Capital lease obligations - current portion 1,564,821
-------------
Total current liabilities 4,831,497

CAPITAL LEASE OBLIGATIONS - long-term portion 3,536,560
DEFERRED REVENUE - long-term portion 1,132,422
-------------
Total liabilities 9,500,479
-------------

STOCKHOLDERS' DEFICIT:
Convertible preferred stock, Series A $.001par value, 52,900 shares
designated, 4,250 issued and outstanding 4
Convertible preferred stock, Series D $.01par value, 50,000 shares
designated, 2,850 issued and outstanding 29
Common stock, $.0001 par value, 80,000,000 shares authorized,
50,029,144 issued, 49,842,157 outstanding 5,004
Subscriptions receivable (500,000)
Treasury Stock (37,397)
Paid in capital 71,953,268
Accumulated deficit (73,454,719)
-------------
Total stockholders' deficit (2,033,811)
-------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 7,466,668
=============

The accompanying notes are an integral part of these consolidated financial
statements.

F-3

MEDCOM USA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2004 AND JUNE 30, 2003
-----------------------------------------------------------------------
2004 2003
------------ ------------
REVENUES:

Terminal sales $ 636,075 $ 769,883
Service 1,344,276 905,142
Equipment lease income 1,049,524 524,798
------------ ------------
3,029,875 2,199,823
COST OF SALES AND SERVICE 458,656 222,181
------------ ------------
GROSS PROFIT 2,571,219 1,977,642
------------ ------------

OPERATING EXPENSES:
General and administrative expenses 3,488,632 2,623,642
Sales and marketing expenses 1,043,634 1,135,364
Royalties 89,127 282,056
Professional and consulting fees 745,348 253,155
Depreciation and amortization 1,453,089 969,463
------------ ------------
Total operating expenses 6,819,830 5,263,680
------------ ------------
OPERATING LOSS (4,248,611) (3,286,038)
------------ ------------

OTHER (INCOME) AND EXPENSES
Interest expense 887,921 438,099
Other income (527,241)
------------ ------------
Total other expense 360,680 438,099
------------ ------------
LOSS BEFORE INCOME TAXES (4,609,291) (3,724,137)

INCOME TAX (BENEFIT) PROVISION - -
------------ ------------

NET LOSS $(4,609,291) $(3,724,137)
============ ============

NET LOSS PER SHARE:
Basic: $ (0.11) $ (0.10)
============ ============

Diluted: $ (0.11) $ (0.10)
============ ============

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 41,167,477 36,954,659
============ ============

Diluted 41,167,477 36,954,659
============ ============

The accompanying notes are an integral part of these consolidated financial
statements.

F-4

MEDCOM USA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
---------------------------------------------------------------------------------------------------------------

\ ----------- PREFERED STOCK -----------\

COMMON STOCK PREFERRED A & B PREFERRED C PREFERRED D PAID-IN TREASURY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK
---------- ------- ------ ------- ------ ------- ------ ------- ----------- ------

BALANCE JULY 1, 2002 36,879,865 $ 3,688 4,250 $ 4 - $ - 2,850 $ 29 $63,103,597 $ -

Common stock issued
to settle claims 100,000 10 23,990

Imputed value of
warrants issued to consultant 150,600
for services to be rendered

Net loss
---------- ------- ------ ------- ------ ------- ------ ------- ----------- ------
BALANCE
JUNE 30, 2003 36,979,865 $ 3,698 4,250 $ 4 - $ - 2,850 $ 29 $63,278,187 $ -
========== ======= ====== ======= ====== ======= ====== ======= =========== ======

SUBSCRIPTION ACCUMULATED
RECEIVABLE DEFICIT TOTAL
----------- ------------- ------------

BALANCE JULY 1, 2002 $ - $(65,121,291) $(2,013,973)

Common stock issued 24,000
to settle claims

Imputed value of
warrants issued to consultant 150,600
for services to be rendered

Net loss (3,724,137) (3,724,137)
----------- ------------- ------------
BALANCE
JUNE 30, 2003 $ - $(68,845,428) $(5,563,510)
=========== ============= ============

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

MEDCOM USA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 (CONTINUED)
---------------------------------------------------------------------------------------------------------------

\ ----------- PREFERED STOCK -----------\
COMMON STOCK PREFERRED A & B PREFERRED C PREFERRED D PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------- ------ ------- ------ ------- ------ ------- -----------

BALANCE JULY 1, 2003 36,979,865 $ 3,698 4,250 $ 4 - $ - 2,850 $ 29 $63,278,187

Common stock issued for cash 7,144,973 714 5,876,392

Common stock issued to settle claims 298,866 30 657,475

Common stock subscribed 1,000,000 100 499,900

Conversion of affiliate note payable 3,186,499 319 776,673

Exercise of stock options 508,941 51 296,933

Treasury shares taken in settlement

Common stock granted as
consdieration for services 910,000 91 567,709

Net loss
---------- ------- ------ ------- ------ ------- ------ ------- -----------
BALANCE
JUNE 30, 2004 50,029,144 $ 5,003 4,250 $ 4 - $ - 2,850 $ 29 $71,953,269
========== ======= ====== ======= ====== ======= ====== ======= ===========

TREASURY SUBSCIRPTION ACCUMULATED
STOCK RECEIVABLE DEFICIT TOTAL
--------- ------------ ------------- ------------

BALANCE JULY 1, 2003 $ - $ - $(68,845,428) $(5,563,510)

Common stock issued for cash 5,877,106

Common stock issued to settle claims 657,505

Common stock subscribed (500,000) -

Conversion of affiliate note payable 776,992

Exercise of stock options 296,984

Treasury shares taken in settlement (37,397) (37,397)

Common stock granted as
consdieration for services 567,800

Net loss (4,609,291) (4,609,291)
--------- ------------ ------------- ------------
BALANCE
JUNE 30, 2004 $(37,397) $ (500,000) $(73,454,719) $(2,033,811)
========= ============ ============= ============

The accompanying notes are an integral part of these consolidated financial
statements.

F-5 (Continued)

MEDCOM USA, INC.
STATEMENT OF CASH FLOWS FOR THE
YEARS ENDED JUNE 30, 2004 AND 2003
------------------------------------------------------------------------------------------
2004 2003
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) $(4,609,291) $(3,724,137)
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 1,453,088 969,463
Issuance of warrants as consideration for services - 150,600
Issuance of common stock as compensation for services 567,800 -
Issuance of common stock for settlement of claims 657,505 24,000
Gain on write-off of obligations (870,110) -
Treasury stock taken in settlement of claims (37,397) -
Allowance for sales returns 40,270 -
Changes in assets and liabilities:
Trade accounts receivable (93,690) (148,309)
Inventories (157,356) (687,275)
Prepaid and other current assets (86,096) 825
Accounts payable (145,515) 240,470
Accrued liabilities (758,195) 396,081
Deferred revenue (1,049,524) (524,798)
------------ ------------
Net cash (used in) operating activities (5,088,511) (3,303,080)
------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (34,351) -
Purchases of software upgrades (208,155) (105,819)
Advances from/to affiliates (1,420,229) 860,308
------------ ------------
Net cash (used in) provided by investing activities (1,662,735) 754,489
------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on capital leases (1,200,996) (607,988)
Proceeds from sale of common stock 5,877,106 -
Proceeds from options exercised 296,984 -
Proceeds from capital sale-leaseback transactions 1,810,313 3,183,611
------------ ------------
Net cash provided by financing activities 6,783,407 2,575,623
------------ ------------

INCREASE IN CASH 32,161 27,032
CASH, BEGINNING OF YEAR 54,460 27,428
------------ ------------
CASH, END OF YEAR $ 86,621 $ 54,460
============ ============

The accompanying notes are an integral part of these consolidated financial
statements.

F-6

MEDCOM USA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS, (CONTINUED)
FOR THE YEAR ENDED JUNE 30, 2004 AND 2003
-------------------------------------------------

SUPPLEMENTAL CASH FLOW INFORMATION: 2004 2003
---------- ----------

Interest paid $ 892,935 $ 411,984
========== ==========
Income taxes paid $ -0- $ -0-
========== ==========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Terminals capitalized under sales/leaseback transactions $2,086,489 $3,612,057
========== ==========

Extinguishment of note payable obligations to affiliate by
conversion to common stock $ 776,992 $ -0-
========== ==========

Exercise of employee options through cashless transactions $ 121,166 $ -0-
========== ==========

Terminals returned and placed back into inventory at net
Capitalized cost $ 920,060 $ -0-
========== ==========

Terminals returned/leases assumed by Company $ 149,950 $ -0-
========== ==========

The accompanying notes are an integral part of these consolidated financial
statements.

F-6 (Continued)

MEDCOM USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2004
--------------------------------------------------------------------------------

1. ORGANIZATION AND BASIS OF PRESENTATION

MedCom USA, Inc. (the "Company"), formally Sims Communications, Inc.,
provides point-of-sale transaction terminals and personal computer based
software to perform medical insurance eligibility verification, claims
processing, and credit card/ATM charges and payments. The Company's
customers are health care providers, primarily physicians' offices
throughout the United States.

The accompanying financial statements represent the consolidated financial
position and results of operations of the Company and includes the accounts
and results of operations of the Company and its wholly owned subsidiaries.
The accompanying financial statements include only the active entity of
MedCom USA, Inc., The Company has several inactive subsidiaries.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company continues to incur
material operating losses and has failed to generate positive cash flow
from operations. The Company has a working capital deficit of $1,981,465 at
June 30, 2004. The Company has generated cash flow through sale-leaseback
financing transactions to fund its operations. Management believes that the
Company has begun to generate a level of volume in the sales and service
contracts of its processing terminals that will allow the Company to meet
operating cash flow requirements. The Company has recently changed some of
its operations that may allow the Company to better manage cash flows.

The Company has begun to experience increased sales of its MedCard System
and has generated cash through the use of sale-leaseback transactions
connected to the sales of the terminals for the MedCard System. Management
is attempting to attain a sustaining level of operating cash flow from the
Company's MedCard operations. The Company has raised additional equity
capital in the year ended June 30, 2004 and may attempt to raise additional
capital to grow the MedCard operations and to fund inventory and receivable
growth.

Cash reserves and working capital at June 30, 2004 were insufficient to
fund currently due obligations. As discussed above, the Company is
generating cash flow from sales activities and sale-leaseback transactions.
Such cash flow is only recently provided some evidence that it is
sufficient to cover current operating expenses. However, this level of cash
flow does not permit the Company to retire many older debts or expand its
operations. The Company believes that it needs additional cash, either from
outside financing or expanded sales activities, in order to retire past due
debts and significantly expand the Company's operations. If the Company is
unable to produce sales as planned and/or raise additional investment
capital to fully implement its business plan, it may jeopardize the ability
of the Company to continue as a going concern.

F-7

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash includes all short-term highly liquid investments that are readily
----
convertible to known amounts of cash and have original maturities of three
months or less. Net bank overdrafts are recorded as current liabilities.

Principles of Consolidation: The consolidated financial statements include
---------------------------
the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions are eliminated.

Inventories consist primarily point-of sale ("POS") terminals and spare
-----------
parts that are held for sale. Inventories are recorded at the lower of cost
or market on a first-in, first-out basis. POS terminals that are returned
by customers and are held for resale are recorded at the carrying value of
the terminal, which is the capitalized cost of the underlying
sale-leaseback transaction, net of accumulated amortization.

----------------------------------------
Property and Equipment and Terminals is stated at cost less accumulated
depreciation. Depreciation is recorded on a straight-line basis over the
estimated useful lives of the assets ranging from 3 to 5 years. Terminals
are recorded at the capitalized cost of the underlying sale-leaseback
transactions. Depreciation expense for the years ended June 30, 2004 and
2003 was $1,450,731 and $969,463, respectively.

Revenue Recognition - The Company's revenue is generated by the sale of POS
-------------------
terminals and transaction fees generated through those terminals. Revenue
from the sale of POS terminals is recognized when delivered to the customer
and installed. Customers also may rent terminals without purchasing them
directly. Rental income is recorded monthly as customers utilize the
terminals. Transactions fees are recognized upon completion of the
transaction processing. Sales commissions are determined on the basis of
the total contract value and are payable and expensed when the terminal is
installed.

Gains are deferred on sale-leaseback transactions of terminals and are
amortized in proportion to the amortization of the leased terminals,
generally over the term of the related capital leases.

Customers may return terminals under certain terms outlined in the rental
agreements. Generally, customer returns do not affect previously recognized
revenue in that rental/service and transaction fee income is recognized as
the customer utilizes the terminal. When a customer terminates service, the
billing process ceases and the terminals are returned and placed into
inventory.

Income Taxes - The Company provides for income taxes based on the
------------
provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, which, among other things, requires that
recognition of deferred income taxes be measured by the provisions of
enacted tax laws in effect at the date of financial statements.

Financial Instruments - Financial instruments consist primarily of accounts
---------------------
receivable, and obligations under accounts payable, accrued expenses,
capital lease obligations and notes

F-8

payable. The carrying amounts of accounts receivable, accounts payable,
accrued expenses and notes payable approximate fair value because of the
short maturity of those instruments. The carrying value of the Company's
capital lease arrangements approximates fair value because the instruments
were valued at the retail cost of the equipment at the time the Company
entered into the arrangements.

The Company has applied certain assumptions in estimating these fair
values. The use of different assumptions or methodologies may have a
material effect on the estimates of fair values.

Net Loss Per Share is calculated using the weighted average number of
------------------
shares of common stock outstanding during the year. The Company has adopted
the provisions of SFAS No. 128 Earnings Per Share.

Use of Estimates- The preparation of financial statements in conformity
----------------
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.

Stock-Based Compensation - Statements of Financial Accounting Standards No.
------------------------
123, Accounting for Stock-Based Compensation, ("SFAS 123") established
accounting and disclosure requirements using a fair-value based method of
accounting for stock-based employee compensation. In accordance with SFAS
123, the Company has elected to continue accounting for stock based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."

From time to time, the Company issues stock options to executives, key
employees and members of the Board of Directors. Generally, when the
Company grants stock options to employees, there is no intrinsic value of
those options on the date of grant. Accordingly, no compensation cost has
been recognized for stock options granted to employees. There were no
options granted in the year ended June 30, 2004 and 400,000 options were
granted in the year ended June 30, 2003. There was no additional vesting of
options previously granted.

The fair values of the options granted in the year end June 30, 2003, were
estimated at the date of grant using the Black-Scholes option-pricing model
with the following assumptions:

Dividend yield None
Volatility 1.56
Risk free interest rate 4.18%
Expected asset life 5 years

Had compensation cost for the Company's stock options been determined based
on the fair value at the grant date for awards in 2003, consistent with the
provisions of SFAS No. 123, the Company's net loss and loss per share would
have been increased to the pro forma amounts indicated below:

F-9

2004 2003
------------ ------------

Net Loss - continuing operations $(4,609,291) $(3,724,137)
Net Loss - discontinued operations - -
------------ ------------
Total net loss - as reported $(4,609,291) $(3,724,137)

Pro-forma effect of stock based compensation $ - $ (150,600)
------------ ------------

Net Loss - pro forma $(4,609,291) $(3,874,737)
============ ============

Loss per share - continuing operations $ (0.11) $ (0.10)
Loss per share - discontinued operations $ - $ -
------------ ------------
Total loss per share - as reported $ (0.11) $ (0.10)

Pro-forma effect of stock based compensation $ - $ -
------------ ------------

Loss per share - pro forma $ (0.11) $ (0.10)
============ ============

The Company accounts for stock awards issued to nonemployees in accordance
with the provisions of SFAS 123 and Emerging Issues Task Force ("EITF")
Issue No. 96-18 Accounting for Equity Instruments that are Issued to Other
Than Employees for Aquiring, or in Conjunction with Selling Goods or
Services. Under SFAS 123 and EITF 96-18, stock awards to nonemployees are
accounted for at their fair value as determined under Black-Scholes option
pricing model.

Intangible Assets at June 30, 2004 consist of goodwill associated with the
-----------------
Company's acquisition of MedCard for the difference between the purchase
price of the acquired business and the fair value of the identifiable net
assets. Medcard is the only remaining operating subsidiary. The Company
adopted Statement of Financial Accounting Standard ("SFAS") No. 142,
Goodwill and Other Intangible Assets, effective July 1, 2002. As a result,
the Company discontinued amortization of goodwill, and instead annually
evaluates the carrying value of goodwill for impairment, in accordance with
the provisions of SFAS No. 142. The Company believes that there has been no
impairment of the carrying value of goodwill of $436,423 as of June 30,
2004.

Goodwill had been amortized over 5 years. Had the Company amortized
goodwill in the year ended June 30, 2004, the related amortization expense
would have been $151,800.

Research and Development costs are expensed as incurred.
------------------------

Impairment of Long-Lived Assets is assessed by the Company for impairment
-------------------------------
whenever there is an indication that the carrying amount of the asset may
not be recoverable. Recoverability of these assets is determined by
comparing the forecasted undiscounted cash flows generated by those assets
to the assets' net carrying value. The amount of impairment loss, if any,
is measured as the difference between the net book value of the assets and
the estimated fair value of the related assets.

F-10

Recently Issued Accounting Pronouncements: In December 2002, the FASB
-----------------------------------------
issued SFAS No. 148, Accounting for Stock-Based Compensation - Transaction
and Disclosure, which provides alternative methods of transition for a
voluntary change to fair value based method of accounting for stock-based
employee compensation as prescribed in SFAS 123, Accounting for Stock-Based
Compensation. Additionally, SFAS No. 148 requires more prominent and more
frequent disclosures in financial statements about the effects of
stock-based compensation. The provisions of this statement are effective
for fiscal years ending after December 15, 2002, with early application
permitted in certain circumstances. The Company presently does not intend
to adopt the fair value based method of accounting for its stock based
compensation.

In June 2003 the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
SFAS No. 150 requires certain instruments, including mandatorily redeemable
shares, to be classified as liabilities, not as part of shareholders'
equity or redeemable equity. For instruments that are entered into or
modified after May 31, 2003, SFAS No. 150 is effective immediately upon
entering the transaction or modifying the terms. For other instruments
covered by Statement 150 that were entered into before June 1, 2003,
Statement 150 is effective for the first interim period beginning after
June 15, 2003. The Company has evaluated the provisions of SFAS No. 150 and
implementation of such was not material.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others. FIN 45 requires a
company, at the time it issues a guarantee, to recognize an initial
liability for the fair value of obligations assumed under the guarantees
and elaborates on existing disclosure requirements related to guarantees
and warranties. The initial recognition requirements are effective for the
Company during the third quarter ending March 31, 2003. The adoption of FIN
45 did not have an impact on the Company's financial position or results of
operations.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51. FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 is effective for all new variable interest entities created
or acquired after January 31, 2003. For variable interest entities created
or acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after June 15,
2003. The adoption of FIN 46 did not have an impact on the Company's
financial position or results of operations.

3. ACCOUNTS RECEIVABLE

The Company's accounts receivable at June 30, 2004 consisted of:

Medcard trade accounts receivable $ 275,420
Other 32,625
----------
Total 308,045
Less: Allowance for doubtful accounts ( 24,742)
----------
$ 283,303
==========

F-11

The Company estimates uncollectible account balances and provides an
allowance for such estimates. The allowance for doubtful accounts at June
30, 2004, consists of an estimate for potentially uncollectible accounts in
the MedCard division.

4. GAIN ON WRITE-OFF OF OLD TRADE VENDOR OBLIGATIONS

The Company had incurred material unpaid obligations in many business
segments that had been sold or abandoned several years ago. The Company has
retained accruals of approximately $1,065,000 since those business units
were divested. The Company attempted to pay numerous of these obligations.
Most of the obligations were due to trade vendors and landlords. Many of
these creditors ceased collection efforts several years ago and the Company
has not had communications with theses creditors since then. Upon being
advised by legal counsel, management believes that the statute of
limitations for collecting on these obligations has expired. On that
premise, the Company removed approximately $870,000 of these obligations
during the year ended June 30, 2004. The $870,000 gain is included in other
income in the accompanying statement of operations for the year ended June
30, 2004.

5. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at June 30, 2004:

Software 936,479
Software upgrades 307,554
Office and computer equipment 235,613
Furnishings and fixtures 128,933
Leasehold improvements 4,439
------------
Total 1,613,018
Less accumulated depreciation (1,273,449)
------------
Property and equipment, net $ 339,569
============

Software represents the cost of software acquired for the operation of the
Company's MedCard System. The capitalized cost of the software is amortized
on a straight-line basis over five years. Additional costs capitalized as
software development during the years ended June 30, 2004 and 2003 were
$208,155 and $105,819, respectively. These upgrades are amortized on a
straight-line basis over three years.

6. TERMINALS

The Company capitalizes the value of the point of sale terminals that are
sold under capital

F-12

sale-leaseback transactions (Note 8). The terminals are purchased from
third party vendors and are recorded as inventory at that time. The Company
enters into sale and service agreements with its customers at which time
the terminal is programmed with the Company's proprietary software and
installed with the customer. Many of those terminals are the basis for the
sale-leaseback transactions discussed in Note 8. The terminals are
capitalized at the value determined by the lessor on the basis of the cash
flow under the terms of the sale and service agreements with the customers.

Terminals $ 5,884,507
Less accumulated amortization (2,061,520)
------------
Terminals, net $ 3,822,987
============

7. NOTES PAYABLE

Notes payable at June 30, 2004 comprise the following:

Convertible note payable to individual. The note
bears interest at 8% per annum and is payable
quarterly. The note is convertible to common
stock at $6.25 per share. The note had an original
maturity date of February 1998 and is currently in
default. $ 25,000

Note payable to landlord. Collateralized by
leasehold improvements. Original principal
balance of $95,000. The note bears interest at 9%
per annum and requires monthly principal and
interest payments of $1,999. The Company has
defaulted on the note, and the landlord has
obtained a judgment which is being appealed.
84,437
--------
Totals $109,437
========

Both of the notes payable are in default as of June 30, 2004. A former
landlord has obtained a court ordered judgment against the Company for the
past due note, unpaid rent and legal fees. The Company is attempting to
renegotiate and settle this obligation.

8. CAPITAL LEASE OBLIGATIONS AND SALE-LEASEBACK TRANSACTIONS

The Company leases many of its MedCard terminals under capital lease
agreements.

The Company has entered into an arrangement with a third party lessor
whereby the Company sells its terminals that are placed with customers to
the lessor. The lessor in turn

F-13

leases back the terminals. These transactions are recorded as
sale-leaseback transactions. The leases between the Company and the lessor
are accounted for as capital leases. The Company generates revenue from the
terminals through monthly service and rental fees and transaction fees. The
value of the sale transaction between the Company and lessor is determined
by Company's agreement with the customer relative to the number of
terminals, length of the customer contract and monthly service fee due from
the customer. The Company acquires terminals from its suppliers, programs
the terminals with its software and sells the terminals to the lessor when
it enters into an agreement with a customer for those specific terminals.
Any gain on the sale transaction with the lessor is deferred and amortized
proportionately with the capitalized asset. That period is generally four
or five years, the typical length of the lease agreement. At June 30, 2004,
the amount of deferred gain on sale-leaseback transactions was $3,295,610.

Generally, the terms of repayment for the capital lease obligations
approximates the monthly rental charged the customer by the Company. These
leases are collateralized by the underlying equipment, contract with the
customer and, in addition, 1,000,000 shares of the Company's common stock.
The projected cash flow from the customer contract is generally greater
than the payments required under the capital lease arrangement with the
customer. There have been occurrences when customers terminate a contract
and the terminals are returned to the Company. The Company will have the
opportunity to resell that unit under a new contract. The Company may also
obtain a new capital lease through a sale leaseback transaction with the
lessor. Therefore, there may be more than a single capital lease obligation
to repay although there is only a single customer contract. The Company
believes that it generates sufficient cash flows from direct sales and
service revenue to cover such variances in capital lease obligations to
customer contracts.

The following presents future minimum lease payments under the capital
leases by year and the present value of minimum lease payments as of June
30, 2004:

Years ended June 30:

Terminals
------------

2005 $ 2,074,068
2006 2,166,649
2007 1,395,614
2008 892,629
2009 196,657
------------
Total minimum lease payments 6,725,617
Lees: amount representing interest (1,624,236)
------------
Present value of minimum
lease payments $ 5,101,381
============

F-14

The capitalized cost of terminals under capital leases for the year ended
June 30, 2004 and 2003 was $5,884,507 and $4,720,435 respectively. The
related accumulated amortization on these assets was $2,061,520 and
$782,383 as of June 30, 2004 and 2003, respectively.

9. INCOME TAXES

The Company recognizes deferred income taxes for the differences between
financial accounting and tax bases of assets and liabilities. Income taxes
for the years ended June 30, consisted of the following:

2004 2003
------------ ------------

Current tax (benefit) provision $(1,642,362) $(1,590,930)
Deferred tax (benefit) provision 1,642,362 1,590,930
------------ ------------
Total income tax provision $ - 0 $ - 0 -
============ ============

Net deferred tax assets of $22,552,435 were fully offset by an equal
valuation allowance at June 30, 2004. The deferred income tax assets relate
primarily to net operating loss carryforwards and differences in book and
tax bases of property and equipment, intangible assets and certain
accruals. The net deferred income tax asset at June 30, 2004 is comprised
of:

Allowance for losses on accounts receivable $ 9,897
Deferred compensation 78,844
Contingency 160,195
Deferred revenue 1,318,244
Property and equipment 84,629
Impairment of intangible assets 1,720,060
Net operating loss carryforwards 19,180,566
-------------
Deferred income tax asset 22,552,435
Less: valuation allowance (22,552,435)
-------------
Total deferred income tax asset - 0 -

Deferred income tax liability (- 0 -)
-------------

Net deferred income tax asset $ - 0 -
=============

Federal net operating loss carryforwards of $51,189,000 expire from 2011 to
2023. State net operating loss carryforwards of $29,603,000 expire from
2005 to 2008. During the year ended June 30, 2004, the Company reduced the
deferred income tax asset related to net operating loss carryforwards by
$3,484,000 resulting from the expiration of such carryforwards. Due to the
conditions discussed in Note 1, future utilization of the net operating
losses is uncertain. The valuation allowance on the deferred income tax
asset was decreased by $1,648,702 in the year ended June 30, 2004,
resulting primarily to the expiration of net operating loss carryforwards.

F-15

The differences between the statutory and effective tax rates is as follows
for the years ended June 30:

2004 2003
---- -----

Federal statutory rates $(1,563,141) (34)% $(1,266,207) (34)%
State income taxes (275,848) (6)% (223,448) (6)%
Valuation allowance for
operating loss carryforwards (1,648,702) (36)% 1,471,014 39%
Reduction of deferred income
tax assets for expiration of net
operating loss carryforwards 3,484,212 76%
Other 3,479 -% 18,641 1%
----------------------------------------
Effective rate $ ( - 0 -) 0% $ ( - 0 -) 0%
========================================

10. OPERATING LEASES

The Company leases its office space under long-term operating leases
expiring through 2008. Rent expense under these leases was $154,238and
$140,481for the years ended June 30, 2004 and 2003, respectively.

Future minimum annual lease payments and sublease rentals under operating
lease agreements for years ended June 30:

2005 158,750
2006 132,914
2007 130,566
2008 100,773
-------
523,003
=======

11. STOCKHOLDERS' EQUITY

During the year ended June 30, 2004, the Company issued 7,144,973 shares of
its common stock for $5,877,106. Of that amount, 42,184shares of the
Company's common stock were sold to an entity controlled by the Company's
president and chairman. The balance of the shares were issued to third
parties in a private placement of the Company's common stock. The shares
were sold throughout the year ended June 30, 2004, ranging from $0.50 per
share at the beginning of the year to $1.50 per share at the end of the
year. Commissions of approximately $426,000 are recorded as a charge in
additional paid in capital as direct costs associated with the raising of
equity capital. In conjunction with the offering of the common stock the
Company issued and the investors received 1,332,199 warrants to purchase
the Company's common stock. The warrants have exercise prices ranging from
$1.00 to $4.50 per share and expire three years from date of issue.

The Company has issued shares of its common stock as consideration to
consultants for services rendered. The value of those shares is determined
based on the trading value of the

F-16

stock at the dates on which the agreements were into for the services.
During the year ended June 30, 2004, the Company granted to consultants,
910,000 shares of common stock valued in the aggregate at $567,800. The
value of these shares was expensed during the year.

During the year ended June 30, 2004, the Company settled a claim with an
investor. The investor had claimed that it was owed shares under the
investment agreement due to substantial dilution and erosion of the stock
price. The settlement required the Company to issue an additional 298,866
shares of the Company's common stock to the investor. The shares were
valued at $657,505 on the basis of the trading price on the date the
settlement was entered into. In a separate settlement, 186,987 shares of
the Company's stock was returned and placed in treasury. The treasury
shares are recorded at $0.20 per share, the trading price on the date the
settlement was entered into. The 186,987 shares remain as treasury stock at
June 30, 2004.

An entity controlled by the Company's president and chairman regularly
advances funds to the Company to cover short-term cash flow deficiencies.
During the year ended June 30, 2004, this affiliate converted advances of
$776,992 into 3,186,499 shares of the Company's common stock.

Common stock options for 508,941 shares were exercised during the year
ended June 30, 2004. A total of 607,800 options were exercised. Of that
amount, holders of 257,800 options performed a cashless exercise netting
only 158,941 shares being issued in those exercises. The balance of 350,000
options were exercised for cash of $296,984.

During the year ended June 30,2003, the Company issued 400,000 warrants at
a strike price of $0.50 as consideration to consultants for services to be
rendered. The value of these warrants was determined using the
Black-Scholes option pricing model and expensed when the warrants were
granted.

Preferred Stock

The Company is authorized to issue up to 300,000 shares of $.001 par value
Preferred Stock. The Board of Directors has the authority to divide the
Preferred Stock into series and, within the certain limitations, to set the
relevant terms of such series created.

In April 1995, the Company established the Series A Preferred Stock and
authorized the issuance of up to 50,000 shares. Each share of series A
Preferred Stock is entitled to a dividend at the rate of $1.60 per share
when, and if declared by the Board of Directors. Dividends not declared are
not cumulative. Additionally, each share of Series A Preferred Stock is
convertible into .20 shares of the Company's Common Stock at any time after
July 1, 1999. A total of 850 shares of common stock may be issued upon the
conversion of the

F-17

shares of Series A preferred stock outstanding as of June 30, 2000. Upon
any liquidation or dissolution of the Company, each outstanding share of
Series A Preferred Stock is entitled to distribution of $20 per share prior
to any distribution to the holders of the Company's common stock. As of
June 30, 2000, the Company has 4,250 shares of Series A Preferred Stock
issued and outstanding.

In April 2000, the Company established the Series D Preferred stock and
authorized the issuance of up to 2,900 shares. The Company issued 494
shares related to a business acquisition of and 2,356 shares for the
acquisition of related intellectual property.

Each share of Series D preferred stock is entitled to a dividend at the
rate of $0.04 per share and has a stated value of $1,000 per share.
Dividends on all Series D preferred stock begin to accrue and accumulate
from the date of issuance. Additionally, each share of Series D preferred
stock is convertible into 40.49 shares of common stock for a total of
576,923 shares at the option of the stockholders. Upon liquidation or
dissolution of the Company, each outstanding share of Series D preferred
stock is entitled to a distribution of the stated amount per share prior to
any distribution to the shareholders of the Company's common stock. The
Company can convert the Series D preferred stock into shares of common
stock using the same conversion ratio at any time after April 15, 2001 so
long as the bid price of the Company's common stock exceeds $4.94 per share
and the shares of common stock issuable upon the conversion of the Series D
preferred stock are either covered by an effective registration statement
or are eligible for sale pursuant to rule 144 of the Securities and
Exchange Commission. Each share of Series D preferred stock is entitled to
vote in all matters submitted to the Company's shareholders on an "as
converted" basis.

The Company has not declared its dividend on the preferred stock for the
years ended June 30, 2004 and 2003. At June 30, 2004, there was an
accumulated undeclared and unpaid dividend on the Series D preferred stock
of $342,000. Total accrued, but unpaid dividends related to the Series D
preferred stock was $23,750 at June 30, 2004.

Common stock warrants issued in the year ended June 30, 2004 consist of the
following:

Number of Exercise
Warrants Price
--------- ---------

678,400 $ 1.00
390,400 $ 2.75
94,400 $ 3.00
148,999 $ 4.00
20,000 $ 4.50
---------
1,332,199
=========

12. COMMITMENTS AND CONTINGENCIES

Employment Agreements

The Company has entered into numerous employment agreements with officers
and key

F-18

employees. Generally, the employment agreements are for three-year periods
and include, as potential additional compensation, incentive bonuses
computed based upon Company's operations and other benefits, including such
items as an automobile allowance, health and life insurance, vacation and
sick pay benefits. In June 2000, the Company entered into employment
agreements with several officers. These agreements were renegotiated in the
year ended June 30, 2002. Total aggregate annual compensation under these
agreements is $208,000. These individuals may be entitled to receive
incentive bonuses and other benefits including health insurance, disability
coverage, vacation and sick pay. These individuals received options to
purchase a total of 25,000 shares of the Company's common stock at $3.00
per share with vesting on an annual basis over two years. The agreements
terminated on June 19, 2003.

Royalty Agreement

In connection with the original licensing and subsequent acquisition of
MedCard, the Company entered into a royalty agreement with the original
Licensor. The royalty provisions of the license agreement remained in
effect after the purchase. This agreement was amended in the year ended
June 30, 2002. The Company will pay the Licensor 20% of the first
$1,000,000 of qualified monthly revenues, less direct costs, generated by
the licensed software and 10% of net monthly revenue in excess of
$1,000,000.

Consulting Agreements

The Company has entered into various consulting agreements with outside
consultants. These agreements entitle the consultant to issuances of common
stock and options as well as cash compensation in exchange for consulting
services relating to such things as raising additional debt and equity
capital, software development, sales development, investor and public
relations and general strategic business consulting. Most of these
agreements were prepaid through the issuance of common stock or warrants.
However, certain of these agreements included additional compensation on
the basis of performance. The Company has cancelled all of these agreements
and wrote-off all of the associated prepaid expense balances at June 30,
2001. The Company does not believe that it has any further obligation under
these agreements. However, there have been certain claims made. During the
year ended June 30, 2003, the Company settled such claim resulting in the
utilization of a $98,000 accrual made as of June 30, 2002. This agreement
included the return of 186,000 shares of the Company's common stock held by
the consultant. These shares were returned as of June 30, 2003, and were
recorded as treasury stock during the year ended June 30, 2004.

During February 2004, the Company has entered into a consulting agreement
whereby the consultant will act as investor relations advisor on the
Company's behalf. Upon the execution of the contract the Company granted
the consultant fifty thousand shares of restricted stock and $50,000.

During February 2003, the Company has entered into a service agreement with
a consultant whereby the consultant will act as financial advisor and
investment banking representative on the Company's behalf. Upon the
execution of the contract the Company granted the consultant warrants to
purchase up to 400,000 shares of the Company's common stock at an

F-19

exercise price of $0.50 per common share. The warrants expire five years
from date of issuance.

Litigation

Subsequent to June 30, 2001, several former employees filed complaints
against the Company alleging unpaid payroll and breach of employment
agreements. The total known claims being sought by the former employees at
June 30, 2001 was approximately $175,000. The Company believes that it has
settled all former employee claims in amounts aggregating to an amount
approximating the accrued amount of $104,000. A former officer has a claim
remaining with the Company. The Company is attempting to settle this claim.
At June 30, 2004, there was $164,000 accrued relating to this matter.

Several landlords are seeking damages from the Company due to the Company
defaulting on several lease agreements. Certain landlords have obtained
legal judgments against the Company. The total amount of such claims was
$634,000. The Company and its legal counsel believe that ultimate
settlement will result in a much lower payout. The Company has accrued
$208,000 associated with these claims at June 30, 2004. This amount was
estimated on the basis of advice from legal counsel whom has settled
several similar suits. However, the ultimate result of any settlement could
vary significantly from this estimate.

The Company had obligated shares of the Company's common stock and warrants
exercisable into common stock under numerous consulting and fund raising
agreements. Some such agreements obligated shares in cases of the
occurrence of substantial dilution or price drop in the trading value of
the Company's common stock. Management believes that it has fulfilled all
such obligations. The Company settled one such claim in the year ended June
30, 2004. Management believes that there is a possibility that additional
claims may arise.

The Company may be subject other unasserted claims associated with the
abandonment of its operations. The Company is also involved in various
claims and legal actions arising in the ordinary course of business. In the
opinion of management, except as discussed above, the ultimate disposition
of these matters will not have a material adverse effect on the Company's
financial position, results of operations, or liquidity.

At June 30, 2004, there was approximately $372,000 estimated and accrued
for claims related to the litigation matters described above.

Customer Contracts

Customers may arrange to have the purchase of the Company's point-of-sale
terminals financed through the financial institution that provides the
sale-leaseback financing to the Company. The Company has agreements with
this financial institution to guarantee varying amounts associated with the
financial institution's arrangements with the customers. Generally, the
Company may be required to remit to the financial institution, one to six
months of scheduled customer payments if the customer defaults on its
financing arrangement with the financial institution. Subsequent to June
30, 2004, the Company

F-20

entered into a new master contract with the financial institution that
limits the recourse to the Company to the first payment under the
customer's contract. The amount of such payment would not exceed $100. The
Company has not experienced material obligations to-date under the recourse
agreements and believes that the new agreement substantially limits
potential obligations in the future to an immaterial amount.

13. NET LOSS PER SHARE

Net loss per share is calculated using the weighted average number of
shares of common stock outstanding during the year. Preferred stock
dividends are subtracted from the net income to determine the amount
available to common shareholders. Preferred stock convertible to 115,396
common shares and options and warrants exercisable into 3,207,224 shares of
common stock were not considered in the calculation for diluted earnings
per share for the year ended June 30, 2004 because the effect of their
inclusion would be anti-dilutive. Preferred stock convertible to 115,396
common shares and options and warrants exercisable into 3,877,281 shares of
common stock were not considered in the calculation for diluted earnings
per share for the year ended June 30, 2003 because the effect of their
inclusion would be anti-dilutive. The following presents the computation of
basic and diluted loss per share from continuing operations:

2004 2003
---- ----
Per Per
(Loss) Shares share (Loss) Shares share
------------ ---------- ------- ------------ ---------- -------

Net (Loss) $(4,609,291) $(3,724,137)
Preferred stock dividends (114,000) (114,000)
------------ ------------
Loss from continuing operations (4,723,291) (3,838,137)

BASIC EARNINGS PER SHARE

Loss available to common
stockholders $(4,723,291) 41,167,477 $(0.11) $(3,838,137) 36,954,659 $(0.10)

Effect of dilutive securities N/A N/A

DILUTED EARNINGS PER SHARE $(4,723,291) 41,167,477 $(0.11) $(3,838,137) 36,954,659 $(0.10)

14. RELATED PARTY TRANSACTIONS

The Company's president and chairman is a significant shareholder of the
Company. This individual controls another entity that is also a significant
shareholder of the Company. During the year ended June 30, 2002, the
Company moved its administrative offices into space occupied by this
related entity that is a significant shareholder of the Company. The
Company shares office space and management and administrative personnel
with this related entity. Certain of the Company's personnel perform
functions for the related entity but there

F-21

was no allocation of personnel related expenses to the related entity in
the years ended June 30, 2004 and 2003.

The Company frequently receives advances and advances funds to an entity
controlled by the Company's president and which is a significant
shareholder of the Company. During the year ended June 30, 2003, the
Company received advances from this entity of $860,308. The outstanding
advance at June 30, 2003 of $776,992 was converted to common stock during
the year ended June 30, 2004. During the year ended June 30, 2004, the
Company advanced funds of $1,420,229 to this entity. This balance due from
this affiliate at June 30, 2004 was $1,420,229. The advances are generally
short term in nature with an interest rate of 3%. The Company paid
management fees of $450,000 to an entity owned by the Company's president
during the year ended June 30, 2004.

During the year ended June 30, 2002, the entity controlled by the Company's
president and chairman acquired 9,192,462 shares of the Company's common
stock for $1,022,600.

During the year ended June 30, 2004, an affiliate an entity controlled by
the Company's president and chairman converted advances of $776,992 into
3,186,499 shares of the Company's common stock. The Company advanced funds
to this affiliate during the year. There is a net amount due from this
entity of $1,420,229 at June 30, 2004. The advances are generally short
term in nature with an interest rate of 3%.

15. CONCENTRATIONS

Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily trade accounts receivable. The
trade accounts receivable are due primarily from small business customers
in numerous geographical locations throughout the United States.

The Company estimates and provides an allowance for uncollectible accounts
receivable.

The Company has raised cash through sale-leaseback transactions. All of
these transactions have been conducted through a single lessor. During the
year ended June 30, 2004, the Company received $1,810,313 under
sale-leaseback transactions from this entity.

16. STOCK BASED COMPENSATION

The Company issues stock options from time to time to executives, key
employees and members of the Board of Directors. The Company has adopted
the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," and continues
to account for stock based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". Accordingly, no compensation cost has been
recognized for the stock options granted to employees.

There were no options granted in the year ended June 30, 2004 and all
options previously granted have been fully vested and therefore there is no
pro forma effect for the year ended

F-22

June 30, 2004. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing-model.

In February 2003, 400,000 warrants to acquire the Company's common stock at
$0,50 per share were issued as consideration for consulting services to be
rendered. The fair value of these warrants of $150,600 was expensed in that
year.

The Company grants options under several stock option plans. The Company's
Incentive Stock Option Plans, Non-Qualified Stock Option Plans and Stock
Bonus Plans are collectively referred to as the "Plans". The following sets
forth certain information as of June 30, 2004 concerning the stock options
and stock bonuses granted by the Company pursuant to the Plans. Each option
represents the right to purchase one share of the Company's Common Stock.

--------------------------------------------------------------------------------
TOTAL SHARES RESERVED REMAINING OPTIONS
UNDER THE PLAN UNDER THE PLAN

1998 Incentive Stock Option Plan 1,500,000 400,167

2000 Incentive Stock Option Plan 1,000,000 925,150

2000 Non-Qualified Stock
Option Plan 2,000,000 1,820,575

1999 Stock Bonus Plan 900,000 833,250

2000 Stock Bonus Plan 500,000 500,000

The options under these plans generally expire five years from date of
grant. The summary of activity for the Company's stock options and warrants
is presented below:

Weighted Weighted
Average Average
Exercise Exercise
2004 Price 2003 Price
------------ --------- ----------- ---------

Options/warrants outstanding at
Beginning of year 3,877,281 $ 9.49 3,863,975 $ 9.49
Granted - 0 - 400,000 $ 0.50
Exercised (607,800) $ 0.69 - 0 -
Terminated/Expired (1,394,457) $ 5.35 (386,694)
Options outstanding at end of year 1,875,024 $ 12.59 3,877,281 $ 8.41
Options exercisable at end of year 1,875,024 $ 12.59 3,877,281 $ 8.41
Options available for grant at end
of year 5,873,599 4,479,142

F-23

Price per share of options outstanding $ 0.47 to $ 0.47 to
$ 40.00 $ 40.00

Weighted average remaining
contractual lives 0.84years 1.84years

Weighted Average fair value of options
granted during the year N/A $ 0.3765

Range of exercise prices of options outstanding at June 30, 2004:

Weighted Weighted
Number Average Number Average
Exercise Price Outstanding Exercise Price Exercisable Exercise Price
------------------ ----------- --------------- ----------- ---------------

$ 0.47-$1.50 729,000 $ 0.49 729,000 $ 0.49
$ 1.51-$3.00 122,250 $ 2.52 122,250 $ 2.52
$ 3.01-$4.50 -0- N/A -0- N/A
$ 4.51-$6.00 68,600 $ 5.00 68,600 $ 5.00
$ 6.01-$10.00 20,000 $ 6.25 20,000 $ 6.25
$ 10.01-15.00 65,000 $ 15.00 65,000 $ 15.00
$15.01 and greater 870,175 $ 24.71 870,175 $ 24.71

17. EMPLOYEE BENEFIT PLAN

The Company maintains a 401(k) profit sharing plan for its employees. Each
United States based full-time employee is eligible to participate in that
plan on the first day of the calendar quarter after completing ninety days
of employment with the Company. A participating employee can contribute up
to fifteen percent (15%) of their annual compensation, up to a maximum of
the federally mandated limit. The Company matches 50% of the contributions
on the first six percent (6%) of the employee's contribution up to a
maximum of three percent (3%). Employees are fully vested on their own
contributions and vest in the Company's contributions twenty percent (20%)
per year over five years. The Plan was frozen subsequent to June 30, 2001
and there were no contributions for the years ended June 30, 2004 and 2003.

18. BUSINESS SEGMENTS

The Company previously had three reportable segments: intelligent vending
machines, healthcare management software development and medical
transaction processing. During the year ended June 30, 2001, the Company
determined it would divest or abandon all business segments other than the
medical transaction processing segment. Therefore, going forward, the
Company will have only one reportable segment. At June 30, 2004 the Company
operates only in the medical transaction processing segment with
substantially all revenue generated in the United States.

F-24

The medical transaction processing segment includes revenue from the
MedCard System, including the sale of terminals, processing fees and
billing service revenue and the licensing, sales and services related to
the Company's One Medical Services Network.

For the years ended June 30, 2004 and 2003, there were no material
concentrations of revenue to specific customers. However, all gains related
to sale-leaseback transactions are associated with one lessor but relate to
numerous customer contracts.

* * * * * *

F-25

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not applicable.
PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

DIRECTOR AND EXECUTIVE OFFICER

Mr. William P. Williams as of August 2001 accepted the position of Chief
Executive Officer and sole Director of the Company. Information representing
Mr. Williams, is set forth below:

William P. Williams 51 Chairman, President, Chief Executive Officer

The chief executive officer and sole director of the Company will hold
office until additional members or officers are duly elected and qualified. The
background and principal occupations of the sole officer and director of the
Company is as follows:

William P. Williams has been the Chairman, Chief Executive Officer, of
Medcom USA since August 2001. He is also currently Chief Executive Officer and
Chairman of the Board for American Nortel Communications, Inc., a publicly
traded company located in Scottsdale, Arizona, which is in the business of
long-distance telephone service domestically, as well as internationally. From
1983 to 1995, he was President and Chairman of the Board of Shelton Financial,
Inc., a financial factoring firm headquartered in San Antonio, Texas. Mr.
Williams has a Bachelor of Arts, and a Master of Business Administration in
Finance from Baylor University.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 9.A. DIRECTORS AND EXECUTIVE
OFFICERS, PROMOTERS, AND CONTROL PERSONS:

The Company is aware that all filings of Form 4 and 5 required of Section
16(a) of the Exchange Act of Directors, Officers or holders of 10% of the
Company's shares have not been timely and the Company has instituted procedures
to ensure compliance in the future.

ITEM 10. EXECUTIVE COMPENSATION

General. Mr. William P. Williams serves as the Company's sole-director and
chief executive officer. Pursuant to a Management Services Agreement executed
and approved by the Company Mr. Williams was compensated approximately $450,000
for management fees, and other sources or forms of compensation was not paid or
collected for Fiscal year ended 2004.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

As of June 30, 2004 information with respect to the only persons owning
beneficially 5% or more of the outstanding common stock and the number of and
percentage of the outstanding shares owned is represented below:

Name and Address Shares Owned (1) Common Stock
------------------------------ ---------------- -------------

American Nortel Communications 19,024,347 39.13%
7975 North Hayden Road #D-333
Scottsdale, Arizona 85258

William P. Williams 5,083,397 10.46 %
7975 North Hayden Road #D-333
Scottsdale, Arizona 85258

(1) Excludes any shares issuable upon the exercise of any warrants or options
or upon the conversion of other convertible securities.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The Company frequently advances funds to an affiliated entity, which is
also a significant shareholder of the Company. During the year ended June 30,
2004, the Company advanced funds of $1,420,229 to this entity.

ITEM 13. EXHIBITS AND REPORTS.

EXHIBITS
--------

3.1 Articles of Incorporation (2)

3.2 Amendments to Articles of Incorporation - Fourth Article (2)

3.3 Amendment to Articles of Incorporation - Name Change (2)

10.18 Amendment to License Agreement - Dream Technologies, LLC (1)

___________________________________________________

(1). Incorporated by reference to the same exhibit filed with Amendment No. 5
to the Company's Registration Statement on Form S-3 (Commission File No.
333-71179)
(2). Incorporated by reference to the same exhibit filed with the Company's
Annual Report on Form 10-KSB for the year ending June 30, 2001.

REPORTS ON FORM 8-K
-------------------

Not applicable.

ITEM 14. CONTROLS AND PROCEDURES.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company maintains controls and procedures designed to ensure that
information required to be disclosed in this report is recorded, processed,
accumulated, and reported to its management, including the chief executive
officer to allow timely decisions regarding the required disclosures. Within
the 90 days prior to the filing date of this report, MedCom's management, with
the participation of its chief executive officer and corporate accounting,
performed an evaluation of the effectiveness of the design and operation of
these disclosure controls and procedures. This officer and management have
concluded that such disclosure controls and procedures are effective at ensuring
that required information is disclosed in the Company's reports.

CHANGES IN INTERNAL CONTROLS

There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
evaluation date.

ITEM 15. SIGNATURES.

In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, there unto duly authorized.