ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.

CRITICAL ACCOUNTING POLICIES

GENERAL

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The Company believes that its critical accounting policies and estimates relate to revenue recognition, software development costs, impairment of long-lived assets, goodwill and intangible assets and investments. Future results may differ from the estimates under different assumptions or conditions.

REVENUE RECOGNITION

Revenue from the sale of equipment is recognized on the terms of freight-on-board shipping point, or upon installation and acceptance of the equipment if installation services are purchased for the related equipment. Transaction processing revenue is recognized upon the usage of the Company's cashless payment and control network. Service fees for access to the Company's equipment and network services are recognized on a monthly basis. Product revenues are recognized from the sale of products from Company owned vending machines when there is purchase and acceptance by the vending customer. Customers have the ability to return vended products for a full refund. The Company estimates an allowance of product returns at the date of sale.

SOFTWARE DEVELOPMENT COSTS

The Company capitalizes software development costs pursuant to Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", after technological feasibility of the software is established and through the product's availability for general release to the Company's customers. All costs incurred in the research and development of new software and costs incurred prior to the establishment of technological feasibility are expensed as incurred. Amortization of software development costs commences when the product becomes available for general release to customers. Amortization of software development costs is calculated as the greater of the amount computed using (i) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues of that product or (ii) the straight-line method over the remaining estimated economic life of the product. The Company reviews the unamortized software development costs at each balance sheet date and, if necessary, will write down the balance to net realizable value if the unamortized costs exceed the net realizable value of the asset.

Software development costs are being amortized over a useful life of two years ending in April 2004. Amortization expense, reflected in cost of sales, was $333,000 and $666,000 for the three and six months ended December 31, 2003, respectively, and $291,000 and $583,000 for the three and six months ended December 31, 2002, respectively.

IMPAIRMENT OF LONG LIVED ASSETS

In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", the Company reviews its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amount of an asset or group of assets exceeds its net realizable value, the asset will be written down to its fair value.

In the period when the plan of sale criteria of SFAS 144 are met, long-lived assets are reported as held for sale, depreciation and amortization cease, and assets are reported at the lower of carrying value or fair value less costs to sell.

GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess of cost over fair value of the net assets purchased in acquisitions. The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets". Under SFAS No. 142, goodwill is not amortized to earnings, but instead is subject to periodic testing for impairment. The Company tests goodwill for impairment using a two-step process. The first step screens for potential impairment, while the second step measures the amount of impairment, if any. The Company uses a discounted cash flow analysis to complete the first step in this process. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. The Company has selected April 1 as its annual test date. To date, no impairment of goodwill has occurred.

Intangible assets include patents, trademarks and non-compete arrangements purchased in acquisitions. Amortization of these intangibles is computed using the straight-line method over their estimated useful lives of five and ten years. Amortization expense was $309,000 and $590,000 for the three and six months ended December 31, 2003, respectively, and $73,000 and $146,000 for the three and six months ended December 31, 2002, respectively.

INVESTMENT

The Company accounts for investments in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Management determines the appropriate classifications of securities at the time of purchase and reevaluates such designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as a separate component of shareholders' equity in accumulated other comprehensive income (loss).

A judgmental aspect of accounting for investments involves determining whether an other-than-temporary decline in value of the investment has been sustained. If it has been determined that an investment has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings. Such evaluation is dependent on the specific facts and circumstances. Factors that are considered by the Company each quarter in determining whether an other-than-temporary decline in value has occurred include: the market value of the security in relation to its cost basis; the financial condition of the investee; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery in the market value of the investment. In evaluating the factors above for available-for-sale securities, management presumes a decline in value to be other-than-temporary if the quoted market price of the security is below the investment's cost basis for a period of six months or more. However, the presumption of an other-than-temporary decline in these instances may be overcome if there is persuasive evidence indicating that the decline is temporary in nature (e.g., strong operating performance of investee, historical volatility of investee, etc.).

FORWARD LOOKING STATEMENTS

This Form 10-QSB contains certain forward looking statements regarding, among other things, the anticipated financial and operating results of the Company. For this purpose, forward looking statements are any statements contained herein that are not statements of historical fact and include, but are not limited to, those preceded by or that include the words, "believes," "expects," "anticipates," or similar expressions. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward looking information is based on various factors and was derived using numerous assumptions. Important factors that could cause the Company's actual results to differ materially from those projected, include, for example
(i) the ability of the Company to generate sufficient sales to generate operating profits, or to sell products at a profit, (ii) the ability of the Company to raise funds in the future through sales of securities, including but not limited to the exercise of outstanding options and warrants, (iii) whether the Company is able to enter into binding agreements with third parties to assist in product or network development, (iv) the ability of the Company to commercialize its developmental products, or if actually commercialized, to obtain commercial acceptance thereof, (v) the ability of the Company to compete with its competitors to obtain market share, (vi) the ability of the Company to obtain sufficient funds through operations or otherwise to repay its debt obligations, including but not limited to Senior Notes, or to fund development and marketing of its products (vii) the ability of the Company to obtain approval of its pending patent applications, or (viii) the ability of the Company to satisfy its trade obligations included in accounts payable and accrued liabilities. Although the Company believes that the forward looking statements contained herein are reasonable, it can give no assurance that the Company's expectations will be met.

RESULTS OF OPERATIONS

The three month period ended December 31, 2003 resulted in a net operating loss of $3,737,624 (approximately $1.3 million non-cash) compared to a net loss of $3,630,997 (approximately $1.7 million non-cash) for the comparable quarter in the prior fiscal year.

Revenues for the three month period ended December 31, 2003 increased to $1,914,586 from $774,647 during the same period in the prior fiscal year, an increase of $1,139,939 or 147%. This increase was primarily attributed to sales of the Company's energy conservation equipment for the three months ended December 31, 2003, as such revenues did not exist in the corresponding quarter of the prior fiscal year since the acquisition of Bayview occurred in July 2003. Revenues are discussed in more detail as follows:

Equipment sales: Revenues from equipment sales increased to $1,425,176 from $384,459 in the corresponding quarter of the prior fiscal year, an increase of $1,040,717 or 271%. This increase is mainly due to sales of the Company's energy conservation equipment of approximately $1,162,000 for the three months ended December 31, 2003, as such revenues did not exist in the corresponding quarter of the prior year, since the acquisition of Bayview occurred in July 2003. The increase from energy conservation equipment sales was offset by a decrease in Business Center equipment sales of approximately $86,000 due to a lower average selling price per Business Center. The average selling price per business center decreased as a result of the popularity of the Company's newly introduced, lower priced Space Saver product.

License and transaction fees: Revenues from license and transaction fees decreased $47,455 or 15% from $314,612 to $267,157 for the three months ended December 31, 2002 and 2003, respectively. This decrease was due to a decrease in fees earned from the Kodak Vending Placement Agreement of approximately $59,000 as a result of the wind down of the contract, offset by an increase in fees of approximately $12,000 as a result of an increase in the number of the Company's e-Port and TransAct units connected to the Company's network.

Product sales and other: Revenues from product sales and other increased to $222,253 from $75,576, an increase of $146,677 or 194% over the same period of the prior fiscal year. This increase was due to $200,000 recorded for the three months ended December 31, 2003 related to the Strategic Alliance Agreement executed in October 2003 between the Company and Conopco, Inc dba Unilever Home & Personal Care North America. This was offset by a decrease in camera and film sales from Company owned vending machines of approximately $56,000 as a result of the wind down of the Kodak Vending Placement Agreement.

Cost of sales consisted of equipment, product and labor costs of approximately $615,000 and $242,000 for the three months ended December 31, 2003 and 2002, respectively, an increase of $373,000; software development amortization of approximately $333,000 and $292,000 for the three months ended December 31, 2003 and 2002, respectively, an increase of $41,000; and network and transaction related costs of $135,000 and $139,000 for the three months ended December 31, 2003 and 2002, respectively, a decrease of $4,000. The increase in total cost of sales to $1,083,419 from $671,940 in the same period prior fiscal year, an increase of $411,479 or 61%, was principally attributable to the increase in equipment sales.

Gross profit for the three months ended December 31, 2003 was $831,167, compared to gross profit of $102,707 in the same period in the prior fiscal year. The increase of $728,460 or 709% was primarily due to the addition of our higher margin, energy conservation equipment sales that were not present in the same period in the prior fiscal year.

Total operating expenses for the three months ended December 31, 2003 was $3,982,817, an increase of $1,528,152 or 62% over the same period from the prior fiscal year. The components of operating expenses (General and administrative, Compensation, Depreciation and amortization and Loss on debt modification) and the causes of this significant increase are explained further below:

General and administrative expenses increased from $1,368,373 for the three months ended December 31, 2002 to $1,780,242 for the three months ended December 31, 2003, an increase of $411,869 or 30%. This increase is due to increases in overall general and administrative expenses of approximately $369,000 related to the acquired energy conservation operation, as such expenses did not exist in the comparable period last fiscal year, an increase of $89,000 in consulting and temporary services, primarily for network services and a $41,000 increase in utility expenses. These increases were offset by decreases in expenses related to professional fees of $130,000, primarily related to promotion and public relations.

Compensation expense increased to $1,740,012 for the three months ended December 31, 2003, a $901,299 or 107% increase over the comparable period last fiscal year. This increase is due to approximately $641,000 increase in bonus expenses, primarily to the Company's executive officers and approximately $205,000 of additional compensation, including sales commissions, related to the acquired energy conservation operations in July 2003, as such expenses did not exist in the comparable period last fiscal year.

Depreciation and amortization expense for the three months ended December 31, 2003 was $420,945, compared to $247,579 for the same period in the prior fiscal year, a $173,366 or 70% increase. This increase was attributable to amortization expense of intangible assets of $236,000 and depreciation expense of fixed assets of $30,000 acquired from Bayview in July 2003. These increases were offset by a decrease of $93,000 of depreciation expense in this quarter compared to the same period last fiscal year, due to assets reaching the end of their estimated useful life after December 31, 2002 but prior to the quarter ended December 31, 2003.

The Company incurred a charge this quarter relating to the modification of debt terms for certain of the 2003 and 2004 Senior Notes in the amount of $41,618. There was no such comparable charge in the same quarter of the prior year. This charge relates to the unamortized debt discount remaining for the Senior Notes maturing in December 2003 and December 2004 whose conversion and maturity terms were modified. The Company offered these note modifications to the Note holders, and recognized the related non-cash charge to operations in order to manage short-term cash flows.

In the three months ended December 31, 2003, a gain of $515,844 was recorded relating to the termination of the Kodak Vending Placement Agreement. This gain is comprised of the payment from Kodak of approximately $675,000 plus the cancellation of Stitch's obligation to the supplier of the vending machines of approximately $124,000 reduced by a write down of the carrying value of vending machines of approximately $283,000 to their realizable value of $300 per vending machine. To the extent any costs are incurred by Stitch to fulfill its obligations under the settlement agreement, these costs will be recorded as incurred, as any additional costs cannot be reasonably estimated at this time.

Total interest expense decreased from $1,283,302 to $1,113,905 for the three months ended December 31, 2002 and 2003, respectively, a decrease of $169,397 or 13%. This decrease was primarily due to lower principal balances on the Company's 12% Senior Notes as the result of conversions of the Senior Notes into shares of the Company's Common Stock. At the time of conversion, the note holder is issued shares equivalent to the conversion rate on the Senior Note, any unamortized debt discount on the note is accelerated and charged to interest expense and future interest on the converted note ceases to accrue. Therefore, interest expense and debt discount amortization for the three months ended December 31, 2003 decreased from the comparable period last fiscal year.

The six month period ended December 31, 2003 resulted in a net operating loss of $13,040,708 (approximately $8.8 million non-cash) compared to a net loss of $7,205,215 (approximately $3.1 million non-cash) for the comparable period in the prior fiscal year.

Revenues for the six month period ended December 31, 2003 increased to $3,595,194 from $1,509,092 during the same period in the prior fiscal year, an increase of $2,086,102 or 138%. This increase was primarily attributed to sales of the Company's energy conservation equipment for the six months ended December 31, 2003, as such revenues did not exist in the corresponding period of the prior fiscal year since the acquisition of Bayview occurred in July 2003. Revenues are discussed in more detail as follows:

Equipment sales: Revenues from equipment sales increased to $2,711,654 from $572,947 in the corresponding period of the prior fiscal year, an increase of $2,138,707 or 373%. This increase is mainly due to sales of the Company's energy conservation equipment of approximately $2,107,383. During the period, the Company fulfilled purchase orders for its energy conservation equipment from customers such as food and drug retailer, Albertsons, automotive parts retailer, AutoZone, and Texas energy utility company, Austin Energy. Revenue from the sales of the Company's e-Port device increased to approximately $264,000 for the six months ended December 31, 2003, an increase of $136,000 or 106%, from $128,000 for the six months ended December 31, 2002. During the period, the Company fulfilled purchase orders for its e-Port device from customers such as vending management company, International Vending Management (IVM), and food service and vending company, Canteen. The increases from energy conservation equipment and e-Port sales was offset by a slight decrease in Business Center equipment sales of approximately $76,000 due to a lower average selling price per business center. The average selling price per business center decreased as a result of the popularity of the Company's newly introduced, lower priced Space Saver product.

License and transaction fees: Revenues from license and transaction fees decreased $70,459 or 11% from $657,265 to $586,806 for the six months ended December 31, 2002 and 2003, respectively. This decrease was due to a decrease in fees earned from the Kodak Vending Placement Agreement of approximately $94,000 as a result of the wind down of the contract, offset by an increase in fees of approximately $24,000 as a result of an increase in the number of the Company's e-Port and TransAct units connected to the Company's network.

Product sales and other: Revenues from product sales and other increased to $296,734 from $278,880, an increase of $17,854 or 6% over the same period of the prior fiscal year. This increase was due to $200,000 recorded in the quarter ended December 31, 2003 related to the Strategic Alliance Agreement executed in October 2003 between the Company and Conopco, Inc dba Unilever Home & Personal Care North America. This increase was offset by a decrease in camera and film sales from Company owned vending machines of approximately $182,000 as a result of the wind down of the Kodak Vending Placement Agreement.

Cost of sales consisted of equipment, product and labor costs of approximately $1,213,000 and $451,000 for the six months ended December 31, 2003 and 2002, respectively, an increase of $762,000; software development amortization of approximately $666,000 and $583,000 for the six months ended December 31, 2003 and 2002, respectively, an increase of $83,000; and network and transaction related costs of $287,000 and $306,000 for the six months ended December 31, 2003 and 2002, respectively, a decrease of $19,000. The increase in total cost of sales to $2,165,582 from $1,339,400 in the same period prior fiscal year, an increase of $826,182 or 62%, was primarily attributable to the increase in equipment sales.

Gross profit for the six months ended December 31, 2003 was $1,429,612, compared to gross profit of $169,692 in the same period in the prior fiscal year. The increase of $1,259,920 or 742% was primarily due to the addition of our higher margin, energy conservation equipment sales that were not present in the same period in the prior fiscal year.

Total operating expenses for the six months ended December 31, 2003 was $11,860,040, an increase of $6,670,194 or 129% over the same period from the prior fiscal year. The components of operating expenses (General and administrative, Compensation, Depreciation and amortization and Loss on debt modification) and the causes of this significant increase in each category are explained further below:

General and administrative expenses increased from $3,010,751 for the six months ended December 31, 2002 to $3,282,011 for the six months ended December 31, 2003, an increase of $271,260 or 9%. This increase is due to increases in overall general and administrative expenses of approximately $731,000 related to the acquired energy conservation operation, as such expenses did not exist in the comparable period last fiscal year. This increase was offset by decreases of $240,000 related to professional fees, primarily related to promotion and public relations, $140,000 of utility expenses and $120,000 in consulting and temporary services, primarily for network services.

Compensation expense increased to $7,443,210 for the six months ended December 31, 2003, a $5,758,778 or 342% increase over the comparable period last fiscal year. This increase is primarily due to the issuance of 10,500,000 shares of Common Stock to the Company's Chief Executive Officer in connection with the amendment of his employment agreement. This was a one-time, non-cash payment valued at $4,620,000 representing 80% of the total increase. Other components of this increase were due to approximately $711,000 increase in bonus expenses, primarily to the Company's executive officers and approximately $412,000 of additional compensation, including sales commissions, related to the acquired energy conservation operations in July 2003, as such expenses did not exist in the comparable period last fiscal year.

Depreciation and amortization expense for the six months ended December 31, 2003 was $815,904, compared to $494,663 for the same period in the prior fiscal year, a $321,241 or 65% increase. This increase was attributable to amortization expense of intangible assets of $444,000 and depreciation expense of fixed assets of $60,000 acquired from Bayview in July 2003. These increases were offset by a decrease of $183,000 of depreciation expense during the current six month compared to the same period last fiscal year, due to assets reaching the end of their estimated useful life after December 31, 2002.

The Company incurred a charge during the six months ended December 31, 2003 relating to the modification of debt terms for certain of the 1999 and 2000 Senior Notes in the amount of $318,915. There was no such comparable charge in the same period of the prior year. This charge relates to the unamortized debt discount remaining for the Senior Notes maturing in December 2003 and December 2004 whose conversion and maturity terms were modified. The Company offered these note modifications to the Note holders, and recognized the related non-cash charge to operations in order to manage short-term cash flows.

In the six months ended December 31, 2003, a gain of $515,844 was recorded relating to the termination the Kodak Vending Placement Agreement. This gain is comprised of the payment from Kodak of approximately $675,000 plus the cancellation of Stitch's obligation to the supplier of the vending machines of approximately $124,000 less a write down of the carrying value of vending machines of approximately $283,000 to their realizable value of $300 per vending machine. To the extent any costs are incurred by Stitch to fulfill its obligations under the settlement agreement, these costs will be recorded as incurred, as any additional costs cannot be reasonably estimated at this time.

Total interest expense increased from $2,192,298 to $3,177,301 for the six months ended December 31, 2002 and 2003, respectively, an increase of $985,003 or 45%. This increase was primarily attributable to charges incurred due to the acceleration of unamortized debt discount and other issuance costs on the 12% Senior Notes that were converted into Common Stock during the six month period.

PLAN OF OPERATIONS

With the acquisition of Bayview on July 11, 2003, the Company now designs and manufactures patented energy conservation devices for equipment such as laser printers, monitors, office peripherals, refrigerated vending machines and glass front merchandisers (referred to as slide or visi coolers). These energy conservation devices reduce power consumption of various types of equipment by allowing the equipment to operate in power saving mode when full power mode is not necessary. These devices, which include the VendingMiser, CoolerMiser, SnackMiser, MonitorMiser and LaserMiser can use activity, occupancy, temperature, timing or other various methods to determine which mode the equipment should be in. Route to market for the energy conservation devices is much the same as the Company's e-Port technology, with the notable addition of governmental and utility rebate and give-away programs, where by part or all of the cost of the energy management device is covered by government funds allocated to energy conservation projects.

In October 2003, the Company signed a strategic alliance agreement with Conopco, Inc. dba Unilever Home & Personal Care North America to be the exclusive provider of laundry detergent for the e-Suds program to be used in colleges and universities located in the United States. Per the terms of the agreement, the Company agrees to be a reseller of Unilever Products that are dispensed through the USA e-Suds System and the Company will also receive fees from Unilever based on the number of injections of Unilever Products through the USA e-Suds System.

In December 2003, the parties to the Kodak Vending Placement Agreement agreed to the termination of the contract effective December 31, 2003. The settlement resulted in the termination of the vending agreement pursuant to which the Company will receive a payment from Kodak of approximately $675,000 (received in January 2004) and payments equal to $300 per vending machine, due from the supplier of the vending machines, as the machines are pulled from service at the supplier's sole cost and expense. Upon receipt of the $300 per vending machine, title to the vending machine will transfer from Stitch to the supplier. The settlement agreement provides that all machines are to be pulled from service no later than mid calendar year 2004. In addition, the supplier agreed to cancel an obligation for the purchase of vending machines owed by Stitch in the approximate amount of $124,000.

The vending machines were used as collateral to secure a bank facility used to purchase the machines under which $516,009 was outstanding as of December 31, 2003. Final payment of the debt will occur no later than the time Stitch transfers title of the machines to the supplier.

Although revenues of the Company will be reduced as a result of vending contract termination, because the Kodak program is and has been operating at a loss, the termination of the program would eliminate these ongoing losses. Revenues related to the Kodak program through the fiscal year ended June 30, 2003 were approximately $1,092,000 and approximately $144,000 and $352,000 for the three and six months ended December 31, 2003, respectively.

In October 2002, the Company signed a Strategic Alliance Agreement with ZiLOG Corporation, a semiconductor company, which is a supplier of microprocessors to the retail point of sale industry. The agreement allows the Company's proprietary network software (USALive) to be embedded on a chip produced by ZiLOG. The Company will license its software to the purchaser and will be entitled to receive a fee for this license. A second revenue stream could be generated from purchasers who buy the retail point of sales terminals and begin to use them, if they elect to use the USA network embedded on the chip. To date, no products have been available for commercial use and accordingly, no revenues have been generated.

In laundry, American Sales Inc. (ASI) has signed a five-year agreement to purchase units of Stitch's e-Suds laundry solution for their university locations in the Midwest, with initial installations to begin in the fall of 2003. In October 2003, the Company installed a system at ASI's facilities for final testing. To date, the system has not completed final testing, and the Company anticipates unit sales to begin during the fourth quarter of fiscal year 2004.

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended December 31, 2003, net cash of $5,484,151 was used by operating activities, primarily due to the net loss of $13,040,708 offset by non-cash charges aggregating to $8,805,187 for transactions involving issuing Common Stock for services and in connection with the amendment to the CEO's employment agreement, depreciation and amortization of assets, amortization of debt discount, loss on debt modifications relating to the Senior Notes and interest expense relating to the Senior Notes paid through the issuance of Common Stock and Common Stock Warrants, offset by a gain on the sale of investment and gain on the termination of a contract. In addition, the Company's net operating assets increased by $1,248,630 (primarily inventory and accounts receivable), a substantial portion of which relates to the addition of the energy conservation equipment line from the Bayview acquisition.

For the six months ended December 31, 2003, net cash used in investing activities was $562,089, comprised of the cash component of the investment in Bayview, purchases of property and equipment and the proceeds received from the sale of a portion of the investment in the Jubilee Trust.

Proceeds from financing activities for the six months ended December 31, 2003 provided the funds necessary to support cash used in operating and investing activities. Proceeds of $6,576,218 were realized from several private placement offerings of Common Stock, the exercise of Common Stock Warrants and collection of Common Stock subscriptions receivable. Payments of long-term debt and capital leases totaled $392,629.

Long-term debt obligations of the Company as of December 31, 2003 were as follows:

Bank facility                                     $   516,009
Working capital loans                                  96,765
Other, including capital lease obligations             49,885
                                                   ----------
                                                      662,659
Less current portion                                  639,611
                                                   ----------
                                                   $   23,048
                                                   ==========

The bank facility (the Facility) was utilized to fund the purchase of vending machines placed at locations where Kodak film products are sold. Borrowings were made from time to time under the Facility, with repayment schedules set at the time of each borrowing, including equal monthly payments over 36 months and an interest rate based upon 495 basis points over the three year U.S. Treasury Notes. The Company granted the bank a security interest in the vending machines. Repayment of principal is also insured by a Surety Bond issued by a third-party insurer in exchange for an initial fee paid by the Company. Final maturity, scheduled to extend into the fiscal year ending June 30, 2005, is anticipated to occur during the year ending June 30, 2004 due to the termination of the vending placement agreement and the removal from service and sale of the vending machines used as collateral for the bank facility. As described above, the debt, with a balance outstanding at December 31, 2003 of $516,009, will be repaid no later than the time Stitch returns the vending machines to the supplier.

In connection with the Stitch acquisition, the Company assumed long-term debt which included a vending equipment borrowing facility and working capital loans. These loans are secured by certain assets of Stitch and bear interest at 6.75% per annum, payable on July 8, 2002. During fiscal year 2003 the bank extended the due date on these loans on several occasions under forbearance agreements. On November 6, 2003, the Company reached an agreement with the bank to make monthly installments that will repay the remaining balance by October 2004.

The Company has incurred losses since inception. For the six months ended December 31, 2003, the net loss was $13,040,708 of which $8,805,187 related to non-cash charges. Cumulative losses through December 31, 2003 amounted to approximately $92 million. The Company has continued to raise capital through equity and debt offerings to fund operations.

The impact of the Bayview acquisition on cash flow for the six months ended December 31, 2003 was a net cash outflow of approximately $1.2 million - $500,000 of cash used in operations and $728,000 invested in operating assets and liabilities in connection with the purchase. The structure of the acquisition of the energy conservation equipment line from Bayview did not include acquiring the working capital required to support the business. The six months' operating cash flows reflected an investment for this working capital.

During the year ended June 30, 2003, cash used in operating activities was approximately $750,000 per month. For the six months ended December 31, 2003 cash used in operating activities, was approximately $915,000 per month. Operating cash flows during the six months ended December 31, 2003 was impacted by increases in inventory and accounts receivable that were disproportionate to the increase in revenues by approximately $600,000. The period also absorbed costs for cash bonuses of approximately $600,000, primarily to the Company's executive officers. The Company believes it can improve its management of working capital, primarily related to accounts receivables, and operating costs to reduce cash used in operating activities to approximately $700,000 per month. Using that as a basis for estimating capital requirements for the next twelve months, along with requirements for capital expenditures and repayment of long-term debt, the Company's cash needs would approximate $9.4 million from January 1, 2004 through December 31, 2004.

This estimate does not consider the positive impact the Company expects to achieve from the Bayview acquisition during the remainder of the year and the incremental revenues from the Company's other products and services. The energy conservation equipment line acquired from Bayview is expected to generate revenues of $5 million during the fiscal 2004 year and produce operating cash flow of approximately $1.5 million during the remainder of the year. As the Bayview acquisition only occured in July 2003, we do not have historical experience with this operation as integrated into the Company's operations and, therefore, the achievement of the positive cash flow impact is not certain at this stage of integration and operation. However, deficits in consolidated operating cash flows are still anticipated for the remainder of fiscal year 2004.

As of December 31, 2003, the Company had $2.5 million of cash and cash equivalents, primarily as a result of proceeds from several private placements of Common Stock entered into during the three months ended September 30, 2003. In September 2003, the Company also sold 700,000 shares of its investment in the Jubilee Trust generating net proceeds of $395,000 and could sell a substantial portion of the remaining Jubilee shares during fiscal year 2004 creating additional cash of approximately $1 million based on the investment's current quoted market price.

As of December 31, 2003, there were 44,591,785 fully vested warrants to purchase Common Stock at exercise prices ranging from $0.067 to $1.25 per share. There are 39,251,092 warrants that are "in the money", with exercise prices below $0.11 per share. The potential exercise of these "in the money" warrants could provide $3,460,260 of additional proceeds to the Company. Subsequent to December 31, 2003, 5,215,370 warrants were exercised, generating $465,070 of proceeds to the Company. However, future exercises of warrants is uncertain and the Company does not expect to rely on the proceeds from the potential exercise of warrants to meet its capital requirements through the end the of 2004 fiscal year.

Based on current revenue and operating levels, cash on hand of $2.5 million, proceeds received from the exercise of warrants subsequent to December 31, 2003 of $465,070, as well as working capital management initiatives and the potential proceeds, at current market prices, generated from the sale of the Jubilee shares, the Company believes it will have sufficient funds to meet its requirements for the remainder of the 2004 fiscal year (through June 30, 2004). However, if revenues remain at current levels during the next twelve months, additional capital of at least $5.5 million will be required to meet cash flow needs during this period from July 1, 2004 and through December 31, 2004 considering the assumptions described above of approximately $9.4 million cash need, cash on hand of $2.5 million and $1 million of additional cash from the sale of its investment in Jubilee, based on current market prices and proceeds of $0.5 million from warrant exercises subsequent to December 31, 2003. The Company intends to meet this capital requirement by raising additional funds through the sale its securities, and given the Company's current product offerings and the markets it is addressing, the Company believes the capital markets should be available to raise sufficient capital to fund its operating needs. However, if revenues increase significantly over this period, cash generated from such improved operations and additional proceeds from the potential exercise of "in the money" warrants could meet a substantial portion of these capital requirements.