Item 12.   Certain Relationships and Related Transactions , and Director Independence

Mr. Warwick is also Chief Executive Officer and Chairman of ADNW, which is the Majority Shareholder of the Company.

During the 2006 fiscal year the Company had the following transactions with Aftersoft's parent company, ADNW: From time to time ADNW advances funds to the Company. Such advances, totaling $14,000 at June 30, 2006, are non-interest bearing and currently have no specific due date. During the year payments totaling $617,000 were advanced to the Aftersoft Group with repayments of $219,000, giving a net effect of $398,000. The Company transferred its note receivable with a related party known as MAM North America, Inc. ("MAM North America") in the amount of $510,000 to ADNW. ADNW agreed to accept the assignment for all the issued shares of MAM North America from the Company and repaid the $510,000 note receivable on October 1, 2005 by allowing the Company to reduce its balance of loans due to ADNW. The Company sold its 43% shareholder interests in MAM Software North America, Inc. in October, 2005. As a consequence of the sale ADNW agreed that MAM Software could offset the $510,000 Note Receivable from MAM Software North America, Inc. against the outstanding debt due ADNW. The net book value of the Company’s investment in MAM Software North America, Inc. prior to the Transfer to ADNW was nil. The transactions allowed the Company to improve its balance sheet by reducing loans due to the parent company. Furthermore, MAM North America has indemnified MAM UK against all past or current liabilities. In fiscal 2006, the Company sold property and equipment to a third party for $308,000, who paid directly to ADNW. This reduced the advances due to the parent company. On June 10, 2006, the Company sold 100% of the outstanding Common Stock of Euro Soft (which by then had its own operations) to a third party for $1,400,000. The proceeds from the sale of Euro Soft were offset against amounts due to the parent company.

 

 

INDEX TO EXHIBITS

Exhibit Number		Description
3 (i) 1		Articles of Incorporation of Aftersoft Group, Inc. (then named W3 Group, Inc.) filed with the Delaware Secretary of State on March 17, 2003 (incorporated by reference to Exhibit 3(i).1 to Aftersoft Group, Inc.’s Registration Statement on Form SB-2 filed on February 16, 2007) .
3 (i).2		State of Delaware Agreement of Merger Between W3 Group, Inc., a Delaware Domestic Corporation (now known as Aftersoft Group, Inc.) and W3 Group, Inc., a Colorado corporation regarding the merger of the two corporations with the survivor corporation being the Delaware corporation, which was filed with the Delaware Secretary of State on May 7, 2003 (incorporated by reference to Exhibit 3(i).2 to Aftersoft Group, Inc.’s Registration Statement on Form SB-2 filed on February 16, 2007).
3 (i).3		Certificate of Amendment to Aftersoft Group, Inc.'s (then known as W3 Group, Inc.) Certificate of Incorporation increasing the authorized stock of the corporation to 110,000,000 shares, 100,000,000 in common stock, par value $0.0001 per share and 10,000,000 of preferred stock, pare value $0.0001 per share, while simultaneously effecting a fifteen (15) for one (1) reverse stock split, which was filed with the Delaware Secretary of State on April 20, 2005 (incorporated by reference to Exhibit 3(i).3 to Aftersoft Group, Inc.’s Registration Statement on Form SB-2 filed on February 16, 2007).
3 (i).4		Certificate of Amendment to Certificate of Incorporation changing the name of the company to Aftersoft Group, Inc. from W3 Group, Inc., filed with the Delaware Secretary of State on December 22, 2005 (incorporated by reference to Exhibit 3(i).4 to Aftersoft Group, Inc.’s Registration Statement on Form SB-2 filed on February 16, 2007).
3 (ii)		By-Laws of Aftersoft Group, Inc.   (incorporated by reference to Exhibit 3(ii) to the Company's Form 10-KSB filed on November 17, 2006).
4.1		Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.1 to Aftersoft Group, Inc.’s Registration Statement on Form SB-2 filed on February 16, 2007 ).
10.1		Share Sale Agreement relating to EXP Dealer Software Limited dated August 4, 2006 among Auto Data Network, Inc., Aftersoft Group, , Inc. and Aftersoft Dealer Software Limited (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 31, 2006).
10.2		Share Sale Agreement relating to Dealer Software and Services Limited dated February 1, 2007 between Aftersoft Group, Inc. and Auto Data Network, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 7, 2007).
14		Code of Ethics (filed herewith) .
21		List of Subsidiaries (incorporated by reference to Exhibit 21 to Aftersoft Group, Inc.’s Registration Statement on Form SB-2 filed on February 16, 2007) .
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   (filed herewith).
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) .
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) .

 

41

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Item 14. Principal Accountant Fees and Services

The following table presents aggregate fees for professional services rendered by our principal independent registered public accounting firm, KMJ Corbin & Company LLP, for the audit of our annual consolidated financial statements for the fiscal year ended June 30, 2007 and 2006.

		For the Year Ended
		June 30, 2007			June 30, 2006
Audit fees (1)		$	129,000		$	90,000
Audit- related fees (2)			-			-
Tax fees (3)			-			-
All other fees			-			-
Total fees		$	129,000		$	90,000

 

(1)		Audit fees are comprised of annual audit fees, quarterly review fees, consent fees and consultation fees on accounting issues.
(2)		There are no audit-related fees for fiscal years 2007 and 2006.
(3)		There are no tax fees which usually comprise of tax compliance and consultation fees.

 

42

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SIGNATURES  

In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Aftersoft Group, Inc.
Date : October 12, 2007	By :	/s/ Ian Warwick
		Ian Warwick
		Chief Executive Officer (Principal Executive Officer)

 

I n accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.      

	Aftersoft Group, Inc.
Date : October 12, 2007	By :	/s/ Ian Warwick
		Ian Warwick
		Chief Executive Officer, Chairman and Director (Principal Executive Officer)
	By :	/s/ Michael O’Driscoll
		Michael O’Driscoll
		Chief Financial Officer (Principal Financial Officer)
Date : October 12 2007	By :	/s/ Simon Chadwick
		Simon Chadwick
		Chief Operating Officer and Director
Date : October 12 2007	By :	/s/ Frederick Wasserman
		Frederick Wasserman
		Audit Committee Chair and Director
Date : October 12 2007	By :	/s/ Dwight Mamanteo
		Dwight Mamanteo
		Compensation Committee Chair and Director
Date : October 12 2007	By :	/s/ Marcus Wohlrab
		Marcus Wohlrab
		Goverance Committee Chair and Director

 

43

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AFTERSOFT GROUP, INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2007 AND 2006

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheet as of June 30, 2007	F-3
Consolidated Statements of Operations and Comprehensive Loss for the years ended June 30, 2007 and 2006 (restated)	F-4
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2007 and 2006 (restated)	F-5
Consolidated Statements of Cash Flows for the years ended June 30, 2007 and 2006 (restated)	F-6
Notes to Consolidated Financial Statements	F-8

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Managers and Members

of Aftersoft Group, Inc.

We have audited the accompanying consolidated balance sheet of Aftersoft Group, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of June 30, 2007, and the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for each of the years in the two-year period then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aftersoft Group, Inc. and subsidiaries as of June 30, 2007, and the results of their operations and their cash flows for each of the years in the two-year period then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Notes 1 and 10, the accompanying consolidated financial statements for the year ended June 30, 2006 have been restated to retroactively reflect combinations of entities under common control that occurred during fiscal 2007.

KMJ CORBIN & COMPANY LLP

Irvine, California

October 12, 2007

 

F-2

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Aftersoft Group, Inc.

Consolidated Balance Sheet

(In thousands, except share data)

		As of
		June 30, 2007
ASSETS
Current Assets
Cash		$	665
Accounts receivable, net of allowance of $227			3,765
Note receivable			865
Amount due from parent company			264
Investment in non-marketable securities			688
Investments in available-for-sale securities			360
Inventories			339
Other			624
Total Current Assets			7,570
Property and Equipment, Net			359
Other Assets
Goodwill			22,393
Amortizable intangible assets, net			7,494
Software development costs, net			1,301
Other long-term assets			29
Total Assets		$	39,146
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable		$	2,688
Accrued expenses			2,050
Current portion of accrued litigation costs			2,275
Payroll and other taxes			1,045
Current portion of long-term debt and accrued interest			745
Current portion of deferred revenue			1,397
Taxes payable			764
Other current liabilities			7
Total Current Liabilities			10,971
Long-Term Liabilities
Deferred revenue, net of current portion			753
Deferred income taxes			880
Accrued litigation costs, net of current portion			1,500
Long-term debt, net of current portion			4
Total Liabilities			14,108
Commitments and contingencies			-
STOCKHOLDERS' EQUITY
Preferred stock
Par value $0.0001 per share; 10,000,000 shares authorized, none issued and outstanding			-
Common stock
Par value $0.0001 per share; 150,000,000 shares authorized, 80,127,384 shares issued and outstanding			8
Additional paid-in capital			26,123
Accumulated other comprehensive income			1,523
Accumulated deficit			(2,616	)
Total Stockholders' Equity			25,038
Total Liabilities and Stockholders' Equity		$	39,146

Aftersoft Group, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share data)

					Restated (see Notes 1 and 10)
		For the year ended June 30, 2007			For the year ended June 30, 2006
Revenues		$	26,778		$	23,479
Cost of revenues			11,061			10,756
Gross Profit			15,717			12,723
Operating Expenses
Research and development			3,693			3,567
Sales and marketing			2,488			2,353
General and administrative			5,112			6,439
Depreciation and amortization			1,947			1,721
Impairment of goodwill			3,100			-
Total Operating Expenses			16,340			14,080
Operating Loss			(623	)		(1,357	)
Other Income (Expense)
Gain on extinguishment of liability			487			-
Interest expense			(149	)		(154	)
(Loss) gain on sale of property and equipment			(4	)		224
Litigation costs			(2,350	)		-
Other, net			26			22
Total other income (expense), net			(1,990	)		92
Pre-tax loss from continuing operations			(2,613	)		(1,265	)
Provision for income taxes			1,040			758
Loss from continuing operations			(3,653	)		(2,023	)
Income from discontinued operations, net of tax			543			448
Gain (loss) on sale of discontinued operations, net of tax			(378	)		295
Net Loss			(3,488	)		(1,280	)
Foreign currency translation gain (loss)			1,899			(74	)
Total Comprehensive Loss		$	(1,589	)	$	(1,354	)
Loss per share attributed to common stockholders – basic and diluted
Net loss from continuing operations		$	(0.04	)	$	(0.03	)
Discontinued operations			-			0.01
Net Loss		$	(0.04	)	$	(0.02	)
Weighted average number of shares of common stock outstanding – basic and diluted			79,828,912			78,401,233

Aftersoft Group, Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands, except share amounts)

		Common Stock
		Shares			Amount			Additional Paid-in- Capital			Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total
Balance as of June 30, 2005			32,500,000		$	3		$	20,934		$	(302	)	$	2,152		$	22,787
Restatement relating to combinations of entities under common control (see Notes 1 and 10) :
Common stock issued for acquisition of EXP Dealer Software Limited			28,000,000			2			2,916			-			-			2,918
Common stock issued for acquisition of Dealer Software and Services Limited			16,750,000			2			686			-			-			688
Restated balance as of June 30, 2005			77,250,000			7			24,536			(302	)		2,152			26,393
Shares issued in connection with merger with W3 Group, Inc.			1,601,167			1			(1	)		-			-			-
Common stock issued to a consultant for services performed			470,000			-			499			-			-			499
Common stock issued for the acquisition of software licenses			500,000			-			530			-			-			530
Foreign currency translation adjustments			-			-			-			(74	)		-			(74	)
Net loss			-			-			-			-			(1,280	)		(1,280	)
Balance as of June 30, 2006 (restated)			79,821,167			8			25,564			(376	)		872			26,068
Common stock issued to consultants for services performed			6,217			-			3			-			-			3
Common stock issued to convert long-term debt			300,000			-			144			-			-			144
Fair value of warrants issued for litigation costs			-			-			412			-			-			412
Foreign currency translation adjustments			-			-			-			1,899			-			1,899
Net loss			-			-			-			-			(3,488	)		(3,488	)
Balance as of June 30, 2007			80,127,384		$	8		$	26,123		$	1,523		$	(2,616	)	$	25,038

Aftersoft Group, Inc.

Consolidated Statements of Cash Flows

(In thousands)

					Restated (see Notes 1 and 10)
		For the year ended June 30, 2007			For the year ended June 30, 2006
Cash Flows from operating activities :
Net loss		$	(3,488	)	$	(1,280	)
Adjustments to reconcile net loss to cash provided by operating activities :
Non-cash revenues			(360	)		-
Depreciation and amortization			1,947			1,721
Gain on extinguishment of liability			(487	)		-
Loss (gain) on sale of property and equipment			4			(224	)
Fair value of warrants issued for litigation costs			412			-
Pre-tax loss (gain) on sale of discontinued operations			378			(422	)
Common stock issued for consulting services			3			499
Impairment of goodwill			3,100			-
Changes in assets and liabilities (net of the effect of acquisitions and divestitures) :
Accounts receivable			(233	)		(1,406	)
Inventories			(75	)		109
Prepaid expenses and other assets			(59	)		(87	)
Net advances from (repayments to) parent company relating to operating activities			(278	)		(870	)
Accounts payable			884			(52	)
Taxes payable			(224	)		904
Deferred revenue			(1,235	)		306
Accrued expenses and other liabilities			300			1,441
Accrued litigation costs			1,805			-
Net cash provided by operating activities			2,394			639
Cash Flows from investing activities :
Purchase of property and equipment			(228	)		(130	)
Proceeds from the sale of property and equipment			-			103
Net advances from (repayments to) parent company relating to investing activities			(1,250	)		1,268
Capitalized software development costs			(585	)		(551	)
Net cash (used in) provided by investing activities			(2,063	)		(690	)
Cash Flows from financing activities :
Payments on long-term debt			(84	)		(1,043	)
Net cash used in financing activities			(84	)		(1,043	)
Effect of exchange rate changes			(40	)		(86	)
Net increase in cash			207			200
Cash at beginning of year			458			258
Cash at end of year		$	665		$	458

Aftersoft Group, Inc.

Consolidated Statements of Cash Flows (Continued)

(In thousands)

					Restated (see Notes 1 and 10)
		For the year ended June 30, 2007			For the year ended June 30, 2006
Supplemental disclosures of cash flow information
Cash paid during the year for :
Interest		$	149		$	130
Income taxes		$	1,300		$	182
Non-cash investing and financing transactions during the year for :
Settlement of note receivable by offsetting against amounts due to Parent		$	950		$	510
Shares issued for acquisition of software licenses		$	-		$	530
Proceeds from sale of office equipment offset against amounts due to Parent		$	-		$	308
Proceeds from sale of Euro Soft offset against amounts due to parent company		$	-		$	450
Earn-out payments to third parties related to EXP paid by Parent		$	2,200		$	-
Shares issued for conversion of long-term debt		$	144		$	-
Euro Software Services Limited divestiture :
Accounts receivable		$	-		$	880
Software licenses			-			530
Accounts payable			-			(240	)
Income taxes payable			-			(192	)
Pre-tax gain on sale			-			422
Note receivable		$	-		$	1,400
Divestiture of Dealer Software and Services Limited :
Accounts receivable		$	933		$	-
Goodwill			700			-
Accounts payable			(68	)		-
Deferred revenue			(322	)		-
Loss on sale			(378	)
Note receivable		$	865		$	-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007 AND 2006

NOTE 1.   Summary of Significant Accounting Policies

Basis of Presentation

Aftersoft Group, Inc. (together with its subsidiaries, the “Company”) is a subsidiary of Auto Data Network, Inc. (“ADNW” or the “Parent”), which owns approximately 82% of the outstanding Common Stock. Subsequent to year end, ADNW is in the process of distributing to its stockholders the shares it holds in the Company.

The Company is a leading provider of business and supply chain management solutions primarily to automotive parts manufacturers, retailers, tire and service chains, independent installers and wholesale distributors in the automotive aftermarket. The Company conducts its businesses through wholly owned subsidiaries with operations in Europe (primarily in the United Kingdom - “UK”) and North America. MAM Software Limited (“MAM”) is based in Sheffield, UK. Aftersoft Network N.A., Inc. (“ASNA”) is comprised of ASNA Warehouse Distribution Management, Inc. and ASNA Tire Management Inc., which are based in San Juan Capistrano, California and ASNA Autoservice, Inc., which is based in Allentown, Pennsylvania. EXP Dealer Software Limited (“EXP”) has two wholly owned subsidiaries. MMI Automotive Limited (“MMI Automotive”) is based in Swindon, UK. Chester, UK-based Anka Design Limited (“Anka”) is an advertising and design business serving the automotive and technology sectors. Dealer Software and Services Limited (“DSS”) is based in Chester and had a subsidiary that was divested in fiscal 2007 (see Note 2). DSS held an 18.18% ownership interest in DCS Automotive Limited (“DCS”), which it divested in fiscal 2008 (see Note 12).

On December 21, 2005, W3 Group, Inc. (“W3”) consummated an Acquisition Agreement (“Agreement”) to acquire all 1,500 of the outstanding shares of Common Stock of Old Aftersoft Group, Inc. (“Oldco”) owned by ADNW in exchange for the issuance of 32,500,000 newly issued shares of W3, par value $0.0001 per share (the “Common Stock”).

Pursuant to the Agreement and as a result of consummation of the Agreement, the existing shareholders of W3 owned 8,877,384 shares, or approximately 11.08% of the 80,127,384 total outstanding shares of the Common Stock and ADNW owned 71,250,000 shares or approximately 88.92% of the total outstanding shares. Concurrent with the closing of the transaction, the Board of Directors of W3 appointed three additional directors designated by ADNW to serve until the next annual election of directors. In addition, concurrent with the close of the transaction, W3 (1) changed its corporate name from W3 Group, Inc. to Aftersoft Group, Inc., (2) changed its corporate address to California, and replaced the corporate officers. The acquisition was recorded as a reverse acquisition, whereby the assets and liabilities and 32,500,000 outstanding shares of Common Stock of Oldco (reported as a 21,667:1 stock split and reflected retroactively for all periods presented) were reported at their historical cost and the 1,601,167 shares of W3 reflected as being issued by the Company on December 21, 2005 as a corporate reorganization. In addition, the results of Oldco for all periods presented prior to the reverse acquisition are reported as the results of the Company.

The Company operates on a June 30 fiscal year end.

Combination of Entities under Common Control

On August 26, 2006, the Company acquired 100% of the issued and outstanding shares of EXP from ADNW in exchange for issuing 28,000,000 shares of Common Stock to ADNW. In addition, on February 1, 2007, the Company acquired 100% of the issued and outstanding shares of DSS from ADNW in exchange for issuing 16,750,000 shares of Common Stock to ADNW. Since these acquisitions are with the Company’s majority shareholder, the net assets acquired are recorded at the amounts reflected in ADNW’s consolidated financial statements as of July 1, 2005, and all historical financial statements for the years ended 2006 and 2007 have been retroactively restated as though the transactions had occurred on July 1, 2005 (see Note 10).

 

F-8

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The net assets of EXP at July 1, 2005 consisted of the following:

Cash		$	64,000
Other current assets			773,000
Property and equipment			177,000
Goodwill			635,000
Amortizable intangibles			2,784,000
Current liabilities			(708,000	)
Other long-term liabilities			(807,000	)
Net assets recorded to stockholders’ equity		$	2,918,000
The net assets of DSS at July 1, 2005 consisted of the following:
Investment in non-marketable securities		$	688,000
Net assets recorded to stockholders’ equity		$	688,000

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements.

Concentrations of Credit Risk

The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.

Cash and Cash Equivalents

The Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At June 30, 2007, the Company had $88,000 of balances in these accounts in excess of the FDIC insurance limits. For banks outside of the United States, the Company maintains its cash accounts at financial institutions which it believes to be credit worthy.

Customers

The Company performs periodic evaluations of its customers and maintains allowances for potential credit losses as deemed necessary. The Company generally does not require collateral to secure its accounts receivable. Credit risk is managed by discontinuing sales to customers who are delinquent. The Company estimates credit losses and returns based on management's evaluation of historical experience and current industry trends. Although the Company expects to collect amounts due, actual collections may differ from the estimated amounts.

No customer accounted for more than 10% of the Company's revenues during the years ended June 30, 2007 and 2006.

Segment Reporting

The Company adopted Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”). SFAS 131 requires public companies to report selected segment information in their quarterly reports issued to stockholders. It also requires entity-wide disclosures about the product, services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. The Company believes it operates in three segments and as such has presented additional segment disclosures (see Note 11).

Geographic Concentrations

The Company conducts business in the United States, Canada and the UK. From customers’ headquartered in their respective countries, the Company derived 20% of its revenues from the United States, and 80% from its UK operations during the year ended June 30, 2007 compared to 1% from Canada, 26% from the United States and 73% from the UK for the year ended June 30, 2006 (as restated). At June 30, 2007, the Company maintained 89% of its net property and equipment in the UK with the remaining 11% in North America.

F-9

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Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Significant estimates made by the Company's management include, but are not limited to, the collectibility of accounts and notes receivable, the recoverability of long-lived assets and valuation of deferred tax assets. Actual results could materially differ from those estimates.

Fair Value of Financial Instruments

The Company's consolidated financial instruments consist of cash, accounts receivable, notes receivable, related party loans, long-term debt, accounts payable and accrued expenses. The carrying values of such instruments classified as current, approximate their fair values as of June 30, 2007 due to their short-term maturities. The difference between the fair value and recorded values of the related party loans and long-term debt are not significant due to the lack of significant differential between current prevailing rates of similar instruments and the rates of the Company’s non-current instruments.

Cash and Cash Equivalents

For the purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes.

Available-for-Sale Investments

The Company accounts for its investments in debt and equity securities with readily determinable fair values that are not accounted for under the equity method of accounting under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”(“SFAS 115”). Management determines the appropriate classification of such securities at the time of purchase and re-evaluates such classification as of each balance sheet date. The Company classifies its marketable securities as available-for-sale under SFAS 115 . Marketable securities consist of equity securities. The specific identification method is used to determine the cost basis of securities disposed of. Unrealized gains and losses on the marketable securities are included as a separate component of accumulated other comprehensive income, net of tax. At June 30, 2007, investments consist of corporate stock with no unrealized gain or loss.

Inventories

Inventories are stated at the lower of cost or current estimated market value. Cost is determined using the first-in, first-out method. Inventories consist primarily of hardware that will be sold to customers. The Company periodically reviews its inventories and records a provision for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Once established, write-downs of inventories are considered permanent adjustments to the cost basis of the obsolete or excess inventories.

Investment in Non-Marketable Securities

DSS owns an 18.18% ownership interest in DCS, a non-public company in the UK, which it acquired for $688,000. Non-marketable securities consist of equity securities for which there are no quoted market prices. Such investments are initially recorded at their cost, subject to an impairment analysis. Such investments will be reduced if the Company receives indications that a permanent decline in value has occurred. Any decline in value of non-marketable securities below cost that is considered to be "other than temporary" will be recorded as a reduction on the cost basis of the security and will be included in the statement of operations as an impairment loss.

Subsequent to June 30, 2007, DSS sold its interest in DCS for $2,000,000 (see Note 12). As a result, this asset has been reflected as a current asset in the accompanying consolidated balance sheet.

F-10

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Property and Equipment

Property and equipment are stated at cost, and are being depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from three to five years. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the related lease terms. Equipment under capital lease obligations is depreciated over the shorter of the estimated useful lives of the related assets or the term of the lease. Maintenance and routine repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the statement of operations.

Software Development Costs

Costs incurred to develop computer software products to be sold or otherwise marketed are charged to expense until technological feasibility of the product has been established. Once technological feasibility has been established, computer software development costs (consisting primarily of internal labor costs) are capitalized and reported at the lower of amortized cost or estimated realizable value. Purchased software development cost is recorded at its estimated fair market value. When a product is ready for general release, its capitalized costs are amortized using the straight-line method over a period of three years. If the future market viability of a software product is less than anticipated, impairment of the related unamortized development costs could occur, which could significantly impact the recorded net income (loss) of the Company.

Amortizable Intangible Assets

Amortizable intangible assets consist of completed software technology, customer relationships and automotive data services and are recorded at cost. Completed software technology and customer relationships are amortized using the straight-line method over their estimated useful lives of 8 to 10 years, and automotive data services are amortized using the straight-line method over their estimated useful lives of 20 years.

Goodwill

Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in the financial statements upon their acquisition and after they have been initially recognized in the financial statements.

SFAS 142 requires that goodwill and intangible assets that have indefinite useful lives not be amortized but rather be tested at least annually for impairment, and intangible assets that have finite useful lives be amortized over their useful lives. In addition, SFAS 142 expands the disclosure requirements about goodwill and other intangible assets in the years subsequent to their acquisition.

SFAS 142 provides specific guidance for testing goodwill and intangible assets that will not be amortized for impairment. Goodwill will be subject to impairment reviews by applying a fair-value-based test at the reporting unit level, which generally represents operations one level below the segments reported by the Company. An impairment loss will be recorded for any goodwill that is determined to be impaired. The Company performs impairment testing on all existing goodwill at least annually at June 30. Based on its analysis, the Company’s management believes that its goodwill is impaired by $3,100,000 at June 30, 2007. The impairment loss relates to ASNA, which is part of the Automotive Parts Aftermarket Sales and Service segment (see Note 11), as a result of recent operating losses. The fair value of ASNA was determined using present value techniques. There can be no assurance, however, that market conditions will not change or demand for the Company’s products and services will continue which could result in additional impairment of goodwill in the future.

For the years ended June 30, 2006 and 2007, goodwill activity was as follows :

Balance, July 1, 2005		$	22,061,000
Restatement for combination of entity under common control - EXP			635,000
Balance, July 1, 2005 and June 30, 2006 (as restated)			22,696,000
Earn-out payments to third parties related to EXP (see Note 2)			2,200,000
Effect of exchange rate changes			1,297,000
Impairment charge			(3,100,000	)
Elimination of goodwill related to divesting of CSC (see Note 2)			(700,000	)
Balance, June 30, 2007		$	22,393,000

 

F-11

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Long-Lived Assets

The Company's management assesses the recoverability of long-lived assets (other than goodwill discussed above) upon the occurrence of a triggering event by determining whether the depreciation and amortization of long-lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long-lived asset impairment, if any, is measured based on fair value and is charged to operations in the period in which long-lived asset impairment is determined by management. At June 30, 2007, the Company's management believes there is no impairment of its long-lived assets (other than goodwill discussed above). There can be no assurance, however, that market conditions will not change or demand for the Company's products and services will continue, which could result in impairment of long-lived assets in the future.

Issuance of Non-Employee Stock for Non-Cash Consideration

All issuances of the Company's stock to non-employees for non-cash consideration have been assigned a per share amount equaling either the market value of the shares issued or the value of consideration received, whichever is more readily determinable. The majority of the non-cash consideration received pertains to services rendered by consultants and others and has been valued at the market value of the shares on the dates issued.

The Company's accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees”. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance with EITF 00-18, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor's balance sheet once the equity instrument is granted for accounting purposes.

Revenue Recognition

The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.” Accordingly, software license revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product component has occurred, the fee is fixed and determinable, and collectibility is probable.

If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met. In accordance with SOP 98-9, the Company accounts for delivered elements in accordance with the residual method when arrangements include multiple product components or other elements and vendor-specific objective evidence exists for the value of all undelivered elements. Revenues on undelivered elements are recognized once delivery is complete.

In those instances where arrangements include significant customization, contractual milestones, acceptance criteria or other contingencies (which represents the majority of the Company's arrangements), the Company accounts for the arrangements using contract accounting, as follows :

1)	When customer acceptance can be estimated, expenditures are capitalized as work in process and deferred until completion of the contract at which time the costs and revenues are recognized.

2)	When customer acceptance cannot be estimated based on historical evidence, costs are expensed as incurred and revenue is recognized at the completion of the contract when customer acceptance is obtained.

The Company records amounts collected from customers in excess of recognizable revenue as deferred revenue in the accompanying consolidated balance sheet.

Revenues for maintenance agreements, software support, on-line services and information products are recognized ratably over the term of the service agreement.

F-12

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Advertising Expense

The Company expenses advertising costs as incurred. For the years ended June 30, 2007 and 2006, advertising expense totaled $199,000 and $211,000 (restated), respectively.

Gain on Extinguishment of Liability

The Company realized $487,000 of income from the extinguishment of sales tax liabilities for the year ended June 30, 2007, due to the expiration of the statute of limitations related to such liabilities. During June 2001, CarParts adopted a formal plan to abandon its internet retailing business and a provision was set up to cover any potential sales tax liabilities. This balance represents the portion of the potential liabilities that were never paid.

Foreign Currency

Management has determined that the functional currency of its subsidiaries is the local currency. Assets and liabilities of the UK subsidiaries are translated into U.S. dollars at the year-end exchange rates. Income and expenses are translated at an average exchange rate for the year and the resulting translation gain (loss) adjustments are accumulated as a separate component of stockholders' equity, which totaled $1,899,000 and ($74,000) (restated) for the years ended June 30, 2007 and 2006, respectively.

Foreign currency gains and losses from transactions denominated in other than respective local currencies are included in income. The Company had no foreign currency transaction gains (losses) for all periods presented.

Comprehensive Income

Comprehensive income (loss) includes all changes in equity (net assets) during a period from non-owner sources. For the years ended June 30, 2007 and 2006, the components of comprehensive income (loss) consist of foreign currency translation gains (losses).

Income Taxes

The Company accounts for domestic and foreign income taxes under Statement of Financial Accounting Standards No. 109 ("SFAS 109"), “Accounting for Income Taxes.”

Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. Deferred taxation is provided in full in respect of taxation deferred by timing differences between the treatment of certain items for taxation and accounting purposes. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Basic and Diluted Earnings (Loss) Per Share

Basic earnings (loss) per common share are computed based on the weighted average number of shares outstanding for the year. Diluted earnings (loss) per share are computed by dividing net income (loss) by the weighted average shares outstanding assuming all potential dilutive common shares were issued. During periods in which the Company incurs losses, Common Stock equivalents, if any, are not considered, as their effect would be anti-dilutive. The Company has no dilutive securities for the years ended June 30, 2007 and 2006.

F-13

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The following is a reconciliation of the numerator and denominators of the basic and diluted earnings (loss) per share computation for the years ended June 30 :

					(As Restated)
		2007			2006
Numerator for basic and diluted loss per share :
Net loss available to common stockholders		$	(3,488,000	)	$	(1,280,000	)
Denominator for basic and diluted loss per common share :
Weighted average number of shares of common stock outstanding			79,828,912			78,401,233
Net loss per common share available to common stockholders – basic and diluted		$	(0.04	)	$	(0.02	)

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,” which defines the threshold for recognizing the benefits of tax return positions as well as guidance regarding the measurement of the resulting tax benefits. FIN 48 requires a company to recognize for financial statement purposes the impact of a tax position if that position is “more likely than not” to prevail (defined as a likelihood of more than fifty percent of being sustained upon audit, based on the technical merits of the tax position). FIN 48 will be effective as of the beginning of the Company’s fiscal year ending June 30, 2008, with the cumulative effect of the change in accounting principle recorded as an adjustment to retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements,” to define fair value, establish a framework for measuring fair value and expand disclosures about fair value measurements. This statement provides guidance related to the definition of fair value, the methods used to measure fair value and disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS 157 on its financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “ The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115”. SFAS 159 would create a fair value option of accounting for qualifying financial assets and liabilities under which an irrevocable election could be made at inception to measure such assets and liabilities initially and subsequently at fair value, with all changes in fair value reported in earnings. SFAS 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption of SFAS 159 will have on its consolidated financial position, results of operations and cash flows.

NOTE 2.   Acquisitions and Divestitures

Euro Software Services Limited

On January 17, 2006, the Company acquired 100% of the outstanding Common Stock of Euro Software Services Limited ("Euro Soft") from a third party for 500,000 shares of its unregistered Common Stock valued at $1.06 per share (based on the closing price at the date of the transaction). As Euro Soft had no operations, customers, accounts receivable or accounts payable at that date, the Company considered the transaction an acquisition of software licenses totaling $530,000.

On June 10, 2006, the Company sold 100% of the outstanding Common Stock of Euro Soft (which by then had its own operations) to a third party for $450,000 in cash and $950,000 in a non-interest bearing note due in installments of cash or publicly traded buyer stock of $450,000 in December 2006 and $500,000 in June 2007. The initial cash payment of $450,000 and the fiscal 2007 installments of $950,000 were paid by the third party directly to ADNW in satisfaction of advances to the Company from ADNW.

F-14

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The operations of Euro Soft and its subsequent sale are considered discontinued operations.

The sale of Euro Soft resulted in a gain on the sale of discontinued operations as follows :

Accounts receivable sold		$	880,000
Software licenses sold			530,000
Accounts payable assumed			(240,000	)
Income taxes payable assumed			(192,000	)
Net assets sold			978,000
Consideration received			1,400,000
Pre-tax gain on sale of discontinued operations		$	422,000
Income taxes			(127,000	)
Gain on sale of discontinued operations, net of tax		$	295,000
Included in discontinued operations of the Company are the following results of Euro Soft between January 17, 2006 and June 10, 2006 :
Revenues		$	880,000
Cost of sales			240,000
Income from operations			640,000
Income taxes			192,000
Income from discontinued operations, net of tax		$	448,000

EXP Dealer Software Limited

The acquisition was recorded as a combination of an entity under common control (see Note 1).

During the year ended June 30, 2007, ADNW made earn-out payments on behalf of the Company to the previous owners of Anka totaling $1,500,000 pursuant to the original acquisition agreement between ADNW and the previous owners. Such payments were recorded as goodwill. There are no additional potential earn-out payments under the acquisition agreement.

Dealer Software and Services Limited

This acquisition was recorded as a combination of an entity under common control (see Note 1). DSS had a wholly owned subsidiary, Consolidated Software Capital Limited (“CSC”).

During the year ended June 30, 2007, ADNW made earn-out payments on behalf of the Company to the previous owners of CSC totaling $700,000 related to the original CSC acquisition by ADNW under the acquisition agreement. Such payments were recorded as goodwill. There are no additional potential earn-out payments under the acquisition agreement.

On June 17, 2007, DSS sold all of its CSC shares for a note receivable of $865,000. This note has the following terms : $432,750 is due 180 days from the date of disposal with the final payment becoming due 360 days from disposal. The $865,000 is reported as a note receivable in the accompanying consolidated balance sheet.

The operations of CSC are considered discontinued operations.

F-15

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