Item 6. Description Of Business ¹

History

The founders of MD Technologies began developing software solutions for the healthcare industry in 1993. Initial development of the Medtopia application began in early 1995 when the founders of the Company decided that the emerging growth of the Internet introduced a significant opportunity to create innovative solutions for the healthcare industry. After several years of modifications and re-engineering the product, Medtopia went live on the Internet with its first physician in November of 1998. We believe that, at the time, Medtopia was the only completely web-based practice management system on the Internet. Our founders struggled to find customers willing to use the product, as the Internet was a relatively new and unproven medium for business applications. Likewise, the idea of businesses storing their data on remote servers and renting, rather than purchasing, their applications was a relatively foreign concept. However, as the Internet became more ubiquitous and generally accepted as a business medium over the following two years, we began to find more and more customers willing to embrace the technology and the product.

Recognizing the need for assistance to adequately develop our applications and implement a realistic distribution plan, our founders incorporated MD Technologies Inc. on February 25, 2000, in the State of Delaware, in order to raise capital to exploit Medtopia at a time they felt that the industry was more accepting of Internet based applications. We remained in a strict research and development mode until January 2001, when we began a formal strategy of acquiring customers and revenue at a steady, consistent pace with the implementation of a sales force and marketing strategy.

As more customers began to use the Medtopia applications, we also began offering accounts receivable management services to complement the sales of the product and add new revenue to the company. We began offering these services to customers in 2002 and have grown our customer base and revenue for these services steadily. Since January of 2002, we have grown our entire customer base of all products and services from 21 customers to 168 customers as of December 2004.

Public Offering of Shares

On December 17, 2003, we qualified a public offering of 1,675,000 shares of common stock at a price of $2.40 per share in accordance with Regulation A (the “Offering”). On December 22, 2003, our registration statement for these shares on Form 10-SB became effective and the Offering was officially closed on June 30, 2004. We raised a total of $3,035,600 from the selling of shares of common stock in the Offering.

Company Vision

Since our inception, our management team has followed two underlying principles: (1) over time, nearly all software business applications will become Internet hosted and managed; and (2) an unwavering dedication to customer service and support will drive customers to us and earn their long-term loyalty. These two principles have guided all our actions since our inception.

Our early lead in the development of Internet-based applications has afforded us a distinct advantage over many competitors who have yet to embrace or adopt the Internet as a medium for their applications. Medtopia’s products and services maintain a price and serviceability advantage over such competitors since we build, host and manage the applications for the customer. For example, the products can be delivered to the customer instantaneously and upgraded continuously and imperceptibly. Modifications are applied immediately and typically with no interruption to the customer. The customer’s data is always backed up and stored off-site, keeping it safe from natural and unnatural disasters. Back-end processes, such as electronic claims processing and data backups, are performed in the background by trained Medtopia staff and are usually unnoticed by the customer. These benefits, and others, create a suite of products that are less intrusive to the customer, and easier to service and maintain by us.

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Internet hosted applications also create a price advantage over many of our competitors. Since our products are delivered and modified quickly and efficiently via the Internet, they are more cost-effective than many other companies’ products. Customer support is enhanced and made more cost effective since all customers use the same version of the applications . Our subscription fees include technical support. Some of our competitors’ monthly costs for technical support alone exceed the total Medtopia subscription fee.

We have a policy of always attempting to answer a service and support call with a live person before the third ring of the telephone. We strive to set a new standard by which others will be measured. The Medtopia support staff is friendly, knowledgeable and dedicated to helping customers with problems and questions. Our management has great confidence in our support team and continues to explore ways to improve their effectiveness.

We are also able to provide a greatly enhanced and value-added service to our accounts receivable management services since we are able to deliver automated and technological solutions to what is ordinarily a paper-driven, manual labor process. Through the use of our technology and automated processes, we are able to deliver a level of service that is faster, more efficient, more affordable, and all with a higher level of quality control than what can be delivered by many of our competitors. The value added by our web-based practice management system combined with our technical expertise in the revenue cycle management of the billing and collections process for physicians’ offices helps us to compete with other companies in ways that they cannot compete respectively with us.

Finally, we believe that the future of healthcare will be shaped with the introduction and permeation of new technology, such as with the implementation of Electronic Medical Records. We have devoted a significant portion of our research and development into this technology, which we believe will become an increasingly adopted tool used by healthcare providers to reduce costs and deliver a higher quality of care to their patients.

These principles and philosophies have molded our history to date, and we believe that a continued devotion to this vision will ensure our success in the future.

Healthcare Industry

Healthcare is a vital part of the United States economy and is critical to every citizen. However, healthcare has yet to fully benefit from the technology revolution that is changing other industries. We believe that advanced information technology will have a fundamental impact on healthcare delivery, payment and personal health management. This revolution will be significant because it will help solve key problems facing the industry: improving patient safety, reducing costs, improving the quality of care, and improving the efficiency of processes for coordinating and paying for healthcare. The convergence of the Internet and healthcare management is a new and evolving paradigm in healthcare management. The market opportunities created by this convergence are expected to expand rapidly.

Cost of healthcare in the United States has been climbing. In 1960 total healthcare expenditures were $26 billion, or 5.1 percent of the gross domestic product (“GDP”). By 2000 total healthcare costs had climbed to $1.3 trillion and represented 15.9 percent of GDP. See, Health, United States, 2001, with Urban and Rural Health Chartbook, published by the U.S. Department of Health and Human Services through the Centers for Disease Control and Prevention. Healthcare costs continue to escalate. According to the United States Center for Medicare & Medicaid Services, formerly the Health Care Finance Administration (“HCFA”), healthcare expenditures in 2006 will exceed $1.6 trillion. Approximately 70 percent of healthcare transactions today are paper-based, resulting in administrative costs of up to 20 percent of each dollar spent. It was the need to reduce these costs that, at least in part, led to the Healthcare Insurance Portability and Accountability Act of 1996 (“HIPAA”). In the United States, the yearly cost of processing and administering claims is about $90 billion. Some healthcare industry analysts believe the $90 billion in administrative costs could be reduced to $5 billion, or less, by moving from a paper-based system to digital systems. See, Healthcare Without Boundaries: Integration Technology for the New Healthcare Economy , February, 2003, Microsoft Corporation White Paper. McKinsey and Company, an international management consulting firm, reports that “[T]he U.S. health care industry is huge—with annual expenditures of more than a trillion dollars—but extremely fragmented: more than half of approximately 600,000 physicians engaged directly in patient care work in practices of eight physicians or fewer.”

In the United States there are more than 600,000 physicians, the majority of whom practice in office base groups or in solo practices. See, American Medical Association Physician Masterfile , Dec. 2000. MD Technologies specifically targets these practices and has begun to penetrate this vast market.

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The healthcare industry is clearly a troubled industry and is being choked by excessive paperwork and inefficiencies, but this has created enormous business opportunities for those companies who can provide solutions to eliminate these inefficiencies.

Products and Services

Our products and services are designed to provide advanced technological solutions to healthcare providers in an attempt to assist them with their administrative and clinical processes. All products are developed internally without the assistance of outside programmers or consultants. The Medtopia suite of products and services consists of Medtopia Manager , Medtopia EMR , Medtopia DMS , Medtopia Mobile, MyMedtopia, and Medtopia Expert . These products and services are designed such that they can be packaged and sold independently of one another. However, they are more specifically designed to complement each other in functionality. Customers can employ the entire suite of products and services into a single solution and maximize their efficiency and productivity.

To date, we have generated the majority of our revenues from the delivery of our first two flagship products and services, Medtopia Manager and Medtopia Expert . The following table summarizes our revenues by application from inception until December 31, 2004.

Medtopia Manager

Medtopia Manager is an Internet-based practice management application that enables physicians and other healthcare providers to manage their organizations online using only a web-browser. It is designed to streamline many of the day-to-day routines involved in running a medical practice, and thereby help physicians and their staff members organize their workload and increase productivity. Physicians and their employees have access to clinical and financial information from the office, home, hospital, or anywhere that an Internet connection is available. The application employs 128-bit SSL encryption, which ensures privacy throughout the entire application and adheres to HIPAA security guidelines. The application consists of several integrated features such as: appointment scheduling, patient account management, electronic claims processing, electronic remittance advice, accounts receivable management, human resource management, project management, electronic medical records, prescription writing, inventory management, and more. All of these tools are designed to work coherently in such a way as to increase productivity throughout the organization. The application also utilizes various workflow queues to assist in many of the work processes that take place in the practice. For example, there is a hospital queue for tracking and managing the admission, discharge, and billing of patients that are currently hospitalized. Similarly, there are claim queues, collection queues, appointment queues, etc. Each of the queues has been designed specifically for helping the office personnel organize information and make it easier to track and manage for maximum efficiency. Since the application and its data are hosted and managed in our data center, the Medtopia staff members can perform all the back-end data operations that would ordinarily require an employee of the practice to perform. These activities include sending claims electronically to payers and clearinghouses, posting electronic remittance advice, performing and monitoring EDI transactions such as electronic claim status and eligibility verifications, performing month-end closeouts, daily data backups, hardware and software upgrades, and other system maintenance. This allows the customers to focus more on their business rather than on mundane data management chores. Moreover, our trained employees are better able to monitor the data management and to manage operations in order to minimize errors. The Medtopia support staff know how to spot potential problems and take corrective action when they arise.

The recurring revenue stream from the subscriptions of Medtopia Manager increases as each new customer is added to the system. While we receive up-front income from the setup and installation of a new customer, it is the recurring revenue that we count on to bolster the company’s growth.

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However, expenses associated with this revenue growth do not increase proportionally. Once a new customer is brought online, the maintenance of the physician’s clinic is related primarily to customer support. New customer support personnel are added as necessary to provide an adequate ratio of support personnel to customers to ensure that all support issues can be handled expeditiously. Our current ratio is approximately one support person per 25 customers. This ratio will be adjusted as needed and may vary depending upon many factors such as the size of the customers added to the system and the geographic location of new customers in relation to our support staff.

Medtopia Manager Pricing

Medtopia Manager is offered to customers as a monthly subscription of $350/month per physician (or provider). Additionally, there is a one-time setup cost of $500 per provider and a $1,200 training fee per site. The Company also offers data conversions for customers with prices ranging between $1,500 to $8,000, depending on the data format, volume of data, and type of conversion (i.e. patient demographic, open-item, or full-detail.) The data-conversion fee is typically negotiated with the customer at the time of the sale and varies on the circumstances. The setup, training, and subscription fees can vary depending upon the number of physicians in the group, the number of physical sites, and the number of users.

Medtopia Mobile

Medtopia Mobile is a handheld application running on Microsoft ^® Pocket PC’s and Microsoft Tablet PC’s that allows the physician to perform various functions while in the exam room with the patient, or while away from the office, such as when making hospital rounds. The application synchronizes with the Medtopia Manager practice management application over the Internet and gives the physician access to medical information on his patients, such as procedure and diagnosis history, drug allergies, medications, insurance information, and medical alerts. The physician also has the ability to document a new encounter with the patient and capture all the necessary billing information to synchronize directly into the practice management application. Additionally, the application allows the physician to capture handwritten and audio notes and store them as part of the patient’s permanent medical record. All information captured by the physician on the device can be synchronized immediately, or in a batch, to the Medtopia servers via the Internet.

The list of features available with Medtopia Mobile includes: (i) an appointment calendar for managing office appointments, hospital rounds, surgeries, and meetings; (ii) super-bills and charge-capture; (iii) prescription writing; (iv) patient medical history; (v) encounter documentation; (vi) referral management; (vii) secured intranet messaging; and (viii) contact management.

Some customers may wish to deploy Medtopia Mobile throughout their enterprise, but may not want to use Medtopia Manager as their practice management system. For these customers, we provide a limited version of Medtopia Manager, which allows them to track and manage the information via a web interface and also export Medtopia Mobile data to their own system.

Medtopia Mobile Pricing

Medtopia Mobile is provided to physicians for a monthly subscription fee of $150. There is a single one-time licensing fee of $1,500. This fee includes the Medtopia Mobile software and the creation of the online Medtopia account if the customer does not already have one.

MyMedtopia

MyMedtopia is a web-based application designed for patients to allow them to track and manage their healthcare information online. Patients can sign up to use MyMedtopia on their own, or their physician can issue an account for them. The application benefits both physicians and their patients by allowing them to share vital healthcare information while encouraging the patient to take a more proactive role in his or her own healthcare. The application enables patients to track information such as family histories, medical conditions, prescriptions and medications, emergency medical information, medical expenses, diet and nutrition, exercise and fitness, and upcoming appointments.

When deployed by a physician to his patients, MyMedtopia can prove to be an invaluable tool for enabling secured and direct communication with the patient. Similarly, the application becomes a tool for utilization by the office staff for coordinating with patients for appointments, prescription requests, and statement questions. If given access by their

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physician, a patient can look up their statement online and see what charges have been paid by the insurance carrier and what their responsibility is. This type of functionality can reduce the number of phone calls into the physician’s practice and thereby help make the overall operation of the practice more efficient.

MyMedtopia Pricing

There is no set pricing for MyMedtopia at this time. We are exploring how best to utilize the functionality of this product in such a way as to eventually create a recurring revenue stream for us. The MyMedtopia application is currently being used by Emory Healthcare as part of the benefits offered to its patients and users of its online healthcare services.

Medtopia Expert

In 2002, we began providing our Medtopia Expert billing and accounts receivable management services to a limited number of customers. As of December 31, 2004, we provided these services to 33 customers. These services typically include the review and data-entry of our customers’ patient encounter information into Medtopia Manager . The accuracy of the billing information is verified using features built into Medtopia that have been especially designed for this purpose. This information is used to process claims with various insurance carriers by sending it electronically through Medtopia and third party clearinghouses. Once entered into Medtopia , our customers can track and review their accounts receivables online as well as run real-time reports and perform their own analysis of the data using only a web-browser. We manage our customers’ receivables all the way through the adjudication process until payment. Upon receiving payment confirmation, denial, or request for additional information, we post the payment to the system, provide any additional information requested, and make any adjustments if necessary. The fact that we host the customers’ information and that they are intimately familiar with our application allows us to provide a higher level of service and achieve economies of scale not available to competing billing companies. This gives us an advantage over competitors who do not possess the technology to deliver this level of service.

Medtopia Expert Pricing

Our Medtopia Expert billing and accounts receivable management services are invoiced to customers as a percentage of actual collections. Our fees are negotiated with each of our customers depending on the level of activity expected and volume and amount of charges. Some customers prefer that our staff perform all data input functions and they provide us with hard copies of their patient encounter information. Others perform the data input themselves. Our fees range on average from 3% to 6% of collections. In most cases we can demonstrate that our fees are less than what our customers would pay for employees to perform similar services in-house. We view this component of our business model as a major growth opportunity for the Company.

Medtopia DMS

The Medtopia DMS application is a new product developed in 2004 and is currently in beta testing. It is a document management system that allows healthcare providers to image, index, archive, search, and retrieve electronic documents throughout their enterprise. The application was designed to work completely over the Internet so that users can have access to their electronic documents from any location at any time wherever Internet access is available. The application was also designed to integrate completely with the entire Medtopia suite of products and services so that potential customers can receive a completely integrated and comprehensive solution for their administrative and clinical needs. The Medtopia DMS was developed to work as a hosted solution for customers who do not wish to purchase or maintain their own server equipment, however the product can also be sold as a standalone system for larger customers who prefer to store their data on their own premises. The application is flexible and can accommodate nearly any kind of electronic document, such as images, word processing documents, and audio files.

Medtopia DMS Pricing

Official pricing has not yet been established, however the product will be sold in two varieties. The first is as a full-service, hosted solution whereby customers are invoiced monthly for a subscription that includes all software, future updates, and service. In the hosted solution, all data is stored on our servers in our data center where it is maintained and backed up routinely. Additionally, the product can be sold as a standalone system where customers can purchase the

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system once and simply pay a monthly fee for service and support. In this configuration, the software runs completely on the customers’ servers on their own premises.

Medtopia EMR

The Medtopia EMR application is a new product developed in 2004 and is currently in beta testing. Medtopia EMR is our electronic medical records application that is designed to interface directly to all of our other products and provide clinical assistance to physicians and their staff. With Medtopia EMR , healthcare providers have the opportunity to reduce their dependence on hardcopy paper records, improve operational efficiencies, and reduce costs all at the same time. The application interfaces directly with the Medtopia Manager practice management application over the Internet and gives the physician access to clinical medical information on his or her patients, such as procedure and diagnosis history, drug allergies, medications, insurance information, past medical history, lab results, x-rays, and medical alerts. The physician also has the ability to document a new encounter with the patient and capture all the necessary billing information to synchronize directly into the practice management application. Additionally, the application allows the physician to capture handwritten and audio notes and store them as part of the patient’s permanent medical record. The application is an enhanced version of the Medtopia Mobile application and allows for additional functionality not found in Medtopia Mobile , such as detailed encounter documentation, evaluation and management coding tools, and advanced prescription writing tools.

The list of features available with Medtopia EMR includes: (i) an appointment calendar for managing office appointments, hospital rounds, surgeries, and meetings; (ii) super-bills and charge-capture; (iii) prescription writing; (iv) patient medical history; (v) encounter documentation; (vi) evaluation and management coding tools; (vii) advanced drug lookup database and utilities; (viii) document imaging and paper chart management; (ix) remote access via Internet and web-browser; (x) SOAP Notes; (xi) referral management tools; (xii) secured intranet messaging; and (xiii) contact management.

Medtopia EMR Pricing

Medtopia EMR is currently in beta testing and formal pricing of the product has not been established yet. Once in production, the product will be sold as both a hosted solution and standalone solution to healthcare providers. When purchased as a hosted solution, customers will receive all the software, upgrades, and service as part of their monthly subscription to the product. As a standalone solution, customers will have the opportunity to purchase the application upfront and pay a lower monthly fee for service and support.

Marketing

The Medtopia products and services are marketed to potential customers through multiple strategies, including telemarketing, direct mail campaigns, door-to-door canvassing, and industry trade shows. Through these and other methods, we focus on establishing the Medtopia brand name and continually strive to place ourselves in front of potential customers as often as possible. Not all potential customers are looking for our products or services at the time we reach them, but we hope to establish the brand name so that we are first in their mind when they begin to look for products and services similar to ours.

We currently focus our marketing efforts on reaching the smaller physicians practices where we feel that our products compete most aggressively against many of our competitors. We utilize our marketing efforts to reach out and identify potential customers and, once identified as a potential candidate with interest in our products, we turn them over to the sales department where a detailed and comprehensive discussion of features and price can be discussed.

We also rely heavily upon potential leads from existing customer referrals, which is a significant source of new sales for our products and services. We have demonstrated that our continued success in maintaining a satisfied customer base is one of the best sources of new leads and sales for the Company. Additionally, we receive leads from our Internet presence which drives potential customers to our website where they can request more information or a demonstration of our products.

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Initial Target Market

Our company’s distribution strategy is to initially expand into large metropolitan areas with numerous physicians where the market research indicates a high potential for adoption of the Medtopia products.

To date, we have targeted our marketing efforts at physicians practicing in metropolitan areas in the states of Louisiana, Florida, Georgia, Mississippi, and Texas. Thereafter, we anticipate penetrating other states and regions where we feel that our products and services will have the best chances of establishing sales and market share. We will continue to identify other markets that present a good opportunity for our products, and we will compete aggressively in those markets as they are identified.

Our core market nationally consists of the 300,000+ physicians who practice alone or in groups of eight or less. The following methods are employed to enlist new customers:

(i) We market directly to individual physicians through the efforts of our inside and outside sales force. We utilize telemarketing and direct mail campaigns for generating new sales leads, which are then solicited by direct-sales representatives. This process usually involves multiple onsite presentations and culminates in a proposal to the customer.

(ii) We brand our products and establish name recognition by participating in trade shows, events and conferences that have the potential to generate interest in us on a local, regional, and national stage.

(iii) We attempt to solicit relationships with large institutional healthcare entities such as hospital companies, physician groups and academic institutions. Well-established relationships at this level can potentially lead to significant sales of our products and services.

(iv) We actively pursue strategic relationships with potential distributors and attempt to establish a national distribution network where our products can be sold as part of a value-added reseller program.

(v) We use a public relations firm to help generate positive news stories and public attention about the company where possible. This helps create public awareness of our company and products and helps generate sales in many cases.

Pricing/Level of Service

Medtopia Manager’s pricing is determined by the management’s analysis of the competition and the targeted customer’s willingness to pay, consistent with a fair profit to us. Specific fees were discussed in preceding sections and will not be repeated here. Varying discounts are offered to volume providers and potential customers depending on many factors.

The pricing of the Medtopia Manager application has remained consistent since 2002. Medtopia Manager costs less than many of its current competitors and is far less expensive than many of the competing high-end practice management applications. We also feel that Medtopia Expert pricing is competitive at its current price, however, we recognize that future pricing of that service may be potentially affected by other factors dictated by the market conditions at that time.

Advertising and Promotion

The overall advertising and promotional objectives are to: (i) position MD Technologies as the leader in the healthcare markets in which we compete; (ii) increase Company awareness and brand name recognition among physicians and their office managers; (iii) generate qualified sales leads and potential new distributors for field sales organizations; (iv) create product advertising programs supporting our marketing position; and (v) coordinate sales literature, demonstration materials, telemarketing programs and direct-response promotions in order to maximize exposure and success.

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Insurance

We have secured Errors and Omissions, D&O, and Comprehensive General Liability insurance and will continue such coverage if available at a reasonable cost.

Data Security

Our data is secured and backed up multiple times daily. Our main office is located in the same building with the technical offices of a telecommunications company that provides us with our primary link to the Internet. We believe this close proximity minimizes the potential for disruption between the telecommunication provider and the Medtopia servers. We also have an ancillary power source to eliminate the risk of power outages. Additionally, we maintain redundant Internet access through two different providers to ensure reliability of our connection to customers.

We have incorporated a security management system to protect patient and physician data, using a combination of security methodologies to provide multiple lines of defense. These include:

Research and Development

Our products are all continually modified and improved in order to remain current and up to date with the latest technology. Since our business model is largely based upon subscription revenue rather than revenue from the sales of version upgrades, our products are constantly updated with new features and improvements on a daily basis. There was a significant increase in research and software development expenses in 2004 compared to the previous two years as we instituted a major focus of new product development on our Medtopia Mobile, DMS , and EMR applications. The total amount capitalized as research and software development costs for 2004 was $190,209, as compared to research and software development costs of $47,198, $51,219, and $170,909 for years 2003, 2002, and 2001 respectively. The majority of initial development for these new products was performed in 2004 and these products, having been determined to be technically feasible, are now in beta testing where current development consists of modification to existing functionality and new feature development to those products for the next version release.

Medtopia Mobile, DMS, and EMR

Research and Software Development Costs

In 2004, we also began the development of a new product enhancement that we labeled Medtopia AI , which is based upon the implementation of artificial intelligence rules-engines into our products. Metopia AI is not a separate product, but rather an underlying technology that we have begun to build into all of our products in order to enhance the performance and to differentiate us from our competitors. We believe that this technology, while in a nascent phase of

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development, will evolve to become the core of our products and will help us maintain a technological edge over our competitors.

Product Strategy

Product Life Cycles

The life cycle for Medtopia Manager, Mobile, DMS, and EMR is potentially unlimited, as it provides the administrative and clinical tools that will always be needed in a physician’s practice. The products are always kept current as upgrades are provided weekly and delivered to customers seamlessly via the Internet. This delivery allows the product to evolve to the continuing needs of the customer. The responsiveness of the Medtopia product development team helps to ensure that the customer’s needs are continually satisfied, thereby helping us retain our customer base for the long-term.

Intellectual Property

We protect our products under available federal trademark and copyright protections as well as through confidentiality agreements with vendors and employees. In particular, the name Medtopia is a registered trademark of the Company. The software that forms the core of Medtopia is copyrighted in the Company’s name. Moreover, total development of the product has been performed exclusively by our employees; no outside contractors have been used.

Government Regulations

We have obtained all required federal and state permits and licenses to operate our business. We adhere to compliance standards of the Healthcare Insurance Portability and Accountability Act of 1996 (“HIPAA”). Our industry is heavily government regulated. Our government regulatory risks run the gamut from regulation affecting our listing as a publicly traded entity to regulations affecting the healthcare industry in general and physician practice management in particular.

Laws and regulations may be adopted with respect to the Internet or other online services covering user privacy, patient confidentiality and other issues, including: pricing, content, copyrights and patents, distribution, characteristics, and quality of products and services. We cannot predict whether these laws will be adopted or how they will affect our business. Any legislation or regulations of this nature could affect the way we conduct our business, particularly in our collection or use of personal information, and could harm our business. Further, activities on or using the Internet have come under increased scrutiny, including increased investigation in the healthcare arena by the Federal Trade Commission and heightened media attention. A number of proposals have been made at the federal, state and local levels that would impose additional taxes on the sale of goods and services through the Internet. Such proposals, if adopted, could impair the growth of electronic commerce, and adversely affect our business.

We may host any of a wide variety of services that enable individuals and companies to exchange information, conduct business and engage in various online activities. The laws relating to the liability of providers of these online services for activities of their users is currently unsettled. These types of claims have been brought, and sometimes successfully pressed, against online service providers in the past.

We could be adversely affected by healthcare regulation. The healthcare industry is highly regulated and is subject to political and regulatory changes. These factors affect the purchasing practices and operation of healthcare organizations. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in our applications and services. Thus, we do not know what effect any proposals would have on our business. Numerous state and federal laws govern the collection, dissemination, use, access to and confidentiality of patient health information. Many states have laws and regulations that protect the confidentiality of medical records or medical information. In addition, the federal Department of Health and Human Services has proposed regulations implementing the Health Insurance Portability and Accountability Act of 1996, or HIPAA, concerning standards for electronic transactions, security and electronic signatures and privacy of individually identifiable health information. These regulations, among other things, require companies to develop security standards for all health information that is used electronically. The

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proposed regulations impose significant obligations on companies that send or receive electronic health information. The application of these laws to the personal information Medtopia collects could create potential liability under these laws. We have designed our services to comply with these regulations, but cannot predict modifications to these regulations. Any changes could cause us to use additional resources to revise our platform and services. Additional legislation governing the distribution of medical records exists and has been proposed at both the state and federal levels. We will be subject to extensive regulation relating to the confidentiality and release of patient records, and it may be expensive to implement security or other measures to comply with new legislation and final regulations. We may also be restricted or prevented from maintaining or delivering patient records electronically, which would have an adverse effect on our business.

The Food and Drug Administration (“FDA”) has jurisdiction under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act, which is referred to here as the “FDA Act”, and may seek to regulate computer products and software as medical devices if they are intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease in humans. The FDA has issued a final rule under which manufacturers of medical image storage devices and related software are required to submit to the FDA pre-market notification applications, which are each referred to in this document as a 510(k) Application, and otherwise comply with the requirements of the FDA Act applicable to medical devices. We have attempted to design our services so that our computer applications and software are not considered to be medical devices. Because we believe our services are not subject to FDA regulation, we have not filed a 510(k) Application with the FDA for our products. However, the FDA may take the position that our services are subject to FDA regulation. In addition, we may expand our services in the future to areas that subject them to FDA regulation. The FDA is currently reviewing its policy for the regulation of computer software, and there is a risk that our software could in the future become subject to some or all of the above requirements. If the FDA takes the position that any of our services or software are subject to FDA regulation, we may be required to file a 510(k) Application, which would be subject to FDA review and approval and which may be a time-consuming process. We have no experience in complying with FDA regulations and believe that complying with FDA regulations may be time-consuming, burdensome and expensive and could delay our introduction of new applications or services.

State and federal statutes and regulations governing transmission of claims may affect our operations. For example, Medicaid rules require certain processing services and eligibility verification to be maintained as separate and distinct operations. We believe that our practices are in compliance with applicable state and federal laws. These laws, though, are complex and changing, and the government may take positions that are inconsistent with our practices.

The practice of most healthcare professions requires licensing under applicable state law. In addition, the laws in some states prohibit business entities from practicing medicine. We have attempted to structure our web site, strategic relationships and other operations to avoid violating these state licensing and professional practice laws. A state may, however, determine that some portion of our business violates these laws and may seek to discontinue them or subject us to penalties or licensure requirements. We employ and contract with others who provide only medical information to consumers and have no intent to provide medical care or advice. We do not maintain professional liability insurance because we believe we are not a healthcare provider and any determination that we are a healthcare provider and acted improperly as a healthcare provider may result in liability for which we are not insured.

Customer Terms

Our relationships with our customers are regulated by subscription contracts that we execute with each customer. These contracts contain our standard terms and conditions, the most important of which relate to the price charged for our services/products. Our primary source of revenue is derived from subscription fees paid by our customers on a monthly basis. Our contracts generally have a one (1) year term and renew on a month-to-month basis after the first year. We have the right to change the price for our services/products on the year anniversary of our contract. Should a customer terminate our relationship, we are obligated to provide them with the information we host for them in a format that allows them to migrate to another vendor. For the years ended December 31, 2004 and 2003, one customer accounted for a total of approximately 16% and 15% of total revenues, respectively and another customer accounted for a total of approximately 10% and 6%, respectively.

There are two types of vendors important to our business. (1) Internet service providers who provide us with our connections to the Internet. We currently use three separate vendors in order to reduce our dependency upon any single vendor for service. If we were to lose one or more of these relationships, we feel that there are several other alternate providers that could provide our Internet connectivity with little or no adverse effect to our business. (2) We rely upon the

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medical billing clearinghouse through which our customers bill insurance claims to third party payers. We currently use Envoy, which is owned by one of our competitors, WebMD. The WebMD Envoy agreement, dated February 17, 2004, entitled “WebMD ENVOY Agreement for Vendors,” allows us to utilize the clearinghouse services, including medical batch transaction services and related software and hardware, of WebMD ENVOY to submit our customers’ claims for services to various payors for those services, primarily private insurance companies. This agreement has a primary term of one (1) year and automatically renews for additional one-year terms unless terminated by either party 60 days prior to the expiration of the then current term. Pursuant to the agreement, we paid WebMD Envoy a service fee of $3,599.00 covering the first year period (2004). All similar service fees for subsequent years are waived in the agreement. Pursuant to the agreement, we pay no fees or charges for submitting claims on behalf of our customers through the WebMD ENVOY clearinghouse to “Participating Payers”, who comprise the large majority of our transactions. Pursuant to the agreement, there is a fee ranging from $0.10 to $0.15 per claim submitted to “Non-Participating Payers.” Although there are other clearinghouses providing similar services, a disruption of our relationship with WebMD ENVOY could temporarily significantly adversely affect our ability to deliver our services. We are currently exploring the possibility of having redundant clearinghouse strategic relationships to mitigate this risk.

Competition

Our competitive position in the healthcare industry can best be described as occupying a niche as the low cost provider given the delivery mechanism (the Internet) and the level of personal and customized service offered. We are trying to serve small to mid-size physician offices with services and applications usually available only to larger practices, but not generally affordable by the smaller practices. The use of the Internet as our delivery and customer service mechanism allows us to provide our services and products very cost effectively.

Medtopia Manager enables its customers to enjoy the benefits of a fully featured practice management system even though the product competes at the same price level as MediSoft. Additionally, since Medtopia is deployed over the Internet and hosted and managed by our expert staff, we are able to create a more intimate relationship with our customers that better ensures product satisfaction and long-term loyalty.

The healthcare information technology market is served by various software companies that distribute and manage clinical and business-related information. The market for these companies’ applications is divided into general user/customer categories, as follows:

1. Hospitals

2. Physicians

3. Insurance/Managed care companies

4. Ancillary services (i.e., pharmacies, imaging companies, laboratories, etc.)

5. Dental

6. Specialty Medical Services

Most software vendors provide only a portion of the software needs of a client. For example, one company may provide billing software while another may provide medical record software. Therefore, it is common for physicians to use multiple software applications concurrently.

While the Medtopia suite of product features enables the products to compete in some form in all six areas of the healthcare industry, the products are currently focused primarily on the physician market. In this segment of the market, there are three distinct categories of customers, namely:

Physicians in this category are the Company’s primary target customers. Many of these practices have PC-based legacy systems that are old or inexpensive (under $5K.) The systems of these practices typically run on a local area network and are primarily limited to billing and collections or limited EMR functionality.

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Group practices of this size tend to run systems that are capable of running on a wide area network, have robust utilities, flexible reporting, and multiple modules of functionality to choose from. The costs of these systems can range between $30K to $60K for the initial purchase, and $3K to $8K per physician for installation. Updates to these applications and yearly maintenance agreements can exceed $10K. A few vendors in this category are companies like Medical Manager, MiSys, and GE Healthcare. The Medtopia products currently compete with these customers at the lower end of the market.

Group practices of this size usually run complex interconnected modules and systems that provide enterprise-wide solutions. These applications are typically deployed on large computers like RISC 6000’s and operate on expensive and dedicated database servers. Organizations deploying these applications can spend hundreds of thousands of dollars or millions for these systems and may require a dedicated IT staff to maintain the hardware, applications, and their interfaces. A few companies in this category include IDX, GE Healthcare, McKesson, and Cerner.

The following is a list of software companies that occupy at least part of the market space in which Medtopia competes:

Of the many healthcare technology software companies in the industry, no single company dominates the market. However, the two companies with whom we compete most strongly in our markets should be recognized.

Medical Manager/WebMD

Started in 1982 as a practice management software product for chiropractors, the Medical Manager product has evolved into one of the more fully featured products on the market today. Most of the Medical Manager installations are using a legacy, text based version of its product running on a Unix file server and serves the medium-to-large medical practice market. Because of its sheer size, product features and reputation, Medical Manager continues to present itself as a formidable competitor.

Medtopia Manager offers the benefits of having as many features as Medical Manager at a much lower price and with better serviceability. Medtopia Manager can also be deployed more easily since it doesn’t require a dedicated server, especially in multi-site environments where office personnel need instantaneous access to information from anywhere.

Medisoft

As a division of NDC, a medical services company that functions as a claims processing company, the MediSoft practice management system provides NDC with a ready source of medical insurance claims to be cleared and transmitted to insurance payers. The MediSoft product, although not as robust or fully featured as most of its competitors, offers a basic system at a low introductory price for the small physician practice. Because of its low price, the company has been very successful in creating a large base of installations.

Employees

As of December 31, 2004, we employed 35 full time paid employees, consisting of nine in administration, eight in research and development, nine in sales and marketing, and nine in operations. Our relationship with our current

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employees fosters high productivity and commitment. None of our employees are covered by a collective bargaining agreement. From time to time, we utilize the services of independent contractors to perform various other services.