SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

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

FOR THE QUARTER ENDED SEPTEMBER  30, 2004

COMMISSION FILE NUMBER 0-21202

FIRSTWAVE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)

 2859 Paces Ferry Road, Suite 1000
Atlanta, GA  30339
(Address of principal executive offices)

 770-431-1200
(Telephone number of registrant)

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

Yes  X    No __

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes __  No  X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

                                Outstanding as of November 12, 2004:

                                Common Stock, no par value           2,693,993 shares

FIRSTWAVE TECHNOLOGIES, INC. 

FORM 10-Q 

For the quarter ended September 30, 2004 

Index 

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Part I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

FIRSTWAVE TECHNOLOGIES, INC.
Consolidated Balance Sheet
(in thousands)

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FIRSTWAVE TECHNOLOGIES, INC.
Consolidated Statement of Changes in Shareholders' Equity
(In thousands, except share data)
(unaudited)

For the Nine Months Ended September 30, 2004

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

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Supplemental schedule of noncash investing and
  financing activities:
The Company acquired Connect-Care, Inc. on March 3, 2003 in a transaction whereby Connect Care merged into a subsidiary of the
Company in exchange for 200,000 shares of Firstwave common stock.  At the time of the acquisition, Connect Care
had liabilities of $624,244 which, by virtue of the merger, became liabilities of our new wholly owned subsidiary,
Connect-Care, Inc.

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

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FIRSTWAVE TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
September 30, 2004

1.      Description of Business and Basis of Presentation

Description of the Company
Headquartered in Atlanta, Georgia, with an office in Surrey, England, Firstwave Technologies, Inc. (“Firstwave” or “the Company”) is a global provider of strategic CRM solutions specifically designed for the Sports and High Technology industries.  Firstwave’s solutions provide companies with fit-to-purpose features that are designed to optimize how companies win, maintain and grow customer and organizational relationships while improving the overall customer experience.  Firstwave’s corporate and product mission reflects our customer-first commitment: To develop and integrate the best software solutions to manage customer interactions and information.  Firstwave supports several product lines: Firstwave CRM (includes eCRM and v.10 products), First Sports, Firstwave Technology and TakeControl.

Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, the consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the consolidated financial statements contained in the Company’s Form 10-K for the period ended December 31, 2003.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements have been included.

The consolidated balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements for the Company at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

The consolidated financial statements include the accounts of Firstwave Technologies, Inc. and its wholly owned subsidiaries, Connect-Care, Inc. and Firstwave Technologies UK, Ltd.  All intercompany transactions and balances have been eliminated in consolidation. 

2.      Use of estimates and Critical Accounting Policies

Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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.  Examples of estimates which require management’s judgment include revenue recognition, accounts receivable reserve, valuation of long-lived assets and intangible assets, and goodwill.  Management bases its estimates on historical experience and on other various factors which are believed to be reasonable under the circumstances.  All accounting estimates and the basis for these estimates are discussed among the Company’s senior management and members of the Audit Committee. Actual results could differ from those estimates.

Critical Accounting Policies
The Company believes that the following accounting policies are critical to understanding the consolidated financial statements:

• Revenue Recognition
• Capitalization of Software Development Costs
• Intangible Assets  

3.     Summary of Significant Accounting Policies

Revenue recognition
The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, and related interpretations.

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Revenue from software product sales (other than ticketing and fan memberships described below) is recognized upon shipment of the product when the Company has a signed contract, the fees are fixed and determinable, no significant obligations remain and collection of the resulting receivable is probable.  The Company accrues for estimated warranty costs at the time it recognizes revenue.

The Company’s products are licensed on a per-user model, except for hosting services. In accordance with Paragraph 8 of SOP 97-2, license revenues under the per-user model are recognized under the Company’s revenue recognition polices when revenue recognition criteria are met.  Hosting services are priced as a monthly or yearly fixed amount based upon number of users, and are recognized ratably by month over the period of service.  Hosting services revenues are consolidated into services revenues on the Company’s financial statements.

The Company has agreements with customers, particularly relating to sporting events, whereby it will recognize revenue at a future date based on a per-ticket or per-fan membership basis. The amount the Company will receive per ticket or membership is variable, but is pre-determined in the terms of the agreements. Although tickets may be sold in advance of the event, the Company will recognize these revenues after the event occurs.  Ticketing revenue is consolidated into software revenues on the Company’s financial statements.  

Services revenue is recognized as services are performed. Our software product is able to function independently in a customer’s environment without additional services.  Our training, implementation, and customization services are optional services to our customers and are not necessary for the functioning of the software product. Our software is offered as a stand-alone product.  It can be implemented with minimal services.  The essential functionality of the software, such as database support and maintenance, preparation of marketing campaigns, and standard workflow, is functional and can be utilized by the customer upon installation as intended by the customer.  At a customer’s request, the software can also be implemented with additional services, such as data conversion and workflow modifications, which are not significant to the functionality of the software, but rather tailor features to most effectively function in the customer’s environment. 

The revenue for the customization or implementation services is recognized as the services are provided and earned.  Revenue is allocated to software and services based on vendor specific objective evidence of fair values.  Because the software is a stand-alone product that can be used for the customer’s purpose upon installation, and because any services performed have insignificant effect on the functionality of the software, services revenues are accounted for separately in accordance with Paragraph 69 of SOP 97-2. 

The Company has not recorded any unbilled receivables related to implementation and customization service revenues, and the Company has accounted for any implementation and customization service revenues that have been billed as the services were performed, in accordance with Paragraphs 65 and 66 of SOP 97-2. 

The Company has arrangements with customers that provide for the delivery of multiple elements, including software licenses and services. The Company allocates and recognizes revenue related to each of the multiple elements based on vendor specific objective evidence of the fair value of each element and when there are no undelivered elements essential to the functionality of the delivered element. Vendor specific objective evidence is based on standard pricing for each of the elements in our multiple element arrangements. Revenue associated with the various elements of multiple element arrangements is based on such vendor specific objective evidence as the price charged for each element is the same as when the element would be sold separately from any other element.  Standard pricing does not vary by customer or by duration, or by requirements of the arrangement. 

International revenues are primarily generated by Firstwave UK and independent distributors who offer licenses of the Company's products in specific geographic areas. Under the terms of the Company's international distributor agreements, international distributors collect license fees and maintenance revenues on behalf of the Company, and remit 50% to 60% of standard license fees and maintenance revenues they produce.  Pursuant to EITF 99-19, the Company recognizes these distributor sales at the gross license amount because the Company retains title to the products, holds the risk and rewards of ownership, such as risk of loss for collection, and responsibility for providing the product to the customer. The Company is responsible for establishing and maintaining the pricing of the product and performs any source code changes to the product.  The independent distributors are considered agents of the Company and work on a commission basis. The commissions paid are reflected as a selling expense in the Company’s financial statements.  The maintenance fees generated by distributor revenues are reflected as maintenance revenues, with the amount retained by distributors shown as a cost of maintenance revenue. 

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Revenues from non-monetary exchanges are recorded at the fair value of the products and services provided or received, whichever is more clearly evident.  During the third quarter of 2004, the Company recognized $20,000 in services revenue and maintenance revenue from non-monetary exchanges.  There were no non-monetary software license exchanges during the third quarter of 2004.  Prior to the third quarter of 2004, the Company entered into agreements with  customers which involved an exchange of software licenses, services, and/or maintenance for marketing sponsorships. The sponsorship packages include “Official CRM Supplier” designations, rights to use customer logos in marketing materials, links to client websites, tickets and hospitality packages, and ads in programs of specific future sporting events.  These prepaid items will be shown as marketing expenses ratably over the term of the agreement as it relates to an Official Designation or when the future sporting event occurs.

The designation of “Official CRM Supplier” and other sponsorship benefits supports the Company’s marketing strategy and brand awareness efforts.  Firstwave has an official designation with the Rugby Football Union, the ChampionsWorld Soccer Series, the Arena Football League, the Atlanta Sports Council, the Chick-fil-A Peach Bowl and iSe Hospitality.  Within the Sports Industry, sponsorships are a common tool for a company to promote its goods and/or services with a popular organization or event. 

These types of designations provide two primary benefits.  First, the Company receives recognition in the general marketing and advertising that the organization or event executes, thereby helping to promote and identify our brand in the market.  As a sponsor, we receive advertising and logo placement within event programs, on-site signage such as field boards, and additional forms of awareness opportunities.   

In addition, we are able to capitalize on our relationship with the organization through the use of the organization’s marks and logos in our marketing materials.  We believe this helps establish our credibility when we attend conferences, generates publicity when announcing the sponsorship and helps open doors for sales contacts. Organizations in the sports industry keep a close watch on each other’s sponsors, partners and vendors.  We plan to continue to maximize our association with these high profile organizations and to use these relationships and opportunities in our marketing materials and campaigns to increase market awareness and generate future revenue producing opportunities.

Maintenance revenue is recognized on a pro rata basis over the term of the maintenance agreements.

Advanced billings for services and maintenance contracts are recorded as deferred revenue on the Company's balance sheet, with revenue recognized as the services are performed and on a pro-rata basis over the term of the maintenance agreements.

The Company provides an allowance for doubtful accounts based on management’s estimate of receivables that will be uncollectible.  The estimate is based on historical charge-off activity and current account status.

The Company’s US accounting management oversees reporting procedures in the UK and monitors their transactions on a timely basis.  The US management reviews transactions and sales contracts as such transactions and sales are occurring to ensure that revenues are recognized under the Company’s revenue recognition policy and that expenses and other transactions are reported in accordance with accounting principles generally accepted in the United States.  Management of the UK subsidiary report directly to US management, with US management substantially involved in all aspects of UK operations.  As such, US management has established procedures to insure that international revenues are recognized properly and on a timely basis.

Software development costs
Capitalized software development costs consist principally of salaries, contract services, and certain other expenses related to development and modifications of software products capitalized in accordance with the provisions of SFAS 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.”  Capitalization of such costs begins only upon establishment of technological feasibility as defined in SFAS 86 and ends when the resulting product is available for sale. The Company evaluates the establishment of technological feasibility based on the existence of a working model of the software product.  Capitalized costs may include costs related to product enhancements resulting in new features and increased functionality as well as writing the code in a new programming language.  In this case, as the version enhancements are built on an already detailed design under an existing source code, technological feasibility is established early for each version.  All costs incurred to establish the technological feasibility of software products are classified as research and development and are expensed as incurred.

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The Company evaluates the realizability of unamortized capitalized software costs at each balance sheet date.  Software development costs which are capitalized are subsequently reported at the lower of unamortized cost or net realizable value. If the unamortized capitalized software cost exceeds the net realizable value of the asset, the amount would be written off accordingly.  The net realizable value of the capitalized software development costs is the estimated future gross revenues of the software product reduced by the estimated future costs of completing and disposing of that product. Amortization of capitalized software costs is provided at the greater of the ratio of current product revenue to the total of current and anticipated product revenue or on a straight-line basis over the estimated economic life of the software, which is not more than three years.  It is possible that those estimates of anticipated product revenues, the remaining estimated economic life of the product, or both could be reduced due to changing technologies.  The amortization of software development costs is presented as a cost of software revenue in the Company’s financial statements.

Goodwill and other intangibles
In accordance with SFAS 142 “Goodwill and Other Intangible Assets,” intangible assets with indefinite useful lives must be tested periodically for impairment.  Examples of matters requiring management’s judgment regarding the existence of impairment of an intangible asset, and the resulting fair value, would include management’s assessment of adverse changes in legal factors, market conditions, or loss of key personnel. If the fair value of the intangible asset is determined to be less than the carrying value, the Company would record an impairment loss.  SFAS 142 prescribes a two-phase approach for impairment testing of goodwill.  The first phase screens for impairment; while the second phase (if necessary) measures the impairment.  Goodwill was evaluated for impairment during the third quarter of 2004 in accordance with SFAS 142 “Goodwill and Other Intangible Assets,” and it was determined there was no instance of impairment of recorded Goodwill.  

Concentration of credit risk
The Company is subject to credit risk primarily due to its trade receivables. The Company has credit risk due to the high concentration of trade receivables through certain customers. The customer accounts receivable which represented more than 10% of total accounts receivable are shown below.

	Dec 31,		Sept 30,
	2003		2004
sports coach UK	65.3%		4.2%
Rugby Football Union	2.9%		16.2%
The Football Association	0.0%		16.9%
KCI USA, Inc.	0.0%		13.3%
Northrop Grumman Public Safety	0.0%		17.7%

Significant Customer
The table below identifies customers who contributed more than 10% of total revenue for each period shown.

	For the Three Months Ended				For the Nine Months Ended
	Sept 30,		Sept 30,		Sept 30,		Sept 30,
	2003		2004		2003		2004
Electronic Data Systems, Ltd.	61.8%		7.7%		61.9%		13.9%
The Football Association	1.7%		16.2%		1.2%		7.5%

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Stock-based compensation
Effective for 2002, the Company adopted SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,” which did not have a material impact on the consolidated financial statements.  The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations and to elect the disclosure option of SFAS 123, "Accounting for Stock-Based Compensation.”   Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.

The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation."  The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee awards (in thousands, except per share data):

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the quarters ended September 30, 2003 and September 30, 2004, respectively: dividend yield of 0% for both quarters; expected volatility of 141% and 128%, and risk-free interest rate of 3.14% and 3.51%. For the nine month periods ended September 30, 2003 and September 30, 2004, respectively; the assumptions used were dividend yield of 0% for both periods; average expected volatility of 144% and 130%, and average risk-free interest rate of 2.87% and 3.41%. 

There were no new options granted during the third quarter of 2004.  The increase in the compensation expense from $448,000 year to date 2003 compared to $844,000 year to date 2004 is primarily due to options issued during the second quarter of 2004 that were immediately vested. 

There is no tax benefit included in the stock-based employee compensation expense determined under the fair-value-based method for the three and nine month periods ended September 30, 2003 and September 30, 2004, as the Company established a full valuation allowance for its net deferred tax assets.

Basic and diluted net loss per common share
Basic net loss per common share is based on the weighted average number of shares of common stock outstanding during the period.  Stock options and convertible preferred stock are included in the diluted earnings per share calculation when they are not antidilutive.  Net loss applicable to common shareholders includes a charge for dividends related to the Company’s outstanding preferred stock.

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Shown below is a reconciliation of the numerators and denominators of the basic and diluted loss per share computations (in thousands, except per share data):

Foreign currency translation
The financial statements of the Company's international subsidiary are translated into U.S. dollars at current exchange rates, except for revenues and expenses, which are translated at average exchange rates during each reporting period.  Currency transaction gains or losses are included in the results of operations as general and administrative expenses in the Company’s financial statements.  Net exchange gains or losses resulting from the translation of assets and liabilities are included as a component of accumulated other comprehensive loss in shareholders' equity.

Impairment of long-lived assets
The Company evaluates impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss would be recognized.  Measurement of an impairment loss for long-lived assets would be based on the fair value of the asset.

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Segment reporting
Management believes that the Company has only a single segment consisting of software sales with related services and support.  The information presented in the consolidated statement of operations reflects the revenues and costs associated with this segment that management uses to make operating decisions and assess performance. 

4.      Acquisition

On March 3, 2003, Firstwave acquired Connect‑Care, Inc., a provider of CRM software solutions for software companies.  Connect‑Care was acquired pursuant to a merger agreement dated March 3, 2003 (the “Merger Agreement”) by and among Firstwave, CC Subsidiary, Inc., a wholly‑owned subsidiary of Firstwave (“Merger Sub”), Connect‑Care, and certain shareholders of Connect‑Care.  Pursuant to the Merger Agreement, Merger Sub merged with and into Connect‑Care, and Connect‑Care, which was the surviving corporation in the Merger, became a wholly owned subsidiary of Firstwave. The results of Connect-Care’s operations have been included in the Company’s financial statements since March 3, 2003.

The following table presents the unaudited pro forma consolidated results of operations as if the acquisition had occurred as of January 1, 2003 (in thousands, except per share data):

		For the Nine Months Ended
		Sept 30,
		2003			2004
Revenues		$	9,987		$	5,692
Net loss applicable
to common shareholders		$	(780)		$	(2,175)
Loss per share
Basic		$	(0.30)		$	(0.81)
Diluted		$	(0.30)		$	(0.81)

5.     Goodwill and Intangibles

The primary objective of the Connect‑Care acquisition was to acquire the customer relationships of the customer base of Connect‑Care and, to a lesser degree, to acquire utilization of Connect‑Care technology.  Of the $3,410,000 purchase price, $300,000 was assigned as an estimated fair value to the intangible asset Connect‑Care technology with an estimated useful life of three years, $900,000 was assigned as an estimated fair value to the intangible asset Connect‑Care customer relationships with an estimated useful life of seven years, and $2,210,000 was assigned to goodwill.  The value assigned to customer relationships was based on potential future revenues that may be derived from such customer relationships. We believe this goodwill reflects such matters as (but not limited to) personnel obtained in the acquisition, new customer opportunities that we will have as a result of our involvement with the acquired customers, relationships we will develop through the acquisition, and expertise and name recognition we will receive through this acquisition. Goodwill will be evaluated periodically for impairment in accordance with SFAS 142 “Goodwill and Other Intangible Assets.”

The weighted average amortization period for these intangible assets subject to amortization is six years. There are no significant residual values in the intangible assets.  The Company began amortization of the intangible assets effective April 1, 2003.  Goodwill was evaluated for impairment during the third quarter of 2004 in accordance with SFAS 142 “Goodwill and Other Intangible Assets,” and it was determined there was no instance of impairment of recorded Goodwill.

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The following table presents details of acquired intangible assets (in thousands):

		December 31, 2003						September 30, 2004
		Gross carrying			Accumulated			Gross carrying			Accumulated
		amount			amortization			amount			amortization
Amortizable intangible assets
Connect-Care Technology		$	300		$	75		$	300		$	150
Connect-Care Customer Relationships		900			96			900			193
Total		$	1,200		$	171		$	1,200		$	343
Aggregate Amortization Expense
For the nine months ended Sept 30, 2004		$	172
Estimated Amortization Expense
For year ended December 31, 2004		$	229
For year ended December 31, 2005		$	229
For year ended December 31, 2006		$	154
For year ended December 31, 2007		$	129
For year ended December 31, 2008		$	129

6.      Borrowings

On July 29, 2004, the Company renewed its Revolving Line of Credit with RBC Centura.  The renewal was made on the terms and conditions set forth in the original Loan Agreement dated July 29, 2003 with the following modifications: the principal amount was decreased from a maximum of $1,000,000 to a maximum of $500,000, no margin formula or certified borrowing base is required for any borrowings under the Line of Credit, and the maturity date was extended to July 27, 2005. The Company had borrowings of $500,000 against the line of credit as of September 30, 2004.

The Revolving Line of Credit bears interest at a variable rate equal to the one month London Interbank Offered Rate (LIBOR) plus 300 basis points, or the “RBC Centura Prime Rate” plus 0.50%, at our option. The weighted average interest rate for the three months ended September 30, 2004 was 4.5%.   The Company must comply with certain financial covenants per the terms of the agreement, including maintaining a balance of $750,000 in a depository account with RBC Centura for the term of the credit facility. As of September 30, 2004, the Company was in compliance with the required covenants.

7.      Preferred Stock

During June 2004, the Company issued 7,000 shares of Series D Convertible Preferred Stock in a private placement. The Company received $700,000 in gross proceeds and incurred approximately $22,000 in expenses related to this offering.  The Preferred Stock has voting rights and accumulates dividends at an annual rate of 9%, payable monthly in cash or shares of common stock, and is convertible at the holder’s option into Common Stock of the Company at anytime after June 15, 2005, at a conversion rate of $3.00 per share of Common Stock.  The Series D Convertible Preferred Stock has a liquidation preference of $100 per share plus all accrued and unpaid dividends but ranks junior to the Company’s Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock with respect to payment upon liquidation and dividends. 

8.      Related Party Transactions

The President and COO of the Company participated in the Series D Convertible Preferred Stock offering during June 2004 purchasing 300 shares of Series D Convertible Preferred Stock for a total investment of $30,000. He is paid monthly dividends of  $225.  The Chairman and CEO of the Company is paid $16,875 monthly for dividends related to his $2,250,000 investment in Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, and Series C Convertible Preferred Stock.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Financial Statements and Notes thereto of the Company presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.  This Report contains forward-looking statements that reflect management’s expectations, estimates, and projections for future periods based on information (financial and otherwise) available to management as of the end of the period covered by this Quarterly Report.  These statements may be identified by the use of forward-looking words such as “may”, “will”, “believe”, “anticipate”, “estimate”, “expect”, “projects”, or “intends”.  Actual events and results may differ from the results anticipated by the forward-looking statements.  Factors that might cause such differences include, but are not limited to, those items discussed under the caption "Certain Factors Affecting Forward-Looking Statements" presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and other factors discussed in the Company’s press releases and other Reports filed with the Securities and Exchange Commission.

Overview
Headquartered in Atlanta, Georgia, with an office in Surrey, England, Firstwave Technologies, Inc. (“Firstwave” or “the Company”) is a global provider of strategic CRM solutions specifically designed for the Sports and High Tech industries.  Firstwave’s solutions provide companies with fit-to-purpose features that are designed to optimize how companies win, maintain and grow customer and organizational relationships while improving the overall customer experience.  Firstwave’s corporate and product mission reflects our customer-first commitment: To develop and integrate the best software solutions to manage customer interactions and information.  Firstwave supports several product lines: Firstwave CRM (includes eCRM and v.10 products), First Sports, Firstwave Technology and TakeControl.

Results of Operations
Total revenues decreased 29.7% from $2,369,000 in the third quarter of 2003 to $1,666,000 in the third quarter of 2004 primarily due to decreased software and services revenues.  For the nine months ended September 30th, total revenues decreased 41.0% from $9,640,000 in 2003 to $5,692,000 in 2004 due to decreases in software and services revenue. The primary cause of the decrease in total revenues is due to lower revenues from our relationship with Electronic Data Systems, Ltd., which contributed 61.9% of our total revenue during the first nine months 2003, compared to 13.9% of total revenue during the first nine months of 2004.  Although we successfully completed implementation of the multi-year services project for Electronic Data Systems, Ltd. during 2003, we continue to provide additional services and support and maintenance to this customer.  During the third quarter of 2004 one customer represented greater than 10% of our total revenues:  The Football Association representing 16.2% of total revenues. 

Software revenues decreased 36.3% from $640,000 in the third quarter of 2003 to $408,000 in the third quarter of 2004.  For the nine months ended September 30th, software revenue decreased 44.5% from $3,019,000 in 2003 to $1,676,000 in 2004. These decreases are due to large software license agreements with Electronic Data Systems, Ltd. during the first and third quarters of 2003, which were not replicated in 2004.  Our software revenues remain significantly dependent upon the size and timing of closing of license agreements.

 Services revenues decreased 44.3% from $1,045,000 in the third quarter of 2003 to $582,000 in the third quarter of 2004, and for the nine months ended September 30th, decreased 59.3% from $4,702,000 in 2003 to $1,915,000 in 2004.  Although we successfully completed implementation of the multi-year services project for Electronic Data Systems, Ltd during 2003, we continue to provide additional services to this customer.  Our services revenues have decreased from 2003 levels because the services revenues we derived from the multi-year contract have not been replaced with other customer accounts. Our services revenues are subject to fluctuations based on variations in the length of and number of active service engagements in a given quarter. 

Maintenance revenues decreased 2.5% from $668,000 during the third quarter of 2003 to $651,000 in the third quarter of 2004.  For the nine months ended September 30th, maintenance revenue increased 6.7% from $1,887,000 in 2003 to $2,013,000 in 2004. The year to date increase is due to the addition of maintenance revenues from the Connect-Care acquisition and additional revenues associated with the CRM product line, including First Sports.  Maintenance revenues are the result of renewal agreements from previous software license sales as well as new license agreements. 

During the third quarter of 2004, the Company recognized $20,000 in services revenue and maintenance revenue from non-monetary exchanges.  There were no non-monetary software license exchanges during the third quarter of 2004.

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Cost of software revenues decreased 16.8% from $386,000 in the third quarter of 2003 to $321,000 in the third quarter of 2004 and for the nine months ended September 30th, increased 16.8% from $865,000 in 2003 to $1,010,000 in 2004.  The year to date increase is due to increased amortization expense related to the June 30, 2003 release of Firstwave CRM Version 10 and Firstwave IDE partially offset by decreased amortization related to prior versions of the product that have fully amortized during 2004. Cost of software revenues includes amortization of capitalized software costs, costs of third party software, media costs, and documentation materials. Cost of software as a percentage of software revenues increased from 60.3% in the third quarter of 2003 to 78.7% the third quarter of 2004. The decrease in software margin is primarily due to the increase in amortization of capitalized software expense detailed above in conjunction with a decrease in software revenue.

Cost of revenues for services decreased 29.1% from $786,000 in the third quarter of 2003 to $557,000 in the third quarter of 2004 and for the nine months ended September 30th, decreased 29.0% from $2,535,000 in 2003 to $1,799,000 in 2004.  These decreases are primarily due to decreases in payroll, resulting from a reduction in the number of services personnel, and payroll related costs, including travel expenses, consistent with decreased services revenues. The cost of revenues for services as a percentage of services revenues increased from 75.2% in the third quarter of 2003 to 95.7% in the third quarter of 2004 primarily due to certain fixed personnel costs, which at lower revenue levels result in a decrease in the services revenue margin.

Cost of revenues for maintenance decreased 37.0% from $181,000 in the third quarter of 2003 to $114,000 in the third quarter of 2004 and for the nine months ended September 30th, decreased 24.9% from $494,000 in 2003 to $371,000 in 2004.  These decreases are due to decreases in payroll costs associated with a reduction in the number of maintenance personnel. The cost of revenues for maintenance as a percentage of maintenance revenue decreased from 27.1% in the third quarter of 2003 to 17.5% in the third quarter of 2004 due to the decreases in cost of revenues for maintenance.

Sales and marketing expense decreased 37.5% from $991,000 in the third quarter of 2003 to $619,000 in the third quarter of 2004 and for the nine months ended September 30th, decreased 34.5% from $3,068,000 in 2003 to $2,011,000 in 2004.  The decreases are the result of decreases in payroll and commission expenses, telemarketing costs, and costs relating to investor relations partially offset by increased expenses related to the amortization of prepaid marketing sponsorships.

The Company’s product innovation and development expenditures, which includes amounts capitalized, decreased 63.9% from $720,000 in the third quarter of 2003 to $260,000 in the third quarter of 2004 and for the nine months ended September 30th, decreased 62.4% from $2,735,000 in 2003 to $1,027,000 in 2004. The decreases are primarily related to a decrease in payroll costs and expenses associated with outside contractors related to the development of CRM Version 10 and the IDE, both of which were released in June 2003.  Software development costs capitalized during the three and nine months ended September 30, 2003 were $213,000 and $1,722,000 respectively.  There were no development costs capitalized during the third quarter of 2004, while $94,000 was capitalized in the nine months ended September 30, 2004.  A net realizable analysis was performed at September 30, 2004 in accordance with SFAS 86. It was determined that the unamortized capitalized software does not exceed its net realizable value; therefore, no impairment loss was recorded.

General and administrative expenses decreased 23.5% from $630,000 in the third quarter of 2003 to $482,000 in the third quarter of 2004 and for the nine months ended September 30th, decreased 20.5% from $1,851,000 in 2003 to $1,471,000 in 2004. The decreases are primarily due to decreases in payroll costs and legal fees, partially offset by fluctuations in the foreign currency exchange rate.  

Dividends on preferred stock increased 29.1% from $55,000 in the third quarter of 2003 to $71,000 in the third quarter of 2004 due to dividends related to the issuance of $700,000 of Series D Convertible Preferred Stock in June of 2004.

The above factors combined to result in a net loss of  $788,000 in the third quarter of 2004 compared to a net loss of $1,175,000 in the third quarter of 2003.  Net loss per basic and diluted share was $0.29 for the third quarter of 2004 compared to a net loss of $0.44 per basic and diluted share for the third quarter of 2003.  At September 30, 2004, the number of basic weighted average shares outstanding were 2,694,000 compared to 2,660,000 at September 30, 2003. 

Balance Sheet

Net accounts receivable decreased 13.7% from $1,230,000 at December 31, 2003 to $1,062,000 at September 30, 2004 primarily due to lower software license revenues invoiced and the collection of outstanding receivables. Prepaid marketing expenses increased 217.5% from $200,000 at December 31, 2003 to $635,000 at September 30, 2004 due to an increase in prepaid marketing expenses related to sports sponsorships. Other prepaid expenses increased 23.4% from $791,000 at December 31, 2003 to $976,000 at September 30, 2004, primarily due to an increase in prepaid expenses related to third party software royalties.  Property and equipment decreased 33.7% from $489,000 at December 31, 2003 to $324,000 at September 30, 2004 as a result of year-to-date depreciation partially offset by new asset purchases.  Capitalized software decreased 29.0% from $2,966,000 at December 31, 2003 to $2,106,000 at September 30, 2004 due to additional capitalization of $94,000 in development costs offset by to year-to-date amortization expense of $954,000.  Intangible assets decreased 16.7% from $1,029,000 at December 31,2003 to $857,000 at September 30, 2004 due to $172,000 in year-to-date amortization expense.

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Accounts payable increased 4.2% from $568,000 at December 31, 2003 to $592,000 at September 30, 2004 due to the timing of payment of certain payables. Deferred revenue decreased 16.8% from $1,429,000 at December 31, 2003 to $1,189,000 at September 30, 2004 due to nine months of revenue recognition of annual maintenance contracts billed in advance at year end 2003, offset by billings and amortization of current year annual maintenance renewals.  Accrued employee compensation decreased 44.6% from $368,000 at December 31, 2003 to $204,000 at September 30, 2004 due to the payment of commissions and incentives during the first nine months of 2004 which were accrued at year end 2003 and lower  incentive accruals recorded during 2004. Borrowings at September 30, 2004 remained at $500,000, the initial draw on the Company’s Line of Credit with RBC Centura. Other accrued liabilities decreased 60.9% from $532,000 at December 31, 2003 to $208,000 at September 30, 2004 primarily due to a decrease in and timing of payments of accrued VAT and payroll taxes in the UK. 

Liquidity and Capital Resources

As of September 30, 2004, the balance of cash and cash equivalents was $1,273,000 compared to $2,704,000 at December 31, 2003. 

During the year 2003, 55.2% of our total revenue was attributed to our relationship with Electronic Data Systems Ltd.  During the first nine months of 2004, this same relationship accounted for 13.9% of total revenues.  Although we successfully completed implementation of their multi-year services project, we continue to provide additional services and receive support and maintenance revenues from this customer.  Our services revenues have decreased from 2003 levels because the services revenues we derived from the delivered multi-year contract have not been replaced with other customer accounts.

On July 29, 2004, the Company renewed its Revolving Line of Credit with RBC Centura.  The renewal was made on the terms and conditions set forth in the original Loan Agreement dated July 29, 2003 with the following modifications: the principal amount was decreased from a maximum of $1,000,000 to a maximum of $500,000, no margin formula or certified borrowing base is required for any borrowings under the Line of Credit, and the maturity date was extended to July 27, 2005. The Company had borrowings of $500,000 against the line of credit as of September 30, 2004.

The Revolving Line of Credit bears interest at a variable rate equal to the one month London Interbank Offered Rate (LIBOR) plus 300 basis points, or the “RBC Centura Prime Rate” plus 0.50%, at our option. The weighted average interest rate for the three months ended September 30, 2004 was 4.5%.   The Company must comply with certain financial covenants per the terms of the agreement, including maintaining a balance of $750,000 in a depository account with RBC Centura for the term of the credit facility. As of September 30, 2004, the Company was in compliance with the required covenants.

During June 2004, the Company issued 7,000 shares of Series D Convertible Preferred Stock in a private placement. The Company received $700,000 in gross proceeds and incurred approximately $22,000 in expenses related to this offering.  The net proceeds of the Series D Convertible Preferred Stock are being used for working capital and general corporate purposes.

Our future capital requirements will depend on many factors, including our ability to obtain positive cash flows, market acceptance of our products, and the timing and extent of spending to support product development efforts and expansion of sales and marketing.  Our future capital needs will be highly dependent upon our ability to control expenses and generate additional software license revenues, and any projections of future cash needs and cash flows are subject to substantial uncertainty. If we are unable to fund expenses from operations or obtain the necessary additional capital, we may be required to reduce the scope of planned product development and sales and marketing efforts, as well as further reduce the size of current staff, all of which could have a material adverse effect on our business, financial condition, and ability to reduce losses or generate profits.

We have no material commitments for capital expenditures.  We do not believe that inflation has historically had a material effect on our Company's results of operations.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to market risk exposures of varying correlations and volatilities, including interest rate risk and foreign exchange rate risk.  Currently, the Company maintains its cash position in money market funds and other bank accounts.  The Company does not currently engage in hedging activities or otherwise use derivatives to alter the interest characteristics of its financial assets.  Although a decrease in interest rates could reduce our interest income, at this time management does not believe a change in interest rates will materially affect the Company's financial position or results of operations.

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The Company has a variable interest rate on the current line of credit which bears interest at the London Interbank Offered Rate (“LIBOR”) plus 3.00%.  Due to the amount of the borrowings and the short term nature of the debt, we do not believe we have a significant risk due to potential fluctuations in interest rates for loans at this time. Changes in interest rates could make it more costly to borrow money in the future and may impede our future acquisition and growth strategies if management determines that the costs associated with borrowing funds are too high to implement these strategies.

The results of operations of Firstwave Technologies, UK Ltd, our wholly owned subsidiary located in Surrey, England, are exposed to foreign exchange rate fluctuations as the financial results of this subsidiary are translated from the local currency to U.S. Dollars upon consolidation.  Because of the significance of the operations of this subsidiary to our consolidated operations, as exchange rates vary, net sales and other operating results, when translated, may differ materially from our prior performance and our expectations.  In addition, because of the significance of our overseas operations, we could also be significantly affected by weak economic conditions in foreign markets that could reduce demand for our products and further negatively impact the results of our operations in a material and adverse manner.  As a result of these market risks, the price of our stock could decline significantly and rapidly.

The Company does not engage in any hedging activities.  As foreign currency exchange rates vary, the fluctuations in revenues and expenses may materially impact the financial statements upon consolidation.  A weaker US dollar would result in an increase to revenues and expenses upon consolidation, and a stronger US dollar would result in a decrease to revenues and expenses upon consolidation.

The Company manages the currency fluctuation risk by monitoring on a regular basis the foreign currency exchange rates as they relate to our UK Subsidiary, and attempts to take action if the foreign currency exchange rate would result in a material impact to the Company’s financial statements upon translation from the local currency, the British pound, to the US Dollar.  The action taken in these instances by the Company is to move the currency from the UK Subsidiary to the Company’s headquarters when doing so would be beneficial for the Company.

Item 4.   Controls and Procedures

Based on their most recent evaluation, which was completed in consultation with management as of the end of the period covered by the filing of this Form 10‑Q, the Company’s Chairman and Chief Executive Officer and Chief Financial Officer believe the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the date of such evaluation in timely alerting the Company’s management to material information required to be included in this Form 10‑Q and other Exchange Act filings. 

PART II.  OTHER INFORMATION

Item 1.    Legal Proceedings
                Not Applicable 

Item 2.    Changes in Securities
                Not Applicable

Item 3.    Defaults Upon Senior Securities
                Not Applicable

Item 4.    Submission of Matters to a Vote of Security Holders
                Not Applicable

Item 5.    Other Information
                Not Applicable

Item 6.    Exhibits and Reports on Form 8-K

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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