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

                                   ----------

                                  FORM 10-KSB/A
                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

(Mark One)

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

                    For the fiscal year ended March 31, 2005

                                       OR

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

            For the transition period from ____________ to __________

                         Commission File No. 333-5278-NY

                       POWERHOUSE TECHNOLOGIES GROUP, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                          <C>
             Delaware                                             94-3334052
 (State or other jurisdiction of                               (I.R.S. Employer
  incorporation or organization)                             Identification No.)
</TABLE>

<TABLE>
<S>                                                               <C>
555 Twin Dolphin Drive, Suite 650
     Redwood City, California                                       94065
 (Address of principal executive                                  (Zip Code)
             offices)
</TABLE>

       Registrant's telephone number, including area code: (650) 232-2600

        Securities registered pursuant to Section 12(b) of the Act: NONE
        Securities registered pursuant to Section 12(g) of the Act: NONE

     Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
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 [ ]

     Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

     State issuer's revenues for the most recent fiscal year: $308,189

     The aggregate market value of common stock of the Company, $0.0001 per
share ("Common Stock") held by non-affiliates of the registrant as of March 31,
2005 was $2,505,332. The Company's Common Stock is traded on the OTC Electronic
Bulletin Board.

     There were 45,489,130 shares of Common Stock issued and outstanding as of
December 3, 2005.

     Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]

<PAGE>

                                     PART I.

This Form 10-KSB/A contains forward-looking statements including, without
limitation, statements concerning the future of the industry in which PowerHouse
Technologies Group, Inc. (the "Company") operates, its product development
plans, business strategy, financial estimates, continued acceptance of its
products and dependence on significant distributors and customers. In some
cases, you can identify forward-looking statements by terminology such as "may",
"will", "should", "expects", "plans", "anticipates", "believes", "estimated",
"predicts", "potential", "continue" or the negative of such terms or other
comparable terminology. You should not place undue reliance on the
forward-looking statements contained in this document. When considering
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements made in this Annual Report on Form 10-KSB/A.
Forward-looking statements, particularly those concerning anticipated events
relating to the development and marketing of the Company's products and the
timing or magnitude of those events, are inherently uncertain. The risk factors
discussed below and other considerations noted throughout this Annual Report on
Form 10-KSB/A could cause its actual results to differ significantly from those
contained in any forward-looking statements.

Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance, or achievements. The Company is under
no duty to update any of the forward-looking statements after the date of this
Annual Report on Form 10-KSB/A to conform forward-looking statements to actual
results.

EXPLANATORY NOTE

The purpose of this Amendment No. 1 on Form 10-KSB/A to the Annual Report on
Form 10-KSB of PowerHouse Technologies Group, Inc. (the "Company") for the
fiscal year ended March 31, 2005 is to restate our consolidated financial
statements for the year ended March 31, 2005, and related disclosures, including
the selected financial data included herein as of and for the year ended March
31, 2005. Accordingly, this Form 10-KSB/A should be read in conjunction with our
filings made with the Securities and Exchange Commission subsequent to the
filing of the original Form 10-KSB, including any amendments to those filings.

We have restated our financial results for the fiscal year ended March 31, 2005
to 1) revise the accounting treatment given the Company's acquisition of First
Person Software, Inc., and 2) revise the accounting treatment given to warrants
issued in connection with Series A Senior Preferred Stock issued by the Company
in 2004. As a result of the restatement, the Company's software technology asset
decreased by $1,306,610, the deferred tax liability of $1,281,154 was
eliminated, and stockholders' equity decreased by $25,456. The Company's net
loss for the year ended March 31, 2005 increased by ($542,718) and the net loss
allocable to holders of common stock decreased by $2,360,437.

Additional detail regarding the restatement is included in Note 1 of the Notes
to Consolidated Financial Statements included in Part II -- Item 7 of this
Amendment No. 1 on Form 10-KSB/A.

ITEM 1. DESCRIPTION OF BUSINESS

The Company is in the business of developing, acquiring and marketing software
and infrastructure technologies designed to improve the way mobile information
is personalized, secured, carried and accessed. The Company was founded in May
2002 as PowerHouse Studios, Inc. ("PowerHouse Studios"). On May 19, 2003,
PowerHouse Studios completed a business combination with Agate Technologies,
Inc., a publicly traded company ("Agate"). Following that transaction, the
Company changed its name to "PowerHouse Technologies Group, Inc." and effected a
1:122 reverse stock split(1). On June 18, 2004, the Company acquired 51% of
First Person Software, Inc. ("First Person") that it did not previously own; the
transaction was effected through a merger of First Person with and into
PowerHouse Acquisition, LLC ("PowerHouse Acquisition"), a wholly-owned
subsidiary of the Company, with PowerHouse Acquisition remaining as the
surviving entity. (See Item 6, Management's Discussion and Analysis or Plan of
Operation under the caption "Significant Events During Fiscal Year 2005").

In March 2005, the Company entered into a three-year development agreement (the
"Development Agreement") with M-Systems Flash Disk Pioneers Ltd., an Israeli
company ("M-Systems"). Pursuant to the Development Agreement, the Company
granted to M-Systems and its affiliates a worldwide, transferable license to use
and distribute the Company's Migo products, and to use related trademarks, as an
integrated part of M-Systems' Universal Serial Bus ("USB") drive product lines
(see Item 6, Management's Discussion and Analysis or Plan of Operation under the
caption "Significant Events During Fiscal Year 2005" below).

----------
(1)  Unless otherwise noted, all share and per-share information is presented on
     a post-split basis.


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<PAGE>

In March 2005, the Company moved its principal place of business into a larger
facility in Redwood City, California and consolidated its operations from San
Ramon, California and San Francisco, California. (See Item 2, Description of
Property).

Company Technology: The Migo(R)

The Company has developed the Migo(R) ("Migo"), a software computing system that
performs advanced synchronization, personalization and data management functions
when installed on portable memory-storage devices that use USB ports on
Windows-based computers. The Company believes that, in a manner similar to that
in which the cellular phone revolutionized the way that many people communicate,
the Migo has the potential to change the way people work with and away from
their personal computers, whether in the office, at home, or from other remote
locations while traveling. The Migo is designed to improve the mobile computing
experience by allowing computer users to easily transport the personalized
desktop environment of their personal computers (complete with the same files,
Microsoft(R) Outlook(R) e-mail, Internet Explorer favorites, wallpaper,
presentations, photos, MP3 audio files and/or various other features) and then
access that same environment by displaying it on any other Windows-based
computer. In addition, the Migo is designed so that once it has been
disconnected from a non-native computer through which a user's personalized
environment has been accessed, no trace of the user's computer environment or
its data will be left behind on that machine.

The Migo software currently supports the Microsoft(R) Windows(R) operating
system (Win 98SE to XP) and Outlook(R) email program. The Company is developing
its Migo software to function with other popular email applications (such as
Exchange and Lotus Notes(R)), web browsers, and other frequently used tools and
applications, and is in the process of researching and developing a range of
Migo software for use on other hardware devices, including larger capacity USB
storage devices, MP3 music players, mobile cellular phones, PDAs and other
mobile data communication platforms. The Company believes these products will
have the potential for customized use across a broad range of industries,
including healthcare, insurance, banking and financial services and education.

Sales Channels

The Company sells, or expects to sell, its products through various channels and
in a variety of different markets. Sales efforts are planned though the
following:

     1.   Software-only sales. The Company has entered into an agreement to
          license its software for distribution by M-Systems, a USB Flash drive
          manufacturer (see Item 6, Management's Discussion and Analysis or Plan
          of Operation under the caption "Significant Events During Fiscal Year
          2005" below). The Company expects to enter into similar software
          licensing contracts with other hardware manufacturers and distributors
          for non-USB Flash devices. It also anticipates selling software
          upgrades and service contracts to existing users of its products and
          users of other USB Flash drive products.

     2.   Web-based sales. The Company is currently selling software and bundled
          products directly to


                                        3

<PAGE>

          consumers through its website, www.migosoftware.com. The Company
          expects to make its Migo software available for USB Flash and other
          memory products already in the market.

     3.   Direct sales, Commercial and Consumer. The Company also sells products
          through agreements directly with commercial end-users and anticipates
          eventually selling to consumers directly.

     4.   International sales. The Company anticipates entering into
          distribution and reseller agreements to sell its products outside the
          US, especially in Europe and Asia

     5.   Distributors/VARs. The Company has entered into a distribution
          agreement with a large educational distributor in the US and has
          launched its products in June 2005 through them to educational
          resellers and direct to universities and colleges.

The Company cannot provide assurances regarding its ability to meet any sales
targets, as it may be affected by many factors not within its control, including
acceptance of its products by consumers, competition, technological advances by
others, and general economic and political issues. General economic and
political issues affect foreign operations more significantly than domestic
operations. Further, all of the potentially adverse factors that can affect a
business in its line are more likely to affect a new company than an established
enterprise.

Uncertain Market Acceptance

The Company's business prospects are dependent upon perceived market need for
software that enhances the utility of small, portable memory devices, suitable
for linkage with all common computer hardware utilized by individual personal
computer users. The Company's business will be subject to all the risks
associated with introducing and marketing a new product or service.

Unproven and Evolving Business Model

The Company launched its Migo software on a USB portable drive in the quarter
ended December 2003, and intends to extend this technology to specialized
vertical market applications such as education, health care and banking. These
applications will require customization for each specialized vertical market
application to enhance usability to consumers. The Company is aware of similar
products that are currently available and anticipates that any business model it
develops will be subject to change. At this time, it is impossible for
management to predict the degree to which consumers will demand such a product
or whether any potential market will be large enough to provide any meaningful
revenue or profit for the Company. Successful implementation of this business
model may also require the Company to enter into partnerships with original
equipment manufacturers ("OEMs") and software solutions providers. The Company
has obtained an agreement with M-Systems, an OEM, (see Item 6, Management's
Discussion and Analysis or Plan of Operation under the caption "Significant
Events During Fiscal Year 2005" below) to distribute its products. However,
there can be no assurance that the Company will find additional OEMs or software
solutions providers willing to partner with it.

Competitive Business Environment


                                        4

<PAGE>

Competition within the software industry and in the mobile data and data storage
industry is highly competitive and the Company's management expects this
competition to intensify in the future. The industry is characterized by rapidly
changing technologies and customer demands for newer and better products. Third
party competitors of the Company could develop products and technologies that
could render the Company's products and technologies obsolete. Many of the
Company's competitors have greater resources, including financial and scientific
personnel, marketing and sales capacity, established distribution networks,
significant goodwill and global name recognition. As a result, these competitors
may be in a better position than the Company to respond quickly to, or
significantly influence, rapid technological change and consumer demand.

Competition within the software industry and in the mobile data and data storage
industry is characterized by several key factors, including, but not limited to,
the following:

     1.   Rapid changes in technology and customer requirements. New
          opportunities for existing and new competitors can quickly render
          existing technologies less valuable.

     2.   Relatively low barriers to entry. Startup capital requirements for
          software companies can be very small, and software distribution over
          the Internet is inexpensive and easily outsourced.

     3.   Significant price competition. Direct distribution of competing
          products, particularly over the Internet, may cause prices and margins
          to decrease in traditional sales channels.

     4.   Consolidations and mergers. Software companies and their individual
          products have a high rate of mergers, product line sales, and other
          transfers and consolidations; consequently, there is a tendency to
          have a higher concentration of able competitors within the industry.

In addition to the foregoing, a slowdown affecting the general growth in demand
for mobile data, data storage and related products and services could harm the
Company's revenues and prospects for achieving profitability. The markets for
the Company's products and services depend upon economic conditions that affect
the broader computer technology and related markets. Downturns in any of these
markets may cause end-users to delay or cancel orders for the Company's products
and services. Customers may experience financial difficulties, cease or scale
back operations, or reverse prior decisions to budget for orders of the
Company's products and services. As a result, the Company could experience
longer product sales cycles, delays in payment and collection, and pressure from
the Company's markets to reduce prices. A reduction in prices could cause the
Company to realize lower revenues and margins. If capital spending in the
Company's markets declines, the Company may not be able to increase revenues or
achieve profitability without increasing market share. If the Company is unable
to compete successfully in the markets for data storage and related products,
the Company may not increase revenues or achieve profitability.

Continuing changes in technology and industry standards could render the
Company's products unmarketable or obsolete. The markets for the Company's
products change rapidly because of technological innovation, changes in customer
requirements, declining prices, and evolving industry standards. New products
and technology often render existing technology products, services or
infrastructure obsolete, too costly or otherwise unmarketable. The Company's
success depends on its ability to introduce innovations in its products and
services, integrate new technologies into current


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<PAGE>

products, and develop new products and services, all on a timely basis. There is
no guarantee that the Company will be successful achieving these goals, nor do
so in a manner sufficiently timely to ensure that the Company is able to compete
successfully for customers and market share. In addition, if the Company fails
to incorporate the features, performance criteria and security standards in its
products and services that customers require, market acceptance of its products
may not materialize, or may be significantly delayed, and the Company's revenues
will level off or decline as a consequence.

Technological advances also require the Company, on a continuing basis, to
commit substantial resources to acquiring and applying new technologies for use
in its products and services. Product development for data storage products
requires substantial lead time for engineering and testing. If the Company does
not commit resources to developing and selling products incorporating new
technologies at the rate demanded by the Company's markets, its products and
services may be rendered obsolete, revenues could suffer, and the Company may
not achieve profitability. Even if the Company does develop new or enhanced
products and services, the Company cannot assure that these products will gain
acceptance in the marketplace. Failure of any of these products and services
could adversely affect revenues and prevent the Company from achieving
profitability.

The Company believes that the distinctive features of its products differentiate
it from competing products, thereby enabling it to remain competitive. The
Company's policy is to develop its own core software, while hardware and other
software applications are outsourced from third party vendors. The Company
believes this policy enables it to adopt new products and integrate new
solutions expediently into the marketplace without the burden of direct
responsibility for dealing with manufacturing and inventory management issues.

The competitive factors listed above may have a material adverse effect on the
Company's future operating results, including reduced profit margins and loss of
market share. Accordingly, there can be no assurance that the Company will be
successful in its ability to enhance current products and develop and introduce
future products that will achieve market acceptance. The Company's future is
largely dependent on the development of new products including, for example,
porting its software onto other portable storage devices, and its enhancements
and applications. Because the Company is a development stage company, these
products and services are still in varying stages of development and there can
be no assurance that the development of these products and services will be
successfully or timely completed.

Principal Suppliers

The Company's current hardware products are sourced from a limited number of
manufacturers. Any termination or significant disruption in these relationships,
or any material adverse change in the financial condition of one of these
manufacturers, could prevent the Company from filling customer orders in a
timely manner and would have a material adverse effect on its financial position
and results of operations. Although the Company believes that its relationships
with these manufacturers are stable and positive, there can be no assurance that
these relationships will continue or that these manufacturers will continue to
be in a position to manufacture products for the Company in a timely and cost
efficient manner. Although the Company is attempting to reduce the adverse
impact that problems with these manufacturers could cause by developing
relationships with other manufacturers, there is no assurance that the Company
would be able to replace these manufacturers


                                        6

<PAGE>
should a disruption in the relationship occur.

In May, 2004, the Company added Hana Micron ("Hana"), a Korean-based electronics
manufacturer, as the principal manufacturer of the Company's products. Under the
terms of the contract, the Company purchases various hardware devices, Hana
preinstalls the Company's software onto the hardware devices, and performs a
quality check on the finished products prior to shipments to distributors,
customers or the Company.

The Company is dependent upon certain third party owners of hardware products
that are "bundled" for sale with the Company's products. There can be no
assurance that any relationship between the Company and any of these third
parties will continue to be beneficial to the Company. There can also be no
assurance that the third parties will continue to produce products in the future
that retain their current level of market acceptance, that the products will
continue to be available in adequate quantities at the times required by the
Company or that third party products will not contain defects or errors. The
Company may experience lost revenues due to a third party's delay in correcting
defects in its products, delay in getting an adequate supply of their products
to the Company, or from any decline in a third party product's market share.

Patents, Proprietary Technology and Other Intellectual Property

The Company relies primarily on a combination of copyright, trademark and patent
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, the Company seeks to avoid
disclosure of its trade secrets by requiring those persons with access to the
Company's proprietary information to execute confidentiality agreements with the
Company and by restricting access to the Company's software source code. The
Company also relies on unpatented proprietary know-how in developing its
products, and employs various methods, including confidentiality agreements with
employees, consultants and others, to protect its trade secrets and know-how.

Irrespective of the foregoing, the Company cannot be sure that these methods of
protecting its proprietary technology, information and know-how will afford
complete protection. Patents may not be enforceable or provide the Company with
meaningful protection from competitors. If a competitor were to infringe on the
Company's patents, the costs of enforcing the Company's patent rights might be
substantial or even prohibitive. Likewise, the Company cannot be sure that
others will not independently develop its trade secrets and know-how or obtain
access to them.

Despite the Company's efforts to protect its proprietary rights, parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of many
countries do not protect the Company's proprietary rights to as great an extent
as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology.

The Company expects that software product developers will increasingly be
subject to infringement


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<PAGE>

claims as the number of products and competitors in the Company's industry
segment grows and the functionality of products in different industry segments
overlap. Any such claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the Company
or at all, which could have a material adverse effect upon the Company's
business, results of operations and financial condition.

Governmental Regulation

The Company's products are not subject to approval from the United States
government, with the exception of export restrictions to certain countries. Our
business operations do not fall under federal, state, or local environmental
regulations. We do not anticipate current or future government regulation to
have a material adverse affect on our capital expenditures, earnings, or
competitive position.

However, any additional government regulation of imports or exports could
adversely affect our international and domestic sales. The United States and
various foreign governments have imposed controls, export license requirements
and restrictions on the import or export of some technologies, especially
encryption technology. From time to time, government agencies have proposed
further regulation of encryption technology. Additional regulation of encryption
technology could add to the expense of product development and enhancements.
Because foreign competitors are subject to less stringent controls on the export
of encryption technology, they may have a competitive advantage over the Company
in both foreign and domestic technology markets.

Product Development

The Company's research and development expenses totaled $425,679 in fiscal year
2005, compared to $108,392 in fiscal year 2004. The majority of the Company's
development costs are focused on meeting its technical plan, which calls for
further developments and enhancements of software to enable the Company to cater
to a wider audience of users and thereby remain competitive.

Employees

As of March 31, 2005, the Company had 17 full-time employees, as well as a
number of consultants who provided administrative and management services
similar to those that would be provided by full and part-time employees. The
Company has also entered into consulting agreements to obtain counsel and
services relating to marketing, media relations and business development.

Migo(R) is a registered trademark of the Company. Microsoft(R), Windows(R),
Outlook(R), MSN(R), are all registered trademarks of Microsoft Corporation.
Lotus Notes(R), is a registered trademark of Lotus Development Corporation.

For accounting and financial purposes, PowerHouse Studios is considered the
Company's


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<PAGE>

predecessor, and the Company prepares and reports on its financial statements,
including those contained in this Annual Report on Form 10-KSB/A, on that basis.
For certain other purposes, however, including to assure the completeness of the
publicly available information concerning the Company that is set forth herein,
the Company includes information relating to Agate as if the Company were the
successor to Agate for all relevant periods.

ITEM 2. DESCRIPTION OF PROPERTY

The Company moved its executive office and principal place of business to office
space located at 555 Twin Dolphin Drive, Suite 650, Redwood City, California
where it occupies approximately 10,270 square feet. The Company has a four (4)
year lease for the Redwood City location which began in March 2005. The annual
rent for this property is approximately $220,000.

The Company also entered into a 25-month lease agreement in July 2004 for 2,335
square feet of office space at 185 Berry Street, San Francisco, California. In
February 2005 the Company entered into a sub-lease agreement for the San
Francisco space with an unrelated third party. The annual rent for this property
is approximately $54,000, which approximately equals the amount the Company
receives from its sub-lease of this property.

ITEM 3. LEGAL PROCEEDINGS

On January 4, 2005, the Company received a demand for arbitration from the The
Wall Street Group ("WSG"), a former service provider, which alleges breach of
contract and related claims pursuant to an alleged contract for services,
primarily related to raising capital. The demand claims damages of approximately
$947,000, plus an alleged option to purchase 138,948 shares of Common Stock. On
September 26, 2005, the Company entered into a Settlement Agreement with WSG and
Wall Street Consultants, Inc. ("WSC"). Under the Settlement Agreement, the
Company paid WSG $328,000 and issued to WSC a five-year option to purchase up to
350,000 shares of the Company's common stock at $0.60 per share. The option
agreement also grants to WSC certain piggyback registration rights.

Subsequent to March 31, 2005, the Company received notice of a legal action
commenced by Richard Dobies, an individual who allegedly purchased Common Stock
in June 2003. Mr. Dobies did not timely respond to the rescission offer made by
the Company in June 2004 (see Item 6, Management's Discussion and Analysis or
Plan of Operation, under the caption "Significant Events for Fiscal Year 2005")
and, for that and other reasons, was excluded from participating in the
rescission offer. The suit claims damages of approximately $400,000, plus
interest from the time of investment. The Company believes the complaint, filed
on June 9, 2005, is without merit and intends to defend it vigorously and
believes that the loss, if any, resulting from the suit will not have a material
impact on the Company's financial position, results of operations, or cash flows
in future years.

Subsequent to March 31, 2005, the Company received notice of a legal action
commenced by Manijeh Moghis related to her former employment with the Company.
Ms. Moghis filed a complaint on June 28, 2005 seeking damages of approximately
$140,000 related to her offer of employment


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which allowed for continuation of benefits in the event of her termination. On
October 26, 2005, the Company and Ms. Moghis entered into a settlement agreement
whereby the Company will pay Ms. Moghis a total of $90,000, $50,000 of which was
paid upon execution of the agreement, and the balance payable in installments
through January 5, 2006.

The Company received notice of a legal action commenced by Joshua Feller related
to his former employment with the Company. Mr. Feller filed a claim with the
Labor Commissioner of the State of California ("Labor Board") on July 12, 2005,
and a separate action in the Superior Court of California, County of Contra
Costa, ("Superior Court") on July 13, 2005 seeking damages related to his
employment. In both cases Mr. Feller claims that an oral agreement with the
Company existed for the payment of performance and other bonuses, and that his
resignation on June 3, 2005 was for "Good Cause", therefore making him eligible
for severance benefits. Mr. Feller also claims interest in stock options of the
Company although no agreement exists for those options. The Labor Board action
seeks damages of approximately $540,000; the Superior Court action seeks similar
damages. The Company believes the complaint is without merit and intends to
defend it vigorously and believes that the loss, if any, resulting from the suit
will not have a material impact on the Company's financial position, results of
operations, or cash flows in future years.

The Company is not aware of any additional pending litigation as of November 28,
2005.

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

None.

                                    PART II.

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Common Stock currently trades on the NASD Over-the-Counter Bulletin Board
("OTC Bulletin Board") under the symbol "PWHT." In April 2004, the Company
submitted its Form 15c2-11 to gain a listing on the OTC Bulletin Board. This
application was approved February 1, 2005. Prior to this approval, the Company's
Common Stock was traded on the Pink Sheets.

The following table sets forth the quarterly high and low sales prices of the
Common Stock for fiscal year 2004 and fiscal year 2005. Such prices represent
prices between dealers and do not include retail mark-ups, mark-downs or
commissions and may not represent actual transactions.

<TABLE>
<CAPTION>
FISCAL YEAR 2004       HIGH     LOW     FISCAL YEAR 2005    HIGH    LOW
-------------------   ------   -----   -----------------   -----   -----
<S>                   <C>      <C>     <C>                 <C>     <C>
First Quarter*(1)     $15.24   $2.00   First Quarter       $5.80   $3.25
Second Quarter        $11.00   $1.05   Second Quarter      $5.00   $3.00
Third Quarter         $ 5.25   $1.72   Third Quarter       $5.60   $3.00
Fourth Quarter        $ 4.00   $2.75   Fourth Quarter      $3.70   $1.00
</TABLE>


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*(1) On May 19, 2003, the Company completed the combination transaction with
     PowerHouse Studios (including a 1:122 reverse-stock-split), and new
     management began its control of the Company. The prices for this quarter do
     not reflect the 1:122 reverse stock split of May 19, 2003.

The market price of the Common Stock, like the price of shares of technology
companies generally, has been and may continue to be volatile. The closing price
of the Common Stock on March 31, 2005 was $1.65 and the closing price on
December 6, 2005 was $0.62. If the Company's future operating results are below
the expectations of stock market analysts and investors, its stock price may
decline. Public announcements of the Company's financial results and business
developments may have a significant impact on the market price of the Common
Stock. For example, each of the following could have the effect of temporarily
or permanently reducing the market price of the Common Stock:

     -    shortfalls in revenues or cash flows from operations;

     -    failure to attain and maintain profitability;

     -    failure to maintain the qualification for the Common Stock to trade on
          the OTC Bulletin Board;

     -    conversions of preferred stock into Common Stock;

     -    delays in development or roll-out of Company products and services;
          and

     -    failure to maintain our competitive position, whether as a result of
          our failure to deliver new and innovative products in response to
          marketplace demands or new product introductions, acquisitions or
          technological innovations by one or more competitors of the Company.

In addition, the stock market often experiences extreme fluctuations in price
and volume that particularly affect the market prices of shares of emerging and
technology companies, such as the Company. These price and volume fluctuations
are often unrelated or disproportionate to the operating performance of the
affected companies. Because of this volatility, the Company may fail to meet the
expectations of its shareholders or of securities analysts, and the Company's
Common Stock price could decline as a result.

Common Stock Holders

As of March 31, 2005, there were approximately 672 holders of record of the
Common Stock. The Company believes that additional beneficial owners of Common
Stock hold shares in street names.

Dividends

The Company has not declared any cash dividends on its Common Stock. The
declaration and payment of dividends is within the discretion of the Company's
Board of Directors and will depend, among other factors, on results of
operations, capital requirements and general business conditions. At the present
time, the Company's anticipated working capital requirements are such that it
intends to follow a policy of retaining earnings, if any, in order to finance
the development of its business.


                                       11

<PAGE>

Accordingly, the Company does not anticipate or contemplate paying dividends in
the foreseeable future.

The following information is presented as of March 31, 2005.

                      EQUITY COMPENSATION PLAN INFORMATION
<TABLE>
<CAPTION>
                                                                                   Number of securities
                                                                                  remaining available for
                                                                                   future issuance under
                                Number of securities to      Weighted-average       equity compensation
                              be issued upon exercise of     exercise price of       plans (excluding
                                 outstanding options,      outstanding options,   securities reflected in
                                 warrants, and rights      warrants, and rights         column (a))
                                          (a)                       (b)                     (c)
                              --------------------------   --------------------   -----------------------
<S>                           <C>                          <C>                    <C>
Equity compensation plans               845,000                    $0.96                  280,000
   approved by security
   holders

Equity compensation plans                28,500                    $2.76                       --
   not approved by security
   holders

Total                                   873,500                    $1.02                  280,000
</TABLE>

In December 2004, the Company's Board of Directors approved a stock option plan
for employees. During the year ended March 31, 2005, the Company approved the
granting of 845,000 of the 1,125,000 options allotted in the plan. Subsequent to
March 31, 2005, the Company increased the number of shares available for grant
under the plan to 9,375,000 shares. For further information on the Company's
equity compensation plan see Item 6, Management's Discussion and Analysis or
Plan of Operation under the caption "Significant Events During Fiscal Year 2005"
below and Item 7, Financial Statements under Note 9, Options.

Also during the year ended March 31, 2005, the Company offered 28,500 options to
certain consultants for services. All of these options were fully vested at the
time of issuance.

Recent Issuances of Unregistered Securities

The following is a description of all equity securities of the Company sold by
the Company during the period covered by this Annual Report on Form 10-KSB that
were not registered under the Securities Act of 1933, as amended ("Securities
Act") and not previously reported in a Quarterly Report on Form 10-QSB, or in a
Current Report on Form 8-K.

On November 8, 2004, the Company issued 7,380 shares of Common Stock to
Greenberg Traurig, LLP for settlement of invoices related to legal services
performed. General and administrative expense of $40,590 was recorded related to
these shares. The Company relied on Section 4(2) of the Securities Act, and
Regulation D promulgated thereunder, as providing an exemption from


                                       12

<PAGE>

registering the sale of these shares of Common Stock under the Securities Act.

On January 12, 2005, the Company issued 20,000 shares of Common Stock to Paul
Isaacs, an employee, pursuant to an employment agreement. General and
administrative expense of $74,000 was recorded related to these shares. The
Company relied on Section 4(2) of the Securities Act, and Regulation D
promulgated thereunder, as providing an exemption from registering the sale of
these shares of Common Stock under the Securities Act.

On February 25, 2005, the Company issued 2,727 shares of Common Stock to Lev
Krystal, an individual, for performing product development services. Consulting
expense of $3,000 was recorded related to these shares. The Company relied on
Section 4(2) of the Securities Act, and Regulation D promulgated thereunder, as
providing an exemption from registering the sale of these shares of Common Stock
under the Securities Act.

On February 25, 2005, the Company issued 79,800 shares of Common Stock to
certain individuals who operate, as a group named New Health Systems, a company
which provides product development services. Consulting expense of $87,780 was
recorded related to these shares. The Company relied on Section 4(2) of the
Securities Act, and Regulation D promulgated thereunder, as providing an
exemption from registering the sale of these shares of Common Stock under the
Securities Act.

On March 29, 2005, the Company issued 19,500 shares of Common Stock to Andy
Mills, an individual, for consulting services. General and administrative
expense of $78,000 was recorded related to these shares. The Company relied on
Section 4(2) of the Securities Act, and Regulation D promulgated thereunder, as
providing an exemption from registering the sale of these shares of Common Stock
under the Securities Act.

On March 31, 2005, the Company issued 7,000 shares of Common Stock to Hugh
Deane, an individual, for performing consulting services. Consulting expense of
$11,550 was recorded related to these shares. The Company relied on Section 4(2)
of the Securities Act, and Regulation D promulgated thereunder, as providing an
exemption from registering the sale of these shares of Common Stock under the
Securities Act.

For the fiscal year ended March 31, 2005, 215,000 shares of Series A Junior
Convertible Preferred Stock ("Junior A Preferred Stock") were surrendered for
conversion, and, in turn, 215,000 shares of Common Stock were issued.

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

The following information should be read in conjunction with the consolidated
financial statements and the notes thereto contained elsewhere in this Annual
Report on Form 10-KSB/A. This Annual Report on Form 10-KSB/A, and in particular
this Item 6, "Management's Discussion and Analysis or Plan of Operation," may
contain forward-looking statements regarding future events or our future
performance. These future events and future performance involve certain risks
and uncertainties,


                                       13

<PAGE>

which we have described in this Annual Report on Form 10-KSB/A under this Item 6
and Part I, Item 1, "Description of Business." Actual events or our actual
future results may differ materially from any forward-looking statements due to
those risks and uncertainties. The Company assumes no obligation to update these
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting our forward-looking statements. This analysis is not
intended to serve as a basis for projection of future events.

The Company is in the business of developing, acquiring and marketing software
and infrastructure technologies designed to improve the way mobile information
is personalized, secured, carried and accessed.

The Company has developed the Migo(R) ("Migo"), a software computing system that
performs advanced synchronization, personalization and data management functions
when installed on portable memory-storage devices that use USB ports on
Windows-based computers. The Company believes that, in a manner similar to that
in which the cellular phone revolutionized the way that many people communicate,
the Migo has the potential to change the way people work with and away from
their personal computers, whether in the office, at home, or from other remote
locations while traveling. The Migo is designed to improve the mobile computing
experience by allowing computer users to easily transport the personalized
desktop environment of their personal computers (complete with the same files,
Microsoft(R) Outlook(R) e-mail, Internet Explorer favorites, wallpaper,
presentations, photos, MP3 audio files and/or various other features) and then
access that same environment by displaying it on any other Windows-based
computer. In addition, the Migo is designed so that once it has been
disconnected from a non-native computer through which a user's personalized
environment has been accessed, no trace of the user's computer environment or
its data will be left behind on that machine.

The Migo software currently supports the Microsoft(R) Windows(R) operating
system (Win 98SE to XP) and Outlook(R) email program. The Company is developing
its Migo software to function with other popular email applications (such as
Exchange and Lotus Notes(R)), web browsers, and other frequently used tools and
applications, and is in the process of researching and developing a range of
Migo software for use on other hardware devices, including larger capacity USB
storage devices, MP3 music players, mobile cellular phones, PDAs and other
mobile data communication platforms. The Company believes these products will
have the potential for customized use across a broad range of industries,
including healthcare, insurance, banking and financial services and education.

Significant Events During Fiscal Year 2005

The following discussion and analysis provides information that our management
believes is relevant to an assessment and understanding of our results of
operations and financial condition, and is used by management in assessing the
Company's performance and making managerial decisions. The following significant
events impacted our financial condition during the fiscal year ended March 31,
2005, and will have a significant influence on our condition in future reporting
periods.

Proctor, et. al. and Related Matters

Since September 15, 2003, the Company had been engaged in litigation in the
Superior Court of the


                                       14

<PAGE>

State of California in and for the County of Los Angeles, South West District
(the "Superior Court") with Joseph Ford Proctor, the Chief Executive Officer of
MayFair Capital Group Limited, BrickHouse Capital Venture Limited, Julie
Holfinger, and other named defendants therein (the "Proctor Litigation" and the
named defendants therein collectively the "Proctor Group"). The Company's
complaint alleged that the Proctor Group, in connection with a capital-raising
effort for the Company, diverted a significant amount of funds from the Company.
The complaint asked to recover the diverted funds and to enjoin the transfer,
sale or exercise of voting rights with respect to approximately 7,000,000 shares
of Common Stock claimed by the Proctor Group, which represented approximately
67% of the total shares of Common Stock then outstanding (the "Proctor Group
Shares").

On November 10, 2004, the Superior Court issued a judgment in favor of the
Company against the Proctor Group for (i) monetary damages and costs of
$12,805,264 (comprised of $3,790,759 as special damages, $9,000,000 as punitive
damages, and $14,505 as costs), (ii) the return of all corporate books and
records of PowerHouse Studios, its predecessors, subsidiaries and affiliated
companies, and (iii) the cancellation of the stock certificates held by the
Proctor Group with respect to the Proctor Group Shares (7,250,000 shares of
Common Stock of PowerHouse Studios) and a declaration that the Proctor Group
Shares, and all legal and beneficial ownership interests therein, were null and
void as of the date of issuance. There can be no assurance that the Company will
collect on any of the monetary damages and costs awarded to it by the Superior
Court, and no accounts receivable for the award have yet been recorded. The
defendants' right to appeal expired on January 17, 2005, and no appeal was filed
by any of the defendants.

As a result of the underlying matters in the Proctor Litigation, certain of its
existing stockholders who had originally acquired their shares of Common Stock
in connection with a private placement conducted from June 2002 through July
2003 by PowerHouse Studios (and after May 19, 2003, by the Company) were given
the opportunity to rescind the purchase of their respective shares for the cash
consideration paid for the shares, with interest. Simultaneously, these
stockholders were also given the opportunity to invest such cash in Series A
Junior Units, consisting of shares of Junior A Preferred Stock, convertible at
any time into shares of Common Stock, and Junior A Preferred Warrants,
exercisable for shares of Common Stock at an exercise price of $3.83 per share
(See "Recission Offer" below).

Placement Agency Agreement

The Company entered into a Placement Agency Agreement, dated as of April 7,
2004, with Middlebury Capital to act as the placement agent for the sale of a
minimum of $8 million, and up to a maximum of $15 million, of the Company's
Senior A Units in the Senior A Units Offering. In conjunction with the Senior A
Units Offering, the Company's 2003-2004 Convertible Notes, as defined below, and
Bridge Notes converted into shares of Series A Senior Convertible Preferred
Stock ("Senior A Preferred Stock") on the first closing of the Senior A Units
Offering. Convertible Note / Bridge Financing and Senior A Units Offering

In October 2003, the Company offered up to $10 million principal amount of
secured convertible notes, bearing 10% interest per annum with a maturity of 10
years (the "2003-2004 Convertible Notes"). At the time of issuance, the
2003-2004 Convertible Notes were secured by all of the


                                       15

<PAGE>

Company's intellectual property and tangible assets, current and future. The
terms of the 2003-2004 Convertible Notes provide that the holder of the
2003-2004 Convertible Notes, at its option, could convert the principal and
interest of the 2003-2004 Convertible Notes into Common Stock at any time at an
initial conversion price of $4.00 per share. The Company issued approximately
$539,000 of 2003-2004 Convertible Notes prior to their conversion on June 14,
2004.

In March 2004 and in conjunction with the commencement of the Company's Senior A
Units Offering of up to $15 million of Senior A Units, which are composed of
shares of Senior A Preferred Stock and Senior A Preferred Warrants, the Company
entered into a Security Agreement with, and issued Secured Convertible
Promissory Notes to, certain investors (the "Security Agreement" and the "Bridge
Notes", respectively, and collectively, the "Bridge Financing") to secure
immediate funding of up to $1,250,000. By their terms, the Bridge Notes bore
interest at the rate of 10% per annum, commencing 90 days from the date of their
issuance and were secured by all of the Company's assets pursuant to the
Security Agreement. The Bridge Notes were due on dates ranging from March 2,
2005, to April 20, 2005, unless repaid in conjunction with the Senior A Units
Offering. In connection with the Bridge Financing, the Company and the holders
of the 2003-2004 Convertible Notes agreed to exchange the 2003-2004 Convertible
Notes for Bridge Notes. Prior to their conversion on June 14, 2004, the Company
received $2,125,000 under the Bridge Financing. On June 14, 2004, the first
tranche of the Senior A Units Offering was completed, and in accordance
therewith, all of the Bridge Notes then outstanding, including the 2003-2004
Convertible Notes that had been exchanged for Bridge Notes, were, by agreement
between the Company and the holders of the Bridge Notes, exchanged into Senior A
Units.

On June 14, 2004, the Company closed upon the first tranche of the Company's
Senior A Units Offering, and issued 3,142,354 shares of Senior A Preferred Stock
and 785,589 5-year warrants to purchase shares of its Common Stock, in exchange
for $8,732,605 from certain institutional investors. The purchase price included
$6,083,605 at $3.06 per share, and included approximately $2,125,000 received
under a previously closed Bridge Financing and approximately $539,000 principal
amount of previously issued 2003-2004 Convertible Notes, following the
conversion of the 2003-2004 Convertible Notes into shares of Senior A Preferred
Stock in connection with the Senior A Units Offering, which was converted at
$2.29 per share. The exercise price for the warrants was $3.83 per share and is
immediately exercisable upon issuance. (See Note 4, "Debt" to our consolidated
financial statements.)

On August 13, 2004, the Company issued 584,329 shares of Senior A Preferred
Stock and issued 146,082 5-year warrants to purchase the shares of its Common
stock, upon the closing of the second and final tranche of the Senior A Units
Offering. The second closing consisted of approximately $1,788,048 in funding of
Senior A Units with certain institutional investors. All terms and conditions
for the second and final tranche were the same as those in the first tranche
closing held on June 14, 2004. The Senior A Units Offering was terminated upon
completion of the second and final closing.

Rescission Offer

Contemporaneous with the commencement of the Senior A Units Offering, the
Company offered to certain of its existing stockholders who originally acquired
their shares of Common Stock in connection with a private placement conducted
from June 2002 through July 2003 by PowerHouse


                                       16

<PAGE>

Studios (and after May 19, 2003, by the Company) the opportunity to rescind the
purchase of their respective shares for the cash consideration originally paid
for the shares ($5.00 per share), with interest earned from the date such shares
were originally purchased. Simultaneously, such stockholders were given the
opportunity to invest cash in Junior Units, consisting of shares of Junior A
Preferred Stock and Series A Junior Common Stock Purchase Warrants, exercisable
for one (1) share of Common Stock at an exercise purchase price of $3.83 (the
"Junior Warrants" and the offerings referred to, the "Rescission Offer" and
"Junior A Units Offering"). The Junior A Preferred Stock has certain preferences
over Common Stock, and the Junior Warrants contain customary anti-dilution
provisions for stock dividends, stock splits and the like.

The Rescission Offer was based on certain of the matters alleged by the Company
in the Proctor Litigation. (See "Proctor Litigation" above). Stockholders who
accepted the Rescission Offer were required to give general waivers and releases
with respect to certain potential claims against the Company.

The Rescission Offer was completed on June 4, 2004, and holders of approximately
1,010,250 shares of Common Stock accepted the Rescission Offer in exchange for
Series A Junior Units and holders of approximately 46,500 shares of Common Stock
accepted the Rescission Offer for cash consideration. Holders of approximately
119,665 shares of Common Stock retained their ownership of Common Stock as
originally purchased.

There is considerable legal uncertainty under both federal and state securities
laws concerning the efficacy of rescission offers and general waivers and
releases with respect to barring claims that would be based on securities law
violations. The Company understands that the SEC takes the position that
acceptance or rejection of an offer of rescission may not bar stockholders from
asserting claims for alleged violations of federal securities laws. Further,
under California's Blue Sky law, which would apply to stockholders resident in
that state, a claim or action based on fraud may not be waived or prohibited
pursuant to a rescission offer.

Accordingly, the Rescission Offer may not have terminated any or all potential
liability the Company may have for failure to properly register our Common Stock
under the Securities Act and there can be no assurance that the Company will be
able to enforce the waivers and general releases it has received in connection
with the Rescission Offer and Junior A Units Offering to bar any claims based on
allegations of fraud or other federal or state securities law violations that
the stockholders who accept the Rescission Offer may have, until the applicable
statutes of limitations have run with respect thereto. The applicable statutes
of limitations vary from state to state and under federal law, the longest of
which would be for up to three years from the occurrence of the alleged
violation. The Company believes, however, that, in addition to such waivers and
releases, it may also have equitable remedies available to it should any of such
persons seek to deny the enforceability of their waivers and releases.

Further, those stockholders who did not accept the Rescission Offer, either
because they affirmatively rejected it or because they failed to respond to it,
may still attempt to assert claims against the Company, as well as against
certain directors and officers of the Company, relating to non compliance with
the securities laws. The Company cannot predict with certainty that those claims
will be barred by the Rescission Offer because the legal effect of the
Rescission Offer is uncertain.


                                       17

<PAGE>

To the extent those claims are brought and result in judgments for damages, the
Company's business, financial condition and results of operations could all be
harmed. The number of shares of Common Stock held by investors who were offered
rescission under the Rescission Offer but did not accept the Rescission Offer
aggregate 119,665 shares, each of which was purchased at a price of $5.00. Even
if we were to be successful in defending claims brought under applicable
securities laws, their mere assertion could result in costly litigation and
significant diversions of effort by management.

Acquisition of First Person

On May 28, 2004, the Company entered into, and on June 18, 2004 closed, a merger
agreement with First Person and its stockholders (the "FPS Merger Agreement")
(either directly as signatories to the FPS Merger Agreement or as parties in
interest to the FPS Merger Agreement, represented by a duly authorized
representative) to acquire approximately 51% of the shares of outstanding common
stock of First Person in consideration of cash and shares of Common Stock of the
Company, at an aggregate of $2,500,000 (the "First Person Merger"). Immediately
prior to the FPS Merger, the Company owned approximately 49% of the outstanding
shares of First Person stock, which shares were originally purchased by the
Company in November 2002. The transaction was treated as an asset purchase for
accounting purposes. The consideration includes a number of shares of Common
Stock that were held in escrow. A certain number of these shares were released
during the year ended March 31, 2005, with the satisfactory achievement by the
Company of certain performance milestones specified in the FPS Merger Agreement.
The two founders of First Person were offered, and accepted, employment with the
Company. However, on February 11, 2005 the former founders of First Person
resigned from their employment with the Company.

Equity Compensation Plans

On December 8, 2004, the Board of Directors adopted and the stockholders
approved the 2004 Omnibus Stock Incentive Plan (the "Stock Incentive Plan") and
reserved 1,125,000 shares for grant under the Stock Incentive Plan. The Company
may issue stock options, restricted stock, or stock bonuses under the Stock
Incentive Plan to employees, directors and consultants. Stock options granted
under the Stock Incentive Plan may be granted at prices not less than the fair
market value at the date of grant for incentive stock options. No participant in
the Stock Incentive Plan who is a key employee may be granted more than 125,000
stock options in any calendar year.

Stock options granted under the Stock Incentive Plan generally vest based on
three years of continuous service and have a contractual term of ten years,
except for options on 114,167 shares that were immediately vested at the grant
date.

On March 29, 2005, the Company filed Form S-8 with the SEC registering 300,000
shares of Common Stock authorized for issuance to non-employees in exchange for
consideration in the form of services. On September 6, 2005, the Company
increased the pool of shares available for grant under the Stock Incentive Plan
to 9,375,000 shares.

Agreement with M-Systems


                                       18

<PAGE>

On March 30, 2005, the Company entered into a three-year Development Agreement
with M-Systems. Pursuant to the Development Agreement, the Company granted to
M-Systems and its affiliates a worldwide, transferable license to use and
distribute the Company's Migo products, and to use related trademarks, as an
integrated part of M-Systems' USB drive product lines. The Company's Migo
products will be offered to M-Systems customers with either (i) limited
functionality or (ii) full functionality for a period of 45 days, after which
the end-user may purchase a license directly from the Company to continue full
functionality or otherwise retain limited functionality. If a M-Systems customer
purchases a M-Systems product that has integrated a limited functioning Migo
product, the Company will receive a fixed amount of cash per unit sold. If a
M-Systems customer purchases a M-Systems product that has integrated a fully
functioning Migo product from the Company, M-Systems will receive a fixed
percentage of cash from the sale of each unit.

The Company is obligated to develop software applications to bundle its Migo
products with M-Systems USB Drives and the Company agreed to provide first level
support for its Migo products to M-Systems and M-Systems' customers and
end-users. The Company is also prohibited from (i) providing any other party or
their customers with services or applications for USB Drives that are provided
to M-Systems under the Agreement, and (ii) bundling its Migo products with any
USB Drive other than M-Systems's USB Flash drive.

Critical Accounting Policies

In accordance with SEC guidance, those material accounting policies that the
Company believes are the most critical to an investor's understanding of the
Company's financial results and condition are discussed below.

The Company's significant accounting policies are more fully described in Note 2
to the consolidated financial statements. Certain of these policies are
particularly important to the portrayal of the Company's financial position and
results of operations and require the application of significant judgment by the
Company's management to determine the appropriate assumptions to be used in the
determination of certain estimates.

Revenue Recognition

The Company recognizes revenue in accordance with Statement of Accounting
Position ("SOP") 97-2, Software Revenue Recognition, as amended, and SEC Staff
Accounting Bulletin ("SAB") No. 104, Revenue Recognition. The Company sells
software licenses in several ways, including but not limited to pre-loading the
software on different types of memory devices for trial, by making trial
versions available by download from its website, and by selling hardware devices
with its software pre-loaded for use. The Company licenses its software products
on a perpetual basis. Revenue is recognized from the sale of software licenses
only when persuasive evidence of an arrangement exists, the product has been
delivered, the fee is fixed or determinable and collection of the resulting
receivable is reasonably assured. For sales over the Internet, the Company uses
a credit card authorization as evidence of an arrangement. The Company
recognizes revenue from sales through the Company's website after the 30-day
return period has lapsed.


                                       19

<PAGE>

Revenue from direct sale contracts is recognized based on the terms of the
agreement, after the product has been delivered, and collection of the resulting
receivable is reasonably assured. Revenue from distributors is recognized when
the product has been sold to third party customers. The Company expects its
distributors and resellers to maintain adequate inventory to meet future
customer demand, and ships products to distributors and resellers at their
request and based on their valid purchase orders.

Inventories

Inventories are valued at the lower of cost or market and are accounted for on
the first-in, first-out basis. The cost of USB Flash memory devices is volatile;
as a result the Company recorded an expense of $70,914 related to the write-down
of its inventory on March 31, 2005. As of March 31, 2005, the Company's
inventory was valued at $86,063.

Impairment of Long-Lived Assets

Property, equipment, intangible and certain other long-lived assets are
amortized over their useful lives. Useful lives are based on management's
estimates of the period that the assets will generate revenues. Long-lived
assets are written down to fair value whenever events or changes indicate that
the carrying amount of an asset may not be recoverable. The Company's policy is
to review the recoverability of all long-lived assets at a minimum of once per
year and record an impairment loss when the fair value of the assets does not
exceed the carrying amount of the asset. The Company's most significant
long-lived asset is the software technology, which is currently being amortized
on the straight-line basis over 5 years, based on management's best current
assumptions and estimates. As circumstances change, the actual life and/or usage
pattern may vary in the future, which might result in either increases or
decreases in future amortization expense. Also, if circumstances and/or
assumptions regarding the utility and recoverability of the software technology
change, future write-offs or write-downs may be required.

Substantial Doubt About the Company's Viability as a Going Concern

The Company's financial statements have been prepared in accordance with
generally accepted accounting principles applicable to a going concern that
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The Company had limited revenues
and minimal assets as of March 31, 2005, and has incurred losses since
inception. The Company is a development stage company. To date, the Company has
relied solely on loans from shareholders and officers and the sale of its equity
securities to fund operations. There can be no assurance that management's plans
will be realized and therefore, until the present conditions substantially
improve, there is substantial doubt about the Company's ability to continue as a
going concern. The report of the Company's independent certified public
accountants therefore contains an explanatory paragraph regarding substantial
doubt about the Company's ability to continue as a going concern.

Subsequent to March 31, 2005, the Company completed a private placement with
certain investors, with an aggregate offering price of $6,045,000, including the
conversion of $883,333, which was advanced, as a bridge loan, after March 31,
2005.

Results of Operations


                                       20

<PAGE>

Three months ended March 31, 2005 and 2004

From its inception, the Company has never been profitable and has sustained
substantial net losses from operations. The Company's revenues were $73,546 for
the three months ended March 31, 2005, and $106,970 for the corresponding period
ended March 31, 2004. Most of the Company's revenue for the three months ended
March 31, 2005, came from online sales of USB Flash products that included the
Company's software pre-installed, and sales of licenses used on other memory
devices. The Company also sold its products (pre-installed and license-only)
through both direct sales and distribution channels. The Company reported no
direct sales for the quarter.

The Company's spending for the three months ended March 31, 2005 increased from
the same period in 2004 due mainly to increased spending on research and
development. The Company hired additional development staff in support of the
M-Systems contract, and the roll-out of new products. Accordingly, costs for
research and development increased to $171,058 from $4,386 for the respective
periods. The Company's spending for sales and marketing related expenses of
$319,287 for the three months ended March 31, 2005 is down from $493,095 in the
corresponding three month period in 2004. During this period in 2004 the Company
had launched its initial product to the market, accounting for the higher costs.
The Company's general and administrative expenses increased to $1,251,323 from
$1,330,608 due to expense increases for staffing to meet the Company's expanded
and anticipated operations.

Twelve months ended March 31, 2005 and 2004

The Company had revenues of $308,189 for the twelve months ended March 31, 2005,
and $345,585 for the corresponding period ended March 31, 2004. During the
twelve months ended March 31, 2005, the Company recognized $135,495 from online
sales of its software and products, and $172,694 from direct sales and sales
through distributor channels. During the twelve months ended March 31, 2004, the
Company sold a private-labeled version of its product, which resulted in revenue
of $115,220. The Company also recognized $114,055 from online sales and $116,310
of revenue through distributor channels. The Company's costs related to product
sales were $702,163 for March 31, 2005, and $214,671 for March 31, 2004. For
fiscal 2005, the costs included amortization of the software technology of
$432,943 and write-downs of $70,914 for existing inventory.

The Company's spending for the twelve months ended March 31, 2005 increased from
the prior year as the Company continued to increase operations of the Company in
anticipation of increased revenue and product development. The Company's sales
and marketing expenses increased to $1,975,132 in fiscal 2005 from $1,782,344 in
fiscal 2004 due mainly to increased advertising costs. During fiscal 2005,
expenses were related to advertising, general company promotion, and the
settlement of a claim by a former vendor. During fiscal 2004, the expenses were
related to the hiring of a senior sales executive and the hiring of additional
employees for sales activities, development of a public relations strategy, and
initial spending on product branding expenses. General and administrative costs
totaled $5,496,035 for fiscal 2005, and $2,611,467 for fiscal 2004, and were
comprised of employment-related expenses and office operations, all of which
were related to the Company's continued business expansion, and expenses related
to the Proctor Group and related litigation. They also consisted of stock-based
compensation for outside consultants, and the granting


                                       21

<PAGE>

of shares to one of the Company's directors.

The Company sustained no losses in fiscal 2005 from the fraud in the Proctor
Litigation; for the twelve months ended March 31, 2004 the loss from the fraud
was $1,789,411. The Company's total losses to date, due to that matter is
$3,142,759, and the Company does not anticipate incurring any additional charges
for this item.

Liquidity and Capital Resources

At March 31, 2005, the Company had working capital of ($1,572,479) as compared
to working capital of ($2,550,515) at March 31, 2004. During the twelve months
ended March 31, 2005, net cash used in operations was $6,286,360 and consisted
principally of a net loss of $10,145,176 and was offset by non cash components
of net loss, including stock-based compensation and services of $1,250,920, and
depreciation and amortization expenses of $430,473. The increase in Accounts
Payable of $247,704 was due mainly to legal services related to the Proctor
Group litigation, while the overall decrease of current liabilities was due to
the conversion of a Bridge Loan to Equity (see Item 7 ""Financial Statements""
under Note 8, Stockholder's Equity of notes to the financial statements). Cash
flows were also affected by the sale of preferred stock of $7.9 million. (see
Item 7 "Financial Statements" under Note 8, Stockholders' Equity of notes to the
financial statements), and the acquisition of First Person (see Item 7
"Financial Statements" under Note 3, Acquisition of First Person Software, Inc.
of notes to the financial statements).

The Company's current cash on hand at March 31, 2005, was not adequate to fund
the Company's operations for more than a short period if the Company were to
continue to use cash in operating activities at the same rate as in prior
months. Following the fiscal year ended March 31, 2005, the Company has been
successful in closing a private placement of the Company's Common Stock (see
Item 6, Management's Discussion and Analysis or Plan of Operation, under the
caption "Events Subsequent to Fiscal Year Ended March 31, 2005" below).

Recent and Expected Losses

From inception, the Company has never been profitable and has sustained
substantial net losses from operations. There can be no assurance that it will
ever generate positive revenues from its operating activities, or that it will
achieve and sustain a profit during any future period, particularly if
operations remain at current levels. Failure to achieve significant revenues or
profitability would materially and adversely affect the Company's business,
financial condition, and results of operations. For the fiscal year ended March
31, 2005, the Company incurred a net pre-tax loss of $10,142,518 and, for the
fiscal year ended March 31, 2004, the Company incurred a net pre-tax loss of
$6,397,293. The Company's auditors, Hein & Associates LLP, issued an opinion in
connection with the Company's financial statements for the fiscal year ended
March 31, 2005 noting that while the Company has recently obtained additional
financing, the sustained recurring losses raise substantial doubt about its
ability to continue as a going concern.

Satisfaction of Current and Future Capital Requirements

No assurance can be given that the Company will be able to satisfy all of its
capital requirements in


                                       22

<PAGE>

the short-term. The Company cannot provide assurances that it will be able to
develop its business to the point of generating consolidated net operating
profits and cash flows from operations. If funds from these sources are not
sufficient to offset operating expenses, the Company plans to institute
cost-saving measures that will not only reduce overhead, but also curtail
operations in certain business segments. The Company cannot assure that such
measures, if implemented, will be sufficient to offset all of our operating
expenses. If the capital raised from sales of securities is not sufficient to
fund the balance of our operating expenses after we implement these cost-cutting
measures, the Company may be forced to discontinue certain operations or may be
unable to continue as a going concern.

Further, the Company's issuance of equity securities to raise capital may be on
terms that are detrimental to existing stockholders. In order to meet its
capital requirements, the Company may continue to offer equity securities for
sale, and stockholders will experience additional dilution. Any new equity
securities we issue may have rights, preferences or privileges senior to those
of existing holders of the Company's Common Stock.

Events Subsequent to Fiscal Year Ended March 31, 2005

2005 Private Placement

On September 26, 2005, the Company completed a private placement with certain
investors of the Company's Common Stock comprised of a total of 19,910,950
shares of Common Stock and warrants (the "Warrants") to purchase a total of
10,900,400 shares of the Company's Common Stock. The securities were sold at
$0.32 per unit, each unit consisting of one share of Common Stock and a warrant
to purchase one-half of one share of common stock. The aggregate offering price
was $6,045,000 and the aggregate placement fee was $191,360 and warrants to
purchase 1,278,490 shares of Common Stock. Fifty percent (50%) of all Warrants
issued are exercisable at $0.40 per share, and the remaining fifty percent (50%)
are exercisable at $0.48 per share. All Warrants expire after three years,
unless theretofore exercised, contain a call provision in favor of the Company
at a price of $.01 if the stock price should exceed $2.00 per share, and permit
cashless exercise only if there is no registration statement in effect after one
year. The proceeds of the private placement included $883,333 of principal and
$23,765 of accrued interest converted into Common Stock from the short-term
bridge financing. The conversion consisted of a total of 3,779,700 shares of
Common Stock at $0.24 per share.

The private placement was effected through Common Stock and Warrant Purchase
Agreements, dated as of September 26, 2005, by and among the Company and the
private placement investors who are named therein (the "Purchase Agreement"). As
a condition to the transaction, all of the Company's Series A Senior Preferred
Convertible Stock (the "Senior A Stock") were converted into 20,632,952 Common
Stock at a conversion ratio of 5.3685 shares of Common Stock for each share of
Senior A Stock, and a Warrant Exchange Agreement, dated as


                                       23

<PAGE>

of September 26, 2005, was entered into with Middlebury Capital LLC, under which
the holders of warrants to purchase 264,725 shares at $3.06 per share exchanged
their warrants for new warrants for 700,000 shares at $.40 per share. In
addition, the Company executed a Registration Rights Agreement, dated as of
September 26, 2005, by and among the Company and the private placement
investors, wherein the Company agreed to register under the Securities Act of
1933, as amended (the "Securities Act") the shares of Common Stock acquired in
the private placement and the shares issuable upon exercise of the Warrants
issued in the private placement.

The proceeds of the private placement will be used for working capital and
general corporate purposes, including $120,904 applied to the repayment of the
balance of the convertible notes that were not converted as part of the
transaction.

Control Personnel: Subsequent to March 31, 2005:

     -    Greg Duffel, Manijeh Moghis and R.B. (Rob) Hutchinson resigned from
          the Board of Directors,

     -    Manijeh Moghis was terminated from her employment as Chief Operating
          Officer, Joshua Feller resigned from his position as Sr. Vice
          President, Sales, David Wells was removed as Chief Financial Officer,
          and Randy Hagin resigned his position as Vice President, Sales.

     -    Kent Heyman, Alex Mashinsky and Greg Osborn were elected to the Board
          of Directors.

     -    Kent Heyman became Chairman of the Board of Directors, Alex Mashinsky
          became Vice Chairman of the Board, and Richard Liebman was appointed
          as interim Chief Financial Officer

(See Item 9, Directors, Executive Officers, Promoters, and Control Persons, and
Item 10, Executive Compensation below.)


                                       24

<PAGE>

ITEM 7. FINANCIAL STATEMENTS

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                 PAGE
                                                                                 ----
<S>                                                                              <C>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.......................    F-2

CONSOLIDATED BALANCE SHEETS - As of March 31, 2005 and 2004...................    F-3

CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years Ended March 31, 2005
   and 2004, and the Period from May 16, 2002 (inception) to March 31, 2005...    F-5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - For the Period
   from May 16, 2002 (inception) to March 31, 2005............................    F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years Ended March 31, 2005
   and 2004, and the Period from May 16, 2002 (inception) to March 31, 2005...    F-8

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS................................   F-10
</TABLE>



                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of
PowerHouse Technologies Group, Inc.

We have audited the accompanying consolidated balance sheets of PowerHouse
Technologies Group, Inc. (A Development Stage Company) (the "Company") as of
March 31, 2005 and 2004, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended, and for
the period from May 16, 2002 (inception) to March 31, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PowerHouse
Technologies Group, Inc. at March 31, 2005 and 2004, and the results of its
operations and its cash flows for the years then ended and for the period from
May 16, 2002 (inception) to March 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

Hein & Associates LLP

Irvine, California

November 15, 2005


                                      F-2
<PAGE>

                       POWERHOUSE TECHNOLOGIES GROUP, INC.
                          (A Development Stage Company)

                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                      AS OF         AS OF
                                                                                    MARCH 31,     MARCH 31,
                                                                                      2005           2004
                                                                                  ------------   -----------
                                                                                   (RESTATED)
<S>                                                                               <C>            <C>
                                     ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                      $    423,729   $   807,484
   Accounts receivable                                                                  34,411        22,938
   Inventory                                                                            86,063        16,088
   Deferred loan costs                                                                      --       172,042
   Other current assets                                                                 41,300        20,000
                                                                                  ------------   -----------
      Total current assets                                                             585,503     1,038,552
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $3,485                       12,362            --
   OTHER ASSETS:
      License fee                                                                           --       208,418
      Investment in equity investee                                                         --       318,511
      Software technology, net of accumulated amortization of $433,751               2,388,586            --
      Other assets                                                                      39,975         2,049
                                                                                  ------------   -----------
      Total other assets                                                             2,428,561       528,978
                                                                                  ------------   -----------
TOTAL ASSETS                                                                      $  3,026,426   $ 1,567,530
                                                                                  ============   ===========
                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
   Accounts payable                                                               $  1,177,767   $   930,063
   Convertible debt, net of debt discount                                                   --     1,492,758
   Finder's fee payable                                                                     --        60,825
   Accrued compensation                                                                 53,446       332,083
   Due to officer                                                                           --        21,251
   Accrued liabilities                                                                 665,199       752,087
   Dividends payable                                                                   261,570            --
                                                                                  ------------   -----------
      Total current liabilities                                                      2,157,982     3,589,067
                                                                                  ------------   -----------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY (DEFICIT):
   Senior A Preferred stock, $.0001 par value; 10,000,000 shares authorized;
      3,723,832 shares issued and outstanding; preference upon liquidation of
      $14,614,856                                                                          372            --
   Junior A Preferred stock, $.0001 par value; 5,000,000 shares authorized;
      795,250 shares issued and outstanding; preference upon liquidation of
      $2,600,000                                                                            80            --
   Common stock, $.0001 par value; 200,000,000 shares authorized; 3,864,364 and
      3,756,516 shares issued and outstanding                                              387           376
   Additional paid in capital in excess of par value                                28,613,909     6,843,990
</TABLE>


                                      F-3
<PAGE>

<TABLE>
<S>                                                                               <C>            <C>
   Deferred consulting compensation                                                         --      (139,650)
   Treasury Stock                                                                     (183,600)           --
   Deficit accumulated in development stage                                        (27,562,704)   (8,726,253)
                                                                                  ------------   -----------
      Total stockholders' equity (deficit)                                             868,444    (2,021,537)
                                                                                  ------------   -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                              $  3,026,426   $ 1,567,530
                                                                                  ============   ===========
</TABLE>


                                      F-4
<PAGE>

                       POWERHOUSE TECHNOLOGIES GROUP, INC.
                          (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                       FOR THE
                                                                                     PERIOD FROM
                                                     FOR THE YEAR                   MAY 16, 2002
                                                      ENDED MARCH   FOR THE YEAR   (INCEPTION) TO
                                                       31, 2005      ENDED MARCH   MARCH 31, 2005
                                                      (RESTATED)      31, 2004       (RESTATED)
                                                     ------------   ------------   --------------
<S>                                                  <C>            <C>            <C>
REVENUES                                             $    308,189   $   345,585    $    653,774
COST OF SALES                                             702,163       214,671         916,834
                                                     ------------   -----------    ------------
GROSS PROFIT (LOSS)                                      (393,974)      130,914        (263,060)
                                                     ------------   -----------    ------------
OPERATING EXPENSES:
   Research and development                               425,679       108,392         745,251
   Sales and marketing                                  1,975,132     1,782,344       3,944,288
   General and administrative                           5,496,035     2,611,467       8,650,383
                                                     ------------   -----------    ------------
      Total operating expenses                          7,896,846     4,502,203      13,339,922
                                                     ------------   -----------    ------------
NON-OPERATING EXPENSES:
   Loss due to theft                                           --     1,789,411       3,142,759
   Equity in loss of investee                              24,365       152,345         205,854
   Interest                                             2,145,302        63,884       2,213,181
   Other (income) expense                                (317,970)       20,364        (297,606)
                                                     ------------   -----------    ------------
      Total non-operating expenses                      1,851,697     2,026,004       5,264,188
                                                     ------------   -----------    ------------
LOSS BEFORE INCOME TAXES                              (10,142,517)   (6,397,293)    (18,867,170)
PROVISION FOR INCOME TAXES                                  2,658           800           4,258
                                                     ------------   -----------    ------------
NET LOSS                                              (10,145,175)   (6,398,093)    (18,871,428)
DEEMED AND REGULAR DIVIDENDS                           (8,691,275)            0      (8,691,275)
                                                     ------------   -----------    ------------
NET LOSS ALLOCABLE TO HOLDERS OF COMMON STOCK        $(18,836,450)  $(6,398,093)   $(27,562,703)
                                                     ============   ===========    ============
NET LOSS PER SHARE ALLOCABLE TO HOLDERS OF COMMON
   STOCK - BASIC AND DILUTED                         $      (5.70)  $     (1.95)
                                                     ============   ===========
WEIGHTED AVERAGE COMMON SHARES - BASIC AND DILUTED      3,305,360     3,285,107
                                                     ============   ===========
</TABLE>


                                      F-5
<PAGE>

                       POWERHOUSE TECHNOLOGIES GROUP, INC.
                          (A Development Stage Company)

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
         FOR THE PERIOD FROM MAY 16, 2002 (INCEPTION) TO MARCH 31, 2005

<TABLE>
<CAPTION>

                                                     COMMON STOCK        JUNIOR A PREFERRED    SENIOR A PREFERRED
                                                 --------------------   -------------------   --------------------   TREASURY
                                                   SHARES     AMOUNTS     SHARES    AMOUNTS     SHARES     AMOUNTS     STOCK
                                                 ----------   -------   ---------   -------   ----------   -------   --------
<S>                                              <C>          <C>       <C>         <C>       <C>          <C>       <C>
   [BALANCE, May 16, 2002 (inception)
   Issuance of Common Stock for services to
      officers and consultant                     1,250,000     125
   Issuance of Common Stock related in
      investment in equity investee in
      November 2002                                  40,000       4
   Net loss
                                                 ----------     ---     ---------     ---      ---------     ---     --------
BALANCE, March 31, 2003                           1,290,000     129
   Issuance of Common Stock for employee
      compensation                                  100,000      10
   Effect of combination with Agate
      Technologies, Inc upon closing May 19,
      2003                                          888,525      89
   Issuance of Common Stock for cash              1,248,191     125
   Issuance of Common Stock for services            229,800      23
   Estimated value of beneficial conversion
      of convertible notes                               --
   Net loss
                                                 ----------     ---     ---------     ---      ---------     ---     --------
BALANCE, March 31, 2004                           3,756,516     376
   Issuance of Senior A Preferred Stock
     upon conversion of convertible notes                                                      1,154,248     115
   Issuance of Senior A Preferred Stock for
      cash                                                                                     2,572,435     257
   Payment of equity financing costs
   Beneficial conversion feature of
      Senior A Preferred Stock
   Beneficial conversion and interest costs
      associated with Bridge and Convertible
      Debt
   Issuance of Common Stock for services            313,907      32
   Amortization of deferred stock-based
      compensation
   Issuance of Common Stock related to the
      purchase of First Person Software, Inc.       272,420      28
   Repurchase of Common Stock related to
      First Person Software, Inc. acquisition                                                                        (183,600)
   Repurchase of Common Stock related to
      Rescission Offer                              (43,000)     (4)
   Exchange of Common shares of Junior A
      Preferred Shares related to Rescission
      Offer                                      (1,010,250)   (101)    1,010,250     101
   Beneficial conversion feature of
      Junior A Preferred Stock
   Amortization of discount related to
      Warrants issued with Junior A Preferred
      Stock
   Dividends on Senior A Preferred Stock
      ($261,570 outstanding at March 31, 2005)       10,001       1                              111,726      11
   Dividends on Senior A Preferred Stock
      for penalty related to non-effective
      status of Registration Statement (SB-2)        21,033       2                              214,160      21
   Conversion of Senior A Preferred and
      Junior A Preferred Stock to Common Stock      543,737      53      (215,000)    (21)      (328,737)    (32)          --
   Stock-based compensation
   Net loss
                                                 ----------    ----     ---------     ---      ---------     ---     --------
   BALANCE, March 31, 2005                        3,864,364     387       795,250      80      3,723,832     372     (183,600)
                                                 ==========    ====     =========     ===      =========     ===     ========

<CAPTION>
                                                                                 DEFICIT
                                                 ADDITIONAL                  ACCUMULATED IN
                                                   PAID-IN      DEFERRED       DEVELOPMENT
                                                   CAPITAL    COMPENSATION        STAGE          TOTAL
                                                 ----------   ------------   --------------   -----------
<S>                                              <C>          <C>            <C>              <C>
   BALANCE, May 16, 2002 (inception)
   Issuance of Common Stock for services to
      officers and consultant                                                                         125
   Issuance of Common Stock related in
      investment in equity investee in
      November 2002                                  99,996                                       100,000
   Net loss                                                                    (2,328,160)     (2,328,160)
                                                 ----------     --------      -----------     -----------
BALANCE, March 31, 2003                              99,996                    (2,328,160)     (2,228,035)
   Issuance of Common Stock for employee
      compensation                                  499,990                                       500,000
   Effect of combination with Agate
      Technologies, Inc upon closing May 19,
      2003                                         (280,515)                                     (280,426)
   Issuance of Common Stock for cash              5,442,234                                     5,442,359
   Issuance of Common Stock for services            843,277     (139,650)                         703,650
   Estimated value of beneficial conversion
      of convertible notes                          239,008                                       239,008
   Net loss                                                                    (6,398,093)     (6,398,093)
                                                 ----------     --------      -----------     -----------
BALANCE, March 31, 2004                           6,843,990     (139,650)      (8,726,253)     (2,021,537)
   Issuance of Senior A Preferred Stock
      upon conversion of convertible notes        2,648,885                            --       2,649,000
   Issuance of Senior A Preferred Stock for
      cash                                        7,871,396                                     7,871,653
   Payment of equity financing costs             (1,355,438)                                   (1,355,438)
   Beneficial conversion feature of
      Senior A Preferred Stock                    5,576,182                    (5,576,182)             --
   Beneficial conversion and interest costs
      associated with Bridge and Convertible
      Debt                                        1,717,726                                     1,717,726
   Issuance of Common Stock for services          1,250,888           --               --       1,250,920
   Amortization of deferred stock-based
      compensation                                               139,650                          139,650
   Issuance of Common Stock related to the
      purchase of First Person Software, Inc.     1,196,107                            --       1,196,135
   Repurchase of Common Stock related to
      First Person Software, Inc. acquisition                                          --        (183,600)
   Repurchase of Common Stock related to
      Rescission Offer                             (214,996)                           --        (215,000)
   Exchange of Common shares of Junior A
      Preferred Shares related to Rescission
      Offer                                              --           --               --              --
   Beneficial conversion feature of
      Junior A Preferred Stock                      880,354                      (880,354)             --
   Amortization of discount related to
      Warrants issued with Junior A Preferred
      Stock                                         880,354                      (880,354)             --
   Dividends on Senior A Preferred Stock
      ($261,570 outstanding at March 31, 2005)      372,472                      (634,054)       (261,570)
   Dividends on Senior A Preferred Stock
      for penalty related to non-effective
      status of Registration Statement (SB-2)       720,309                      (720,332)             (0)
   Conversion of Senior A Preferred and
      Junior A Preferred Stock to Common Stock                        --               --               0
   Stock-based compensation                         225,680                            --         225,680
   Net loss                                                                   (10,145,175)    (10,145,175)
                                                 ----------     --------      -----------     -----------
   BALANCE, March 31, 2005                       28,613,909           --      (27,562,704)        868,444
                                                 ==========     ========      ===========     ===========
</TABLE>


                                      F-6
<PAGE>

                       POWERHOUSE TECHNOLOGIES GROUP, INC.
                          (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                 FOR THE PERIOD
                                                             FOR THE YEAR      FOR THE YEAR    FROM MAY 16, 2002
                                                           ENDED MARCH 31,   ENDED MARCH 31,     (INCEPTION) TO
                                                                 2005              2004          MARCH 31, 2005
                                                           ---------------   ---------------   -----------------
<S>                                                        <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                 $(10,145,175)      $(6,398,093)      $(18,871,428)
   Adjustments to Reconcile Net Loss to Net Cash Used
      in Operating Activities:
      Common stock issued for services                         1,250,920         1,203,650          2,454,695
      Equity in loss of investee                                  24,365           152,345            205,854
      Depreciation and amortization                              430,473                --            430,473
      Interest expense related to debt issuance costs            201,242            21,261            239,008
      Interest expense related to amortization of debt
         discount                                                172,042            37,766            193,303
      Interest expense related to beneficial conversion        1,717,726                --          1,717,726
      Stock option expense                                       225,680                              225,680
      Changes in operating liabilities:
         Accounts receivable                                     (11,473)          (22,938)           (34,411)
         Inventory                                               (69,975)          (16,088)           (86,063)
         Other current assets                                    (21,300)          (20,000)           (20,000)
         License fee                                                  --          (118,418)          (118,418)
         Other assets                                            (37,926)           (2,049)           (61,275)
         Accounts payable                                        247,704           807,510          1,177,767
         Accrued compensation                                   (278,637)          267,083             53,446
         Accrued liabilities                                      29,225           357,608            386,833
         Due to officer                                          (21,251)          (72,416)                --
                                                            ------------       -----------       ------------
   Net cash used in operating activities                      (6,286,360)       (3,802,779)       (12,106,810)
                                                            ------------       -----------       ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of First Person Software                       (1,276,937)               --         (1,276,937)
   Purchase of equipment                                         (15,847)               --            (15,847)
   Investment in equity of investee                                   --                --           (130,000)
                                                            ------------       -----------       ------------
   Net cash used in investing activities                      (1,292,784)               --         (1,422,784)
                                                            ------------       -----------       ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Payment of finders' fee                                       (60,825)          (50,000)          (110,825)
   Payment of debt issuance costs                             (1,355,438)          (98,425)        (1,453,863)
   Principal payments on note payable to equity investee              --          (183,995)          (270,000)
</TABLE>


                                      F-7
<PAGE>

<TABLE>
<S>                                                         <C>                <C>               <C>
   Advances on common stock subscriptions                             --                --          2,233,676
   Proceeds from convertible notes                               955,000         1,684,000          2,639,000
   Payments upon rescission of common stock                     (215,000)               --           (215,000)
   Proceeds from sale of common stock                                 --         3,258,683          3,258,683
   Proceeds from sale of preferred stock                       7,871,652                --          7,871,652
                                                            ------------       -----------       ------------
   Net cash provided by financing activities                   7,195,389         4,610,263         13,953,323
                                                            ------------       -----------       ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS            (383,755)          807,484            423,729
CASH AND CASH EQUIVALENTS, beginning of period                   807,484                --                 --
                                                            ------------       -----------       ------------
CASH AND CASH EQUIVALENTS, end of period                    $    423,729       $   807,484       $    423,729
                                                            ============       ===========       ============

NON-CASH  INVESTING AND FINANCING ACTIVITY:
   Issuance of note payable for acquisition of
      investment in equity investee                                   --                --       $    270,000
   Issuance of common stock in exchange for an
      investment in equity investee                                   --                --            100,000
   Issuance of common stock in connection with the
      acquisition of First Person Software, Inc.            $  1,196,135                --          1,196,135
   Debt discount recognized in connection with
      convertible notes                                               --       $   239,008            239,008
   Liabilities assumed upon Company's combination with
      Agate Technologies, Inc.                                        --           280,426            280,426
   Issuance of senior A preferred stock in connection
      with conversion of debt                                  2,649,000                --          2,649,000
   Issuance of shares for dividends                            1,092,816                --          1,092,816

SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
   Interest                                                           --                --                 --
   Income Taxes                                                    2,658               800              4,258
</TABLE>


                                      F-8
<PAGE>

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     1.        ORGANIZATION AND NATURE OF OPERATIONS

               RESTATEMENT OF FISCAL YEAR ENDED MARCH 31, 2005:

               The Company has restated its financial results for the fiscal
               year ended March 31, 2005 to 1) revise the accounting treatment
               given the Company's acquisition of First Person Software, Inc.,
               and 2) revise the accounting treatment given to warrants issued
               in connection with Series A Senior Preferred Stock issued by the
               Company in 2004.

               In the Annual Report on 10-KSB as originally filed, the Company
               treated its acquisition of the 51% of First Person Software, Inc.
               that it did not previously own as an asset purchase for
               accounting purposes. The effect of this accounting treatment was
               that the Company recorded a deferred tax liability in the initial
               amount of $1,547,000, with a corresponding increase in the amount
               of the capitalized software technology asset. Additionally, the
               recognition of the deferred tax liability and increased software
               technology asset gave rise to additional amortization expense and
               deferred tax benefit in the Statement of Operations for the year
               ended March 31, 2005, amounting to $240,390 and $260,530,
               respectively. The Company subsequently reviewed the accounting
               treatment given this transaction and determined that the
               acquisition should have been treated as a business combination
               following the guidance in Statement of Financial Accounting
               Standards No. 141 and EITF No. 98-3. Accordingly, the deferred
               tax liability referred to above, including the related increases
               in the software technology asset, amortization expense, and
               deferred tax benefit, was reversed.

               Also in the Annual Report on 10-KSB as originally filed, the
               Company treated warrants issued in connection with its 2004
               issuance of Series A Senior Preferred Stock as liabilities. The
               warrants were initially recorded at their estimated fair value,
               which was adjusted to market at the end of each reporting period.
               The Company subsequently determined, based on the guidance in
               EITF Topic D-98, that the warrants should have been treated as
               mezzanine equity and, as such, no mark to market adjustments
               should have been recorded. The effects of this change were to
               reduce interest expense by $692,000, reduce other income by
               $1,209,262, and reduce deemed and regular dividends by
               $2,903,155.

               Development Stage Operations - PowerHouse Technologies Group,
               Inc. (a Development Stage Company) (the "Company") is a
               development stage company under the provisions of Statement of
               Financial Accounting Standards ("SFAS") No. 7, "Accounting and
               Reporting by Development Stage Enterprises" and was incorporated
               under the laws of the State of Delaware on May 16, 2002 as
               PowerHouse Studios, Inc. On May 19, 2003, the Company completed a
               combination with Agate Technologies, Inc. ("Agate") and conducted
               a 1-for-122 reverse split of the Agate common stock. Unless
               otherwise specified, all share and per-share amounts have been
               retroactively adjusted to reflect the split. Concurrent with this
               transaction, the Company amended its Articles of Incorporation
               changing its name to PowerHouse Technologies Group, Inc.

               In June 2004, the Company acquired the remaining 51% of First
               Person Software, Inc. ("First Person") that it did not already
               own in consideration of cash and shares of the Company's Common
               Stock.

               The Company has limited operating history and limited revenues.
               Located in Redwood City, CA, the Company is in the business of
               developing, acquiring and marketing computing software and
               infrastructure technologies designed to improve the way mobile
               information is personalized, secured, carried and accessed. The
               Company's corporate website is www.migosoftware.com.

     2.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

               Basis of Presentation - The accompanying financial statements
               have been prepared in conformity with accounting principles
               generally accepted in the United States ("US GAAP"), which
               contemplate continuation of the Company as a going concern.
               However, the Company is subject to the risks and uncertainties
               associated with a new business, has no established source of
               revenue, and has incurred significant losses from operations.
               These matters raise substantial doubt about the Company's ability
               to continue as a going concern. From inception, the Company has
               never been profitable and has sustained substantial net losses
               from operations. There can be no assurance that it will ever
               generate positive revenues from its operating activities, or that
               it will achieve and sustain a profit during any future period,
               particularly if operations remain at current levels. Failure to
               achieve significant revenues or profitability would materially
               and adversely affect the Company's business, financial condition,
               and results of operations. These financial statements do not
               include any adjustments relating to the recoverability and
               classification of recorded asset amounts, or amounts and
               classification of liabilities that might be necessary should the
               Company be unable to continue as a going concern.

               Management estimates that the current funds available and on-hand
               will be adequate to fund operations throughout fiscal 2006. The
               Company anticipates that revenue from the sale of its current
               product line will begin increasing during the first half of its
               fiscal year 2006. Subsequent to March 31, 2005, the Company
               completed a private placement with certain investors, with an
               aggregate offering price of $6,045,000, as more fully described
               in Note 12.

               Principles of Consolidation - The consolidated financial
               statements include the accounts of the Company and its
               subsidiaries, PowerHouse Acquisition Company and PowerHouse
               Studios, Inc. All significant intercompany accounts and
               transactions have been eliminated in consolidation.

               Use of Estimates - The preparation of financial statements in
               conformity with US GAAP requires


                                      F-9
<PAGE>

               management to make estimates and assumptions that affect the
               reported amounts of assets and liabilities and disclosure of
               contingent assets and liabilities at the date of the financial
               statements, and the reported amounts of revenues and expenses
               during the reported periods. Management bases its estimates and
               assumptions on historical experience and on various other
               assumptions that it believes are reasonable under the
               circumstances. Actual results could differ from those estimates.
               Significant estimates include the valuation of acquired software
               technology and revenue recognition.

               Cash and Cash Equivalents - The Company considers temporary
               liquid investments with an original maturity of three months or
               less to be cash equivalents.

               Accounts Receivable - Accounts Receivable are stated at the
               amount management expects to collect from outstanding balances.
               An allowance for doubtful accounts is provided for those accounts
               receivable considered to be uncollectible, based upon historical
               experience and management's evaluation of outstanding accounts
               receivable at the end of the year. At March 31, 2005 management
               believes that all amounts are collectable.

               Inventory - Inventory is valued at the lower of cost or market
               with cost determined by the first-in, first-out method. At March
               31, 2005 and 2004, inventory consisted of finished goods of which
               certain amounts were on consignment with third party distributors
               and resellers. Although the Company is principally in the
               business of developing software, to support sales of software
               licenses it may at times purchase hardware and resell it with its
               software pre-installed. As a result, the Company may be exposed
               to a number of factors that could result in portions of its
               inventory becoming either obsolete or in excess of anticipated
               usage. These factors include, but are not limited to,
               technological changes in its markets, competitive pressures in
               products and prices, and the introduction of new product lines.
               The Company regularly evaluates its ability to realize the value
               of its inventory based on a combination of factors, including
               historical usage rates, forecasted sales, product life cycles,
               and market acceptance of new products. When inventory that is
               obsolete or in excess of anticipated usage is identified, it is
               written down to realizable salvage value or an inventory
               valuation reserve is established.

               For the year ended March 31, 2005, the Company recorded an
               expense of $70,914 related to the write-down of the Company's
               inventory to its realizable value. For the year ended March 31,
               2004, there were no such inventory write-downs.

               Property and Equipment - Property and equipment are stated at
               cost. Depreciation is computed using the straight-line method
               over estimated useful lives of three to five years. Leasehold
               improvements are amortized over the shorter of the lease term or
               the estimated useful life. The Company capitalizes costs
               associated with acquiring and installing software to be used for
               internal purposes.

               Software Technology Assets - Software technology assets, acquired
               as part of the First Person Software acquisition (Note 4) are
               stated at cost. Amortization is computed using the straight-line
               method over an estimated useful life of five years.

               Impairment of Long-Lived Assets - Property, equipment, intangible
               and certain other long-lived assets are amortized over their
               useful lives. Useful lives are based on management's estimates of
               the period that the assets will generate revenues. Long-lived
               assets are written down to fair value whenever events or changes
               indicate that the carrying amount of an asset may not be
               recoverable. The Company's policy is to review the recoverability
               of all long-lived assets at a minimum of once per year and record
               an impairment loss when the fair value of the assets does not
               exceed the carrying amount of the asset. The Company's most
               significant long-lived asset is the software technology, which is
               currently being amortized on the straight-line basis over 5
               years, based on management's best current assumptions and
               estimates. As circumstances change, the actual life and/or usage
               pattern may vary in the future, which might result in either
               increases or decreases in future amortization expense. Also, if
               circumstances and/or assumptions regarding the utility and
               recoverability of the software technology change, future
               writeoffs or writedowns might be required.

               Revenue Recognition - The Company recognizes revenue in
               accordance with Statement of Accounting Position ("SOP") 97-2,
               Software Revenue Recognition, as amended, and Staff Accounting
               Bulletin


                                      F-10
<PAGE>

               ("SAB") No. 104, Revenue Recognition.

               The Company recognizes revenue from sales through the Company's
               website after the 30 day return period has lapsed. The Company's
               software products are licensed on a perpetual basis. Revenue from
               the sale of software licenses is recognized only when persuasive
               evidence of an arrangement exists, the product has been
               delivered, the fee is fixed or determinable and collection of the
               resulting receivable is reasonably assured. For sales over the
               Internet, the Company uses a credit card authorization as
               evidence of an arrangement.

               Revenue from direct sale contracts of the Company's products to
               commercial users is recognized based on the terms of the
               agreement, after the product has been delivered, and collection
               of the resulting receivable is reasonably assured. Revenue from
               distributors is recognized when the product has been sold to
               third party customers.

               Basic and Diluted Loss Per Share - In accordance with the
               Financial Accounting Standards Board's ("FASB") SFAS No. 128,
               "Earnings Per Share," the basic loss per common share, which
               excludes dilution, is computed by dividing the net loss available
               to common shareholders by the weighted average number of common
               shares outstanding. Diluted loss per common share reflects the
               potential dilution that could occur if all potential common
               shares had been issued and if the additional common shares were
               dilutive. As a result of net losses for all period presented,
               there is no difference between basic and diluted loss per share
               of Common Stock. Potential shares of common stock to be issued
               upon the exercise of options and warrants amounted to 2,867,401
               and no shares at March 31, 2005 and 2004, respectively.

               Comprehensive Loss - Comprehensive loss is comprised of net loss
               and other comprehensive income (loss). Other comprehensive income
               (loss) includes certain changes in stockholders' equity that are
               excluded from net loss, such as unrealized gains and losses on
               marketable securities and currency translation adjustments.
               Comprehensive income (loss) for the years ended March 31, 2005
               and 2004 equals net loss.

               Stock-Based Compensation - In December 2004, the FASB issued SFAS
               No. 123R, Share Based Payment. SFAS No. 123R establishes the
               accounting for grants of stock options and other transactions in
               which an entity exchanges its equity instruments for goods or
               services. It also addresses transactions in which an entity
               incurs liabilities in exchange for goods or services that are
               based on the fair value of the entity's equity instruments or
               that may be settled by the issuance of those equity instruments.
               SFAS No. 123R (1) revises SFAS No. 123, Accounting for
               Stock-Based Compensation, (2) supersedes Accounting Principles
               Board ("APB") Opinion No. 25, Accounting for Stock Issued to
               Employees, and (3) establishes fair value as the measurement
               objective for share-based payment transactions. The Company has
               adopted SFAS 123R effective January 1, 2005 in accordance with
               the standard's early adoption provisions. Prior to January 1,
               2005, the Company's Board of Directors had not approved the
               granting of any stock options. As such, the Company decided to
               follow the provisions of SFAS No. 123R on a prospective basis,
               and for the year ended March 31, 2005, the Company recorded
               $225,680 of compensation expense related to the granting of stock
               options to employees.

               Advertising - Advertising costs are charged to expense as
               incurred and totaled $622,584 in 2005 and $83,550 in 2004.

               Research and Development - Research and development costs are
               charged to operations as incurred, and totaled $425,679 for 2005
               and $108,932 for 2004. Some of the Company's products include
               certain software applications that are integral to the operation
               of the core product. The costs to develop such software have not
               been capitalized, as the Company believes its current software
               development process is essentially completed concurrent with the
               establishment of technological feasibility of the software.

               Fair Value of Financial Instruments - The estimated fair values
               for financial instruments under SFAS No. 107, Disclosures about
               Fair Value of Financial Instruments, are determined at discrete
               points in time based on relevant market information. These
               estimates involve uncertainties and cannot be determined with
               precision. For certain of the Company's financial instruments,
               including certain assets, accounts payable,


                                      F-11
<PAGE>

               accrued liabilities and debt, the carrying amounts approximate
               fair value due to their maturities.

               Concentrations of Credit Risk - Credit risk represents the
               accounting loss that would be recognized at the reporting date if
               counterparties failed completely to perform as contracted. The
               Company's product revenues are concentrated in the software
               industry, which is highly competitive and rapidly changing.
               Significant technological changes in the industry or customer
               requirements, or the emergence of competitive products with new
               capabilities or technologies, could adversely affect operating
               results. Concentrations of credit risk (whether on or off balance
               sheet) that arise from financial instruments exist for groups of
               customers or counterparties when they have similar economic
               characteristics that would cause their ability to meet
               contractual obligations to be similarly affected by changes in
               economic or other conditions described below.

               Financial instruments that subject the Company to credit risk
               consist of cash balances maintained in excess of federal
               depository insurance limits and accounts receivable, which have
               no collateral or security. The Company maintains its cash
               balances with high credit quality financial institutions. At
               times cash deposits may be in excess of Federal Deposit Insurance
               Corporation's limits. To date, the Company has not experienced
               any such losses and believes it is not exposed to any significant
               credit risk.

               Investment in Affiliated Companies - The equity method of
               accounting is used for investments in which the Company has
               significant influence. Generally this represents common stock
               ownership or partnership equity of at least 20% and not more than
               50%. The cost method of accounting is used for investments in
               which the Company does not have significant influence. Generally
               this represents common stock ownership or partnership equity of
               less than 20%.

               Prior to June 2004, the equity method of accounting was used for
               the Company's 49% investment in First Person Software ("First
               Person"), a private company. In June 2004, the Company acquired
               the remaining 51% of First Person for approximately $2,500,000 in
               cash and Common Stock. The acquisition was accounted for using
               the purchase method of accounting in accordance with SFAS No.
               141, Business Combinations, and as more fully described in Note
               3.

               Income Taxes - The Company accounts for income taxes using the
               asset and liability method, as set forth in SFAS No. 109,
               Accounting for Income Taxes, wherein deferred tax assets and
               liabilities are recognized for the future tax consequences
               attributable to differences between financial statement carrying
               amounts of existing assets and liabilities and their respective
               tax bases. Deferred tax assets and liabilities are measured using
               enacted tax rates expected to apply to taxable income in the
               years in which the temporary differences are expected to be
               recovered or settled. Reserves against deferred tax assets are
               provided when management cannot conclude that realization of such
               assets is probable.

               Recently Issued Accounting Pronouncements - In December 2004, the
               FASB issued SFAS No. 153, Exchanges of Non-monetary Assets. SFAS
               No. 153 amends the guidance in APB Opinion No. 29, Accounting for
               Non-monetary Transactions, to eliminate certain exceptions for
               non-monetary exchanges of similar productive assets, and replaces
               it with a general exception for exchanges of non-monetary assets
               that do not have commercial substance. The Company does not
               believe that adoption of SFAS No. 153 will have a material effect
               on its financial position, results of operations, or cash flows.

               In September 2004, the Emerging Issues Task Force ("EITF") issued
               EITF No. 04-8, The Effect of Contingently Convertible Instruments
               on Diluted Earnings per Share. EITF No. 04-8 provides new
               guidance on when the dilutive effect of contingently convertible
               securities with a market price trigger should be included in
               diluted earnings per share. The new guidance states that these
               securities should be included in the diluted earnings per share
               computation regardless of whether the market price trigger has
               been met. The guidance in EITF 04-8 is effective for all periods
               ending after December 15, 2004 and would be applied by
               retrospectively restating previously reported earnings per share.
               The adoption of this pronouncement is not expected to have a
               material effect on the Company's financial statements.


                                      F-12
<PAGE>

     3.        ACQUISITION OF FIRST PERSON SOFTWARE, INC.

               During fiscal year 2003, the Company purchased a 49% interest of
               the then outstanding shares of First Person. The total purchase
               price of the investment in First Person was $500,000. This
               purchase was accounted for under the equity method, for which the
               investment in stock of First Person has been recorded at cost and
               the carrying amount of the investment has been adjusted to record
               the Company's share of the earnings/losses of First Person after
               the date of acquisition.

               Through March 31, 2004 the Company recorded losses of $181,489,
               for the Company's 49% interest in First Person's net loss. For
               the period between April 1, 2004 through the date of the
               acquisition, the Company recorded a loss of $24,365. Therefore
               the balance of the Company's investment in First Person totaled
               $318,511 at March 31, 2004 and $294,146 at the date of
               acquisition.

               During the first quarter of fiscal year 2005, the Company
               purchased the remaining 51% of the outstanding shares of First
               Person that it did not previously own in consideration of cash
               and shares. The total purchase price was approximately
               $2,500,000, which included cash of $1,000,000, 217,938 shares of
               Common Stock valued at $1,000,000 at the date of the acquisition,
               direct acquisition costs of $349,000 and the elimination of
               certain inter-company accounts including $97,000 of accrued
               expenses, $208,000 of prepaid royalties and the remaining balance
               of the Company's investment in First Person totaling $294,000 at
               the date of acquisition. Also, there was additional purchase
               consideration contingent upon certain performance milestones.

               As a result of the issuance of 54,482 shares associated with the
               completion of certain milestones, the software technology asset
               was increased by $196,135 subsequent to the effective date of the
               acquisition.

               As of the effective date of the First Person merger, the purchase
               price was allocated to the assets and liabilities of First Person
               as follows:

<TABLE>
<S>                                                <C>
Cash                                               $      403
Stock of the Company (to become treasury shares)      183,600
Software technology (Note 4)                        2,327,502
Accounts payable                                      (56,054)
                                                   ----------
                                                   $2,455,451
                                                   ==========
</TABLE>

               The following unaudited pro forma consolidated statement of
               operations assumes that the acquisition occurred as of the
               beginning of the periods presented and presents pro forma
               financial information for the years ended March 31, 2005 and
               2004. There would be no pro forma impact on revenue from this
               acquisition. In the Company's opinion, all adjustments necessary
               to present fairly such unaudited pro forma consolidated statement
               of operations have been made. The unaudited pro forma results are
               provided for comparative purposes only and are not necessarily
               indicative of what actual results would have been had the Company
               acquired First Person on such dates, nor do they give effect to
               synergies, cost savings, and other changes expected to result
               from the acquisition. Accordingly, the pro forma financial
               results do not purport to be indicative of results of operations
               as of the date hereof, for any period ended on the date hereof,
               or for any other future date or period.


                                      F-13
<PAGE>

<TABLE>
<CAPTION>
                                                   For the years ended March 31,
                                                   -----------------------------
                                                        2005           2004
                                                    ------------   -----------
<S>                                                 <C>            <C>
Net loss as reported                                $(10,145,175)  $(6,398,093)
Adjustment for First Person                             (156,075)     (723,030)
                                                    ------------   -----------
Pro forma net loss                                   (10,301,250)   (7,121,123)
Deemed and regular dividends                          (8,691,275)           --
                                                    ------------   -----------
Net Loss Applicable to Holders of Common Stock      $(18,992,525)  $(7,121,123)
                                                    ============   ===========
Net Loss Per Share Allocable to Holders of
   Common Stock - Basic and Diluted:

   As Reported                                            ($5.70)       ($1.95)
                                                    ============   ===========
   Pro Forma                                              ($5.61)       ($2.00)
                                                    ============   ===========
   </TABLE>

     4.        INTANGIBLE ASSETS

               Intangible assets, which result from the First Person acquisition
               entered into in June 2004, consist of the following:
<TABLE>
<S>                         <C>
Software technology asset   $2,822,337
Accumulated amortization      (433,751)
                            ----------
                            $2,388,586
                            ==========
</TABLE>

               The Company is currently amortizing its acquired intangible asset
               over 5 years. Amortization expense related to the software
               technology asset amounted to $433,751 for the year ended March
               31, 2005. No software technology amortization was recorded for
               the year ended March 31, 2004.

               The expected future annual amortization expense of intangible
               assets is as follows:

<TABLE>
<CAPTION>
For the year ended March 31,
----------------------------
<S>                            <C>
            2006               $  564,467
            2007                  564,467
</TABLE>


                                      F-14
<PAGE>

<TABLE>
<S>                            <C>
            2008                  564,467
            2009                  564,467
            2010                  130,718
                               ----------
                               $2,388,586
                               ==========
</TABLE>

     5.        DEBT

               Bridge Loan - Through March 31 2004, the Company issued
               $1,684,000 of secured convertible notes and warrants to
               individual investors. The notes accrued interest at a rate of 10%
               per annum commencing 90 days from the date of issuance, and were
               secured by all of the Company's assets. The notes were due at
               various dates through April 2005. The principal balance of the
               notes and any accrued and unpaid interest would automatically
               convert into units of equity upon a future qualified financing of
               not less than $8 million. The convertible notes included 5-year
               warrants to purchase 169,826 shares of the Company's common stock
               at $2.69 per share or 75% of the price of the next qualified
               stock offering. The Company calculated the fair value of the
               warrants using the Black-Scholes model and recorded a debt
               discount against the face of the notes (based on the relative
               fair value of the warrants and the debt) to be amortized to
               interest expense over the 12-month life of the notes. In
               accordance with EITF 00-27, "Application of Issue No. 98-5 to
               Certain Convertible Instruments," which provides guidance on the
               calculation of a beneficial conversion feature on a convertible
               instrument, the Company determined that the notes also had a
               beneficial conversion feature, which the Company began amortizing
               to interest expense over the term of the notes along with the
               debt discount.

               In April 2004, the Company issued an additional $965,000 of
               secured convertible notes and warrants under the Middlebury
               Bridge Loan agreement in which the principal balance of the notes
               and accrued and unpaid interest would also automatically convert
               into units of equity upon a future qualified equity financing of
               not less than $8 million. The convertible notes included 5-year
               warrants to purchase 118,736 shares of the Company's common stock
               at $2.69 or 75% of the price of the next qualified stock
               offering. The Company calculated the fair value of the warrants
               using the Black-Scholes model and recorded a debt discount
               against the face of the notes (based on the relative fair value
               of the warrants and the debt) to be amortized to interest expense
               over the 12-month life of the notes. In accordance with EITF
               00-27, "Application of Issue No. 98-5 to Certain Convertible
               Instruments," which provides guidance on the calculation of a
               beneficial conversion feature on a convertible instrument, the
               Company determined that the notes also had a beneficial
               conversion feature, which the Company began amortizing to
               interest expense over the term of the notes along with the debt
               discount.

               In total, the Company recorded $656,500 of debt discount and
               $1,300,500 of beneficial conversion, of which $37,800, had been
               recorded as interest expense for the year ended March 31, 2004
               and the remaining balance was expensed during the year ended
               March 31, 2005.

               In June 2004, the Company completed the initial closing of a
               qualified equity financing and converted $2,649,000 of
               convertible promissory notes to equity. These convertible
               promissory notes were all converted within their initial
               interest-free period during which no interest was charged on the
               face amounts. However, in connection with the conversion, the
               Company recorded the remaining unamortized debt discount and
               beneficial conversion feature to interest expense. For the year
               ended March 31, 2005, the Company recorded $1,889,768 of interest
               expense relating to the amortization of debt discount and the
               beneficial conversion feature.

               Upon conversion of the convertible notes to equity, the Company
               recorded an additional beneficial conversion effect of $692,000
               as interest expense, as the exercise price of the warrants
               decreased to $2.29 per share. This was the lower of $2.69 or 75%
               of the price of the next qualified equity financing ($3.06 per


                                      F-15
<PAGE>

               share of Senior A Preferred Stock). In accordance with EITF 98-5,
               "Accounting for Convertible Securities with Beneficial Conversion
               Features or Contingently Adjustable Conversion Ratios," the
               incremental beneficial conversion was limited to the original
               proceeds of the debt.

     6.        ACCRUED LIABILITIES

               Accrued liabilities consist of the following as of March 31:
<TABLE>
<CAPTION>
                               2005       2004
                             --------   --------
<S>                          <C>        <C>
Settlements payable          $484,386   $270,589
Options to be issued           95,284     80,056
Accrued operating expenses     85,529    401,442
                             --------   --------
                             $665,199   $752,087
                             ========   ========
</TABLE>

               Settlements payable increased due to increased reserves for
               pending lawsuits (see Note 13), and accrued operating expenses
               decreased due to the release of $280,426 related to liabilities
               from the combination with Agate.

     7.        INCOME TAXES

               For the years ended March 31, 2005 and 2004, income tax expense
               amounted to $2,658 and $800, respectively, representing minimum
               California franchise taxes. There has been no provision for U.S.
               federal income taxes for any period as the Company has incurred
               operating losses in all periods.

               A reconciliation of income taxes at the statutory federal income
               tax rate to net income taxes included in the accompanying
               statements of operations is as follows:

<TABLE>
<CAPTION>
                                            Year Ended March 31,
                                            --------------------
                                                2005     2004
                                               -----    -----
<S>                                         <C>         <C>
Statutory U.S. federal rate                    34.0%     34.0%
State income taxes, net of federal effect       4.5%      3.4%
Interest related to debt discount and
   beneficial conversion                       (6.4%)
Stock option expense                           (0.8%)
Other                                          (1.0%)    (1.4%)
Valuation allowance                            30.3%)   (36.0%)
                                               ----     -----
Effective Tax Rate                               --%       --%
                                               ====     =====
</TABLE>

               Deferred income taxes reflect the net tax effects of temporary
               differences between the carrying amounts of assets and
               liabilities for financial reporting purposes and the amounts used
               for income tax purposes. Significant components of the Company's
               deferred tax assets as of March 31, 2005 and 2004 are as follows:


                                      F-16
<PAGE>

<TABLE>
<CAPTION>
                                                         2005           2004
                                                     -----------    -----------
<S>                                                  <C>            <C>
Net operating losses                                 $ 5,823,440    $ 2,754,200
Other, primarily accrued expenses                         20,780          8,100
                                                     -----------    -----------
                                                       5,844,220      2,762,300
Less: Valuation allowance                             (5,844,220)    (2,762,300)
                                                     -----------    -----------
Net deferred tax assets                              $        --    $        --
                                                     ===========    ===========
</TABLE>

               Realization of deferred tax assets is dependent upon future
               earnings, if any, the timing and amount of which are uncertain.
               Accordingly, the net deferred tax assets have been fully offset
               by a valuation allowance. The valuation allowance increased by
               $3.08 million and $1.5 million during the years ended March 31,
               2005 and 2004, respectively.

               As of March 31, 2005, the Company had net operating loss
               carryforwards for federal income tax purposes of approximately
               $14.9 million, which expire in the years 2020 through 2025. The
               Company also had net operating loss carryforwards for state
               income tax purposes of approximately $12.9 million, expiring in
               the years 2011 through 2015.

               Utilization of the Company's net operating loss and tax credit
               carryforwards may be subject to a substantial annual limitation
               due to the ownership change limitations provided by the Internal
               Revenue Code and similar state provisions. Such an annual
               limitation could result in the expiration or elimination of the
               net operating loss and tax credit carryforwards before
               utilization.

     8.        STOCKHOLDERS' EQUITY

               Common Stock - Effective May 19, 2003, the Company completed a
               combination with Agate. The Company conducted a 1-for-122 reverse
               split of the Agate common stock for which the Company issued
               888,525 shares of its Common Stock and assumed Agate's
               liabilities totaling $280,426. Additionally, the Company amended
               its Articles of Incorporation changing its name to PowerHouse
               Technologies Group, Inc. The combination was accounted for as a
               reverse acquisition. As a result, no goodwill was recorded.

               In April 2003, the Company issued 100,000 shares of its Common
               Stock to the President and Chief Executive Officer of Forward
               Solutions, Inc., a former wholly-owned subsidiary. Compensation
               expense of $500,000 was recorded in the year ended March 31, 2004
               related to these shares.

               Common Stock Issued for Compensation and Consulting Services -
               For the year ended March 31, 2004, the Company issued 229,680
               shares of Common Stock for services and recorded $703,650 of
               compensation expense and $139,650 as deferred compensation
               related to these shares (as more fully described below).

                    In December 2003, the Company issued 60,000 shares of its
                    Common Stock to a director and employees for services and
                    compensation. Compensation expense of $279,000 was recorded
                    related to these shares.

                    In March 2004, the Company issued 40,000 shares of its
                    Common Stock to The Hoffman Agency, a public relations
                    company, as payment for certain amounts owed as part of
                    normal operations. Consulting expense of $110,000 was
                    recorded related to these shares.

                    In March 2004, the Company issued 50,000 shares of Common
                    Stock to certain individuals who operate as RedCentre
                    Consulting Limited for performing sales and marketing
                    services in western Europe. Consulting expense of $175,000
                    was recorded related to these shares.


                                      F-17
<PAGE>

                    In March 2004, the Company issued 79,800 shares of Common
                    Stock to certain individuals who operate as New Health
                    Systems for performing product development services.
                    Consulting expense of $139,090 was recorded related to these
                    shares, and $139,090 was recorded in stockholders' equity as
                    deferred consulting compensation for future services.

               For the year ended March 31, 2005, the Company issued 313,907
               shares of Common Stock for services and recorded $1,250,920 of
               compensation expense (as more fully described below).

                    In June 2004, the Company issued 15,000 shares of Common
                    Stock in full satisfaction for all services rendered under a
                    professional services agreement with San Diego Torrey Hills
                    Capital. The Company recorded consulting expense of $86,250
                    during the period.

                    In September 2004, the Company issued 10,000 shares of
                    Common Stock to David Piesse for performing product research
                    and documentation services. Consulting expense of $32,500
                    was recorded related to these shares.

                    In November 2004, the Company issued 150,000 shares of
                    Common Stock to Michael Balmuth in connection with prior
                    employment matters related to the founding and early
                    operation of the Company. The Company recorded an expense of
                    $825,000 for the issuance of these shares.

                    In November 2004, the Company issued 7,380 shares of Common
                    Stock to Greenberg Traurig, LLP for settlement of invoices
                    related to legal services performed. The Company recorded
                    expense of $40,590 related to these shares.

                    In November 2004, the Company issued 2,500 shares of Common
                    Stock to Robin Hutchison for services as a member of the
                    Board of Directors. The Company recorded expense of $12,250
                    related to these shares.

                    In January 2005, the Company issued 20,000 shares of Common
                    Stock to Paul Isaacs pursuant to an employment agreement.
                    The Company recorded expense of $74,000 related to these
                    shares.

                    In February 2005, the Company issued 2,727 shares of Common
                    Stock to Lev Krystal for performing product development
                    services. The Company recorded expense of $3,000 related to
                    these shares.

                    In February 2005, the Company issued 79,800 shares of Common
                    Stock to certain individuals who operate as a group New
                    Health Systems performing product development services. The
                    Company recorded expense of $87,780 related to these shares.
                    Additionally, in February 2005, New Health Systems completed
                    the required work for which $139,500 of previously issued
                    stock for services were issued. The Company recorded the
                    remaining $139,500 of deferred compensation related to
                    shares issued for services in fiscal 2004 to New Health
                    Systems.

                    In March 2005, the Company issued 7,000 shares of Common
                    Stock to Hugh Deane in full payment for services rendered in
                    fiscal 2005. The Company recorded expense of $11,550 related
                    to these shares.

                    In March 2005, the Company issued 19,500 shares of Common
                    Stock to Andy Mills in satisfaction of prior debts for
                    services. The Company recorded expense of $78,000 related to
                    these shares.

               Common Stock Issued in Connection with Acquisition of First
               Person Software - In June 2004, the Company issued a total of
               217,938 shares of Common Stock in connection with the Company's
               acquisition of those shares of First Person that were not
               previously owned by the Company. (Note 3). The Company also
               reserved for issuance an additional 108,991 shares of the
               Company's Common Stock, the issuance of


                                      F-18
<PAGE>

               which was contingent upon the satisfaction of certain performance
               milestones, which were achieved as described in Note 3.

               In September 2004, the Company issued a total of 27,241 shares of
               Common Stock in connection with the completion of a certain
               performance milestone set forth in the Company's merger
               agreement, dated as of May 28, 2004, with First Person and its
               stockholders (the "FPS Merger Agreement"). The Company increased
               the value of the assets purchased from First Person by $88,533
               related to this issuance.

               In December 2004, the Company issued a total of 27,241 shares of
               Common Stock with a value of $107,602 for satisfaction of certain
               performance milestone set forth in the FPS Merger Agreement. The
               Company increased the value of the assets purchased from First
               Person by $107,602 related to this issuance.

               Senior A Preferred Stock

               In June 2004, the Company closed the first tranche of the
               Company's Senior A Units Offering, and issued 3,142,354 shares of
               Senior A Preferred stock and 785,589 5-year warrants to purchase
               shares of its Common Stock, in exchange for $8,732,605 from
               certain institutional investors. The purchase price included
               $6,083,605 at $3.06 per share and $2,649,000 received under
               previously issued convertible notes. The convertible promissory
               notes converted at $2.29 per share, which was 75% of $3.06 per
               share issued to other investors (See Note 5). The exercise price
               for the warrants was $3.83 per share and the warrants are
               immediately exercisable upon issuance.

               In August 2004, the Company closed the second and final tranche
               of the Company's Senior A Units Offering and issued 584,329
               shares of Senior A Preferred Stock and 146,082 5-year warrants to
               purchase shares of its Common Stock, in exchange for $1,788,048
               from certain institutional investors at $3.06 per share. The
               exercise price for the warrants was $3.83 per share and the
               warrants are immediately exercisable upon issuance.

               The holders of the Senior Series A Units had registration rights
               that required the Company to file and have declared effective a
               registration statement with the SEC to register the resale of the
               Common Stock issuable upon conversion of the Senior A Preferred
               Stock and the Common Stock issuable upon exercise of the
               warrants. In the event the Company is unable to cause the
               registration to be effective by the following dates: for
               convertible notes holders - 90 days from the date of issuance of
               Senior A Units (September 12, 2004); for the first tranche - 120
               days from the date of issuance of Senior A Units (October 12,
               2004), for the second tranche - 120 days from the date of
               issuance of Senior A Units (December 13, 2004), the Company would
               be penalized. The penalty accrued at a rate of 3% per month of
               the original amount invested, up to a maximum of 30%, at which
               point the holders of the Senior A Units have the right to put the
               stock and warrant back to the Company for full redemption.
               Pursuant to the terms of the Registration Rights Agreement,
               during the first 90 days in which the penalty is earned, the
               penalty is payable either in cash or in shares of Senior A
               Preferred Stock, at the Company's election. After that 90-day
               period expires, the penalty must be paid in cash. The total
               penalty accrued by the Company totaled $720,332 through the
               effective date of the registration, which the Company paid-in
               kind through the issuance of 214,160 shares of Series A Senior
               Preferred Stock and 21,033 shares of Common Stock for full
               settlement.

               In accordance with EITF 00-27, "Application of Issue No. 98-5 to
               Certain Convertible Instruments," which provides guidance on the
               calculation of a beneficial conversion feature on a convertible
               instrument, the Company has determined that the Series A
               Preferred Stock also had a beneficial conversion feature of
               $5,021,961 as of the date of issuance. The Company recorded this
               beneficial conversion feature as a deemed dividend upon issuance
               to be included in arriving at net loss applicable to holders of
               Common Stock.

               In connection with the June and August 2004 transactions, the
               Company granted to its private placement agent, 264,776 5-year
               warrants to purchase Senior A Preferred Stock at an exercise
               price of $3.06 per share and 68,559 warrants to purchase Common
               Stock at an exercise price of $2.29 per share. The


                                      F-19
<PAGE>

               Company calculated the fair value of the warrants using the
               Black-Scholes model to be $1,517,600 and $349,100, which the
               Company as cost of raising capital and as an offset to Additional
               Paid-in Capital.

               The following is a summary of the rights of Series A Preferred
               Stock:

               Dividends. Each share of Senior A Preferred Stock is entitled to
               receive, to the extent funds are legally available, non
               cumulative dividends, when and as declared by the Board of
               Directors, at the rate of 8.0% per year of the original purchase
               price (initially $3.06 per share), prior to and in preference to
               any declaration or payment of a dividend to the holders of the
               Junior A Preferred Stock or Common Stock. The dividend is payable
               commencing as of the date of issuance and thereafter
               semi-annually on June 1 and December 1 of each year, in either
               cash or in kind by issuance of additional shares of Senior A
               Preferred Stock, at the option of the Company. In addition, each
               share of Senior A Preferred Stock shares in all ordinary
               dividends or distributions, other than a liquidating
               distribution, declared or paid on the Common Stock or Junior A
               Preferred Stock, on an as-converted basis. Beginning on the
               second anniversary of the closing date of the Senior A Units
               Offering, if, during any semi-annual dividend accrual period, the
               closing price (determined on the basis of the average weighted
               daily trading price) of the Common Stock for 5 trading days falls
               below three times the original purchase price (appropriately
               adjusted for stock splits, stock dividends and the like), the
               dividend rate for that period shall increase to 12% per annum.

               For the year ended March 31, 2005, the Company recorded $634,054
               of 8% dividends on the Senior A Preferred Stock. To satisfy a
               portion of this liability due through December 1, 2004, the
               Company issued 111,726 shares of Senior A Preferred Stock and
               10,001 shares of Common Stock valued at $372,484. The outstanding
               liability at March 31, 2005 totaled $261,570. This liability was
               paid in stock subsequent to March 31, 2005.

               Keep Even Right. In the event the Company sells equity
               securities, convertible securities or warrants to any person, the
               holders of the Senior A Preferred Stock have the right to
               purchase their pro rata portion of such shares for a period of 45
               days after the closing of such sale (the "Keep Even Right"). The
               Keep Even Right shall not apply to any underwritten public
               offering of Company equity securities by an internationally
               recognized underwriter at a price per share of Common Stock no
               less than three times the original purchase price (appropriately
               adjusted to reflect the occurrence of any stock split, stock
               dividend, stock combination, stock subdivision or like
               occurrences).

               Liquidation. In the event of a liquidation, dissolution or
               winding up of the Company, whether voluntary or involuntary, each
               share of Senior A Preferred Stock is also entitled to a
               liquidation preference, in preference to any other class or
               series of the Company's capital stock, equal to 150% of the
               original purchase price (appropriately adjusted to reflect the
               occurrence of any stock split, stock dividend, stock combination,
               stock subdivision or like occurrences).

               Secured Party Status. The holders of the Senior A Preferred Stock
               were secured by a senior lien on the intellectual property and
               the Company's rights under management employment contracts of the
               Company.

               Conversion. The Company's Senior A Preferred Stock is
               convertible, at the option of the holder at any time, into such
               number of shares of Common Stock as is obtained by multiplying
               the number of shares of Series A Preferred Stock to be converted
               by the Liquidation Preference per share and dividing the result
               by the conversion price of $3.06 per share or, if there has been
               an adjustment of the conversion price, by the conversion price as
               last adjusted and in effect on the date any share or shares of
               Senior A Preferred Stock are surrendered for conversion. The
               Senior Preferred Stock was initially convertible at the rate of
               one share of Common Stock for each share of Senior A Preferred
               Stock, subject to adjustments for any stock split, stock
               dividend, stock combination, stock subdivision or like
               occurrences. The agreement allows for certain events to trigger
               mandatory conversion by the Company.

               Change in Conversion Price. If the Company issues or sells Common
               Stock without consideration or for a consideration per share less
               than the Conversion Price in effect immediately prior to the time
               of such issue or sale, then the Conversion Price shall be reduced
               to a price equal to the price paid (or deemed to have


                                      F-20
<PAGE>

               been paid) per share for such additional shares of Common Stock.

               Junior A Preferred Stock Issued in Conjunction with a Rescission
               Offer

               Contemporaneous with the Senior A Units Offering, the Company
               offered to certain of its existing shareholders who originally
               acquired their shares of Common Stock in connection with a
               private placement conducted from June 2002 through July 2003 by
               PowerHouse Studios (and after May 19, 2003, by the Company) the
               opportunity to rescind the purchase of such shares for the cash
               consideration originally paid for the shares ($5.00 per share),
               with interest earned from the date such shares were originally
               purchased. Simultaneously, such stockholders were given the
               opportunity to invest cash in Junior Units, consisting of shares
               of Junior A Preferred Stock and Junior Warrants, exercisable for
               one (1) share of Common Stock at an exercise purchase price of
               $3.83 per share. The Junior A Preferred Stock has certain
               preferences over Common Stock, and the Junior Warrants contain
               customary anti-dilution provisions for stock dividends, stock
               splits and the like.

               As a result of the Rescission Offer, the Company issued 1,010,250
               shares of Junior A Preferred Stock, convertible into Common Stock
               upon demand in exchange for the same number of shares of the
               Company's Common Stock. The Company also issued 252,563 5-year
               warrants to purchase shares of its Common Stock at $3.83 per
               share. Holders of approximately 46,500 shares of Common Stock
               accepted the Rescission Offer for cash consideration, which
               resulted in a payout of principal and interest of approximately
               $254,649. The repurchased stock was retired. Holders of
               approximately 119,665 shares of Common Stock retained their
               ownership of Common Stock as originally purchased. The Company
               calculated the fair value of the 252,563 5-year warrants, issued
               to purchase shares of the Company's Common Stock, using the
               Black-Scholes model and recorded $880,354 as a deemed dividend
               (based on the relative fair value of the warrants and Junior A
               Preferred Stock). In accordance with EITF 00-27, the Company
               determined that the Junior A Preferred Stock then contained a
               beneficial conversion feature of $880,354 and recorded an
               additional deemed dividend to arrive at a net loss available to
               holders of Common Stock.

               There is considerable legal uncertainty under both federal and
               state securities laws concerning the efficacy of rescission
               offers and general waivers and releases with respect to barring
               claims that would be based on securities law violations. The
               Company understands that the SEC takes the position that
               acceptance or rejection of an offer of rescission may not bar
               stockholders from asserting claims for alleged violations of
               federal securities laws. Further, under California's Blue Sky
               law, which would apply to stockholders resident in that state, a
               claim or action based on fraud may not be waived or prohibited
               pursuant to a rescission offer.

               Accordingly, the Rescission Offer may not have terminated any or
               all potential liability the Company may have for failure to
               properly register our Common Stock under the Securities Act and
               there can be no assurance that the Company will be able to
               enforce the waivers and general releases it has received in
               connection with the Rescission Offer and Junior A Units Offering
               to bar any claims based on allegations of fraud or other federal
               or state securities law violations that the stockholders who
               accept the Rescission Offer may have, until the applicable
               statutes of limitations have run with respect thereto. The
               applicable statutes of limitations vary from state to state and
               under federal law, the longest of which would be for up to three
               years from the occurrence of the alleged violation. The Company
               believes, however, that, in addition to such waivers and
               releases, it may also have equitable remedies available to it
               should any of such persons seek to deny the enforceability of
               their waivers and releases.

               Further, those stockholders who did not accept the Rescission
               Offer, either because they affirmatively rejected it or because
               they failed to respond to it, may still attempt to assert claims
               against the Company, as well as against certain directors and
               officers of the Company, relating to non compliance with the
               securities laws. The Company cannot predict with certainty that
               those claims will be barred by the Rescission Offer because the
               legal effect of the Rescission Offer is uncertain. To the extent
               those claims are brought and result in judgments for damages, the
               Company's business, financial condition and results of operations
               could all be harmed. The number of shares of Common Stock held by
               investors who were offered rescission under the Rescission Offer
               but did not accept the Rescission Offer aggregate of 119,665
               shares, each of which was purchased at a price of $5.00. Even if
               the Company was to be successful in


                                      F-21
<PAGE>

               defending claims brought under applicable securities laws, their
               mere assertion could result in costly litigation and significant
               diversions of effort by management.

               Conversion of Series A Senior Preferred Stock and Series A Junior
               Preferred Stock into Common Stock

               During the fiscal year ended March 31, 2005, certain holders of
               Series A Senior Preferred Convertible Stock (the "Senior A
               Preferred Stock") and Series A Junior Convertible Preferred Stock
               (the "Junior A Preferred Stock") requested conversion of their
               shares into Common Stock, pursuant to their respective
               agreements. For the year ended March 31, 2005, there were 328,737
               shares of Senior A Preferred Stock and 215,000 shares of Junior A
               Preferred Stock surrendered for conversion, and 543,737 shares of
               Common Stock were issued.

               Deemed Dividends

               For the year ended March 31, 2005, the Company recorded total
               deemed and regular dividends as follows:

<TABLE>
<S>                                                                   <C>
Deemed dividend related to beneficial conversion feature on
   Senior A Preferred Stock                                           $5,576,181
Deemed dividend related to beneficial conversion feature of
   Junior A Preferred Stock                                              880,354
Amortization of debt discount related to Series A Junior Common
   Stock Purchase Warrants                                               880,354
Dividends related to Penalties paid to Senior A Preferred
   Stockholders for non-effective status of Registration Statement       720,332
                                                                      ----------
      Total Deemed Dividends                                           8,057,221
Senior A Preferred Stock Dividends                                       634,054
                                                                      ----------
      Total Deemed and Regular Dividends                              $8,691,275
                                                                      ==========
</TABLE>

               There were no deemed or regular dividends for the year ended
               March 31, 2004.

     9.        OPTIONS

               Stock Option Plan - On December 8, 2004, the Board of Directors
               adopted and the stockholders approved the 2004 Omnibus Stock
               Incentive Plan (the "Stock Incentive Plan") and reserved
               1,125,000 shares for grant under the Stock Incentive Plan. The
               Company may issue stock options, restricted stock, or stock
               bonuses under the Stock Incentive Plan to employees, directors
               and consultants. Stock options granted under the Stock Incentive
               Plan may be granted at prices not less than the fair market value
               at the date of grant for incentive stock options.

               Stock options granted under the Stock Incentive Plan generally
               vest based on three years of continuous service and have a
               contractual term of ten years, except for options on 114,167
               shares that were immediately vested at the grant date. The fair
               value of each stock option is estimated using the Black-Scholes
               model. Expected volatility is based on management's estimate
               using the historical stock performance of similar non-accelerated
               software companies, the expected term of the options is
               determined using the "simplified" method described in SEC Staff
               Accounting Bulletin No. 107, and the risk-free interest rate is
               based on the implied yield of U.S. Treasury zero-coupon bonds
               with a term comparable to the expected option term.

               Following is a summary of the assumptions used in the
               Black-Scholes model:


                                      F-22

<PAGE>

<TABLE>
<S>                                        <C>
Range of expected volatility                151% - 159%
Weighted average expected volatility           153%
Range of risk-free interest rate           2.98% - 4.33%
Weighted average risk-free interest rate       3.48%
Expected life in years                          6.0
Dividend yield                                 0.0%
</TABLE>

               Compensation expense relating to stock options recognized in the
               quarter and year ending March 31, 2005 amounted to $225,680,
               representing the fair value of options granted, amortized on a
               straight-line basis over the vesting period. The weighted average
               grant date fair value of options granted was $1.02 per share.

               A summary of option activity under the Stock Incentive Plan for
               the year ended March 31, 2005 is as follows:

<TABLE>
<CAPTION>
                                        Weighted Average
                                --------------------------------
                                          Exercise   Contractual
                                            Price        Life
                                 Option      per      Remaining,
                                 Shares     Share      in Years
                                -------   --------   -----------
<S>                             <C>       <C>        <C>
Outstanding at April 1, 2004         --
Granted                         845,000     $1.02
Exercised                            --        --
Forfeited or expired                 --        --
                                -------     -----
Outstanding at March 31, 2005   845,000     $1.02        9.39
                                =======     =====        ====
Exercisable at March 31, 2005   181,111     $1.01        9.05
                                =======     =====        ====
</TABLE>

               The aggregate intrinsic value of option shares outstanding at
               March 31, 2005 was $679,350. The aggregate intrinsic value of
               option shares exercisable at March 31, 2005, was $115,911.

               As of March 31, 2005, there was approximately $732,000 of total
               unrecognized compensation expense related to non-exercisable
               options granted (753,879 option shares at a weighted average
               grant date fair value of $0.97 per share), which is expected to
               be recognized over a weighted average period of 2.6 years. The
               Company has an available pool of options for issuance of
               1,125,000. As of March 31, 2005 there were 280,000 available for
               grant. During the year the Company issued options at an exercise
               price ranging from $1.01 to $1.16 per share.

               Consultants - During 2005, the Company granted a total of 28,500
               options to certain consultants for the purchase of the Company's
               Common Stock based on contractual arrangements which were not
               effectively issued as of March 31, 2005 for which the Company
               accrued a liability of $95,284.

     10.       RELATED PARTY TRANSACTIONS

               Advances from Officer and Accrued Compensation - During the year
               ended March 31, 2005, the Company repaid $267,083 in accrued
               wages for certain officers and other employees. Also during the
               year ended March 31, 2005 the Company repaid $21,251 to its Chief
               Executive Officer for expenses advanced since inception.

     11.       COMMITMENTS AND CONTINGENCIES



                                      F-23
<PAGE>

               Agreement with M-Systems - On March 30, 2005, the Company entered
               into a three-year development agreement with M-Systems Flash Disk
               Pioneers Ltd., an Israeli company ("M-Systems"). Pursuant to the
               agreement, the Company granted to M-Systems and its affiliates a
               worldwide, transferable license to use and distribute the
               Company's Migo products, and to use related trademarks, as an
               integrated part of M-Systems' USB drive product lines. The
               Company's Migo products will be offered to M-Systems customers
               with either (i) limited functionality or (ii) full functionality
               for a period of 45 days, after which the end-user may purchase a
               license directly from the Company to continue full functionality
               or otherwise retain limited functionality. If a M-Systems
               customer purchases a M-Systems product that has integrated a
               limited functioning Migo product, the Company will receive a
               fixed amount of cash per unit sold. If a M-Systems customer
               purchases a M-Systems product that has integrated a fully
               functioning Migo product from the Company, M-Systems will receive
               a fixed percentage of cash from the sale of each unit sold.

               The Company is obligated to develop software applications to
               bundle its Migo products with M-Systems USB Drives and the
               Company agreed to provide first level support for its Migo
               products to M-Systems and M-Systems' customers and end-users. The
               Company is also prohibited from (i) providing any other party or
               their customers with services or applications for USB Drives that
               are provided to M-Systems under the Agreement, and (ii) bundling
               its Migo products with any USB Drive other than M-Systems' USB
               Drive.

               Lease Agreement - In December 2004, the Company entered into a
               48-month lease agreement with a third party for 10,270 square
               feet of office space located in Redwood City, California. The
               agreement commenced March 1, 2005 and requires monthly lease
               payments of $14,891, which escalate to $19,513 through February
               28, 2009.

               In July 2004, the Company entered into a 25-month lease agreement
               with a third party for 2,335 square feet of office space located
               in San Francisco, California. The agreement commenced March 1,
               2005 and requires monthly lease payments of $4,281 which escalate
               to $4,475 through July 31, 2006. On February 4, 2005 the Company
               entered into a sub-lease agreement with an unrelated third party
               for the San Francisco, California space. The sublease commenced
               on February 21, 2005, and the sub-lessor will pay the Company an
               amount equal to the monthly rent through the termination of the
               sublease on July 31, 2006.

               Future minimum lease payments under these operating leases, net
               of sublease income, as of March 31, 2005, are as follows:

               <TABLE>
               <S>           <C>
               Fiscal 2006   $254,000
               Fiscal 2007    240,000
               Fiscal 2008    229,000
               Fiscal 2009    215,000
                             --------
               Total         $938,000
                             ========
               </TABLE>

               Total rent expense for the year ended March 31, 2005 was
               $152,482, net of sublease income of $5,504. For the year ended
               March 31, 2004, total rent expense was $51,905, and for the
               period from May 16, 2002 (inception) to March 31, 2005 was
               $204,387.

               Litigation - During the year ended March 31, 2004, the Company
               recorded a loss due to theft in the amount of $1,789,411,
               relating to the "Proctor Litigation", which represented a
               complaint filed against certain individuals and companies in
               2003. The complaint alleged that the defendants, in connection
               with a capital-raising effort for the Company, diverted a
               significant amount of funds from the Company. In November 2004, a
               judgment was issued in favor of the Company against the
               defendants for (i) monetary damages, (ii) the return of corporate
               books and records of the Company and its predecessors and (iii)
               cancellation of Company stock certificates claimed by the
               defendants. As collection of monetary damages and costs awarded
               to the Company is doubtful, no amounts related to this judgment
               have been recorded in the accompanying financial statements.

               On January 4, 2005, the Company received a demand for arbitration
               from The Wall Street Group, a former service provider, which
               alleges breach of contract and related claims pursuant to an
               alleged contract for

                                      F-24

<PAGE>

               services, primarily services related to raising capital. The
               demand claims monetary damages, and an alleged option to purchase
               138,948 shares of Common Stock. On September 26, 2005, the
               Company entered into a Settlement Agreement with WSG and Wall
               Street Consultants, Inc. ("WSC"). Under the Settlement Agreement,
               the Company paid WSG $328,000 and issued to WSC a five-year
               option to purchase up to 350,000 shares of the Company's common
               stock at $0.60 per share. The option agreement also grants to WSC
               certain piggyback registration rights.

               In the normal course of business, the Company is subject to
               various claims and litigation matters none of which in
               management's opinion will have a material effect on financial
               results.

               The Company is not aware of any additional litigation as of
               November 28, 2005 except as discussed in Note 12.

               Employment/Consulting Contracts

               In May 2002, the Company entered into an employment agreement
               with Jay Elliot, the Company's Chief Executive Officer, for a
               perpetual period terminable upon 30 days' notice by either party.
               The agreement calls for a salary at the rate of $240,000 per
               annum and is subject to review no less than annually. The
               agreement calls for an annual target bonus of 25% of the then
               current base salary, pursuant to a bonus plan to be adopted by
               the Board of Directors. Pursuant to the agreement, Mr. Elliot was
               granted 700,000 shares of the Company's Common Stock. During the
               year ended March 31, 2005, Mr. Elliot and the Company mutually
               agreed to waive a retention bonus provision that was contained in
               his prior employment agreement, and agreed to provide Mr. Elliot
               a continuation of compensation and benefits for a period of
               twelve (12) months should he be terminated from the Company
               without cause.

               On April 1, 2003, the Company entered into an employment
               agreement with Joshua Feller, the President and Chief Executive
               Officer of the Company's wholly-owned subsidiary for a perpetual
               period terminable upon 30 days' notice by either party. During
               the year ended March 31, 2005 the Company and the employee agreed
               to mutually amend the employment agreement due to the dissolution
               of the wholly-owned subsidiary. Mr. Feller was given the title
               Sr. Vice President, Business Development, and provided a 6-month
               continuation of compensation and benefits if terminated from the
               Company without cause. The agreement calls for a salary at the
               rate of $175,000 per annum and is subject to review no less than
               annually. The agreement calls for an annual target bonus of 25%
               of the then current base salary, pursuant to a bonus plan to be
               adopted by the Board of Directors. Mr. Feller also received
               100,000 shares of Common Stock as part of the compensation
               package, and is eligible for a retention bonus at the discretion
               of the Board of Directors. Subsequent to March 31, 2005, Mr.
               Feller voluntarily resigned from the Company.

               On July 15, 2003, PowerHouse Technologies Group, Inc. entered
               into a consulting agreement with Gregory Duffell, the Company's
               then Chief Operating Officer and International President, for a
               period of three years, subject to certain cancellation provisions
               including a mutual 90-day notice period. The agreement calls for
               annual payments of $200,000 paid semi-monthly, and provides for
               the reimbursement of approved expenses including living expenses
               while in the United States. The agreement restricts the
               consultant from engaging in other business activities while under
               contract with the Company, and provides for other restrictions to
               protect the intellectual and business property of the Company.
               During the year ended March 31, 2005, the consulting agreement
               was mutually amended and Mr. Duffell's title became Sr. Vice
               President and International President. Subsequent to March 31,
               2005, the Company terminated its consulting agreement with Mr.
               Duffel.

               On January 1, 2004, the Company entered into an employment
               agreement with David Wells, the Company's Vice President Finance
               Operations, for a perpetual period terminable upon 30 days'
               notice by either party. The agreement calls for a salary at the
               rate of $160,000 per annum and is subject to review no less than
               annually. The agreement calls for an annual target bonus of 25%
               of the then current base salary, pursuant to a bonus plan to be
               adopted by the Board of Directors. Mr. Wells also received
               125,000 options for the purchase of Common Stock, which were
               approved by the Board of Directors on January 20, 2005. During
               the year ended March 31, 2005 the agreement with Mr. Wells and
               the Company was mutually amended. The amendment called for a new
               title as "Vice President, Finance", and agreed to provide Mr.

                                      F-25

<PAGE>

               Wells a continuation of compensation and benefits for a period of
               six (6) months should he be terminated from the Company without
               cause. Subsequent to March 31, 2005, the Company terminated its
               employment agreement with Mr. Wells.

               On November 1, 2004, the Company entered into an employment
               agreement with Manijeh Moghis, the Company's then Chief Operating
               Officer terminable at any time upon notice by either party. The
               agreement called for a salary at the rate of $225,000 per annum.
               The agreement called for an annual target bonus of 50-100% of the
               then current base salary, pursuant to a bonus plan to be adopted
               by the Board of Directors. In addition, the COO also received
               500,000 options for the purchase of Common Stock, which were
               approved by the Board of Directors on January 20, 2005. The
               options began vesting over a period of three years over the
               following schedule: 12.5% of the total shares of Common Stock
               underlying the options shall vest three months from Ms. Moghis'
               employment start date, which was November 1, 2004, and
               thereafter, 1/36 of the total shares of Common Stock underlying
               the options shall vest on the first date of each full month
               during which Ms. Moghis remained employed with the Company during
               the 36-month vesting period. Ms. Moghis was also nominated to the
               Company's Board of Directors, and her nomination was approved by
               the Board of Directors. Subsequent to March 31, 2005 the Company
               terminated its employment agreement with Ms. Moghis, and she
               simultaneously resigned from the Company's Board of Directors.
               131,944 of Ms. Moghis' options vested and, subsequently expired
               90 days from date of termination.

               Guarantees

               In November 2002, the FASB issued FIN No. 45, Guarantor's
               Accounting and Disclosure Requirements for Guarantees, Including
               Indirect Guarantee of Indebtedness of Others. The Company has
               determined that certain agreements, described below, fall within
               the scope of FIN 45.

               Under its bylaws, the Company has agreed to indemnify its
               officers and directors for certain events or occurrences arising
               as a result of the officer or director's serving in such
               capacity. The Company has a directors and officers liability
               insurance policy that limits the Company's exposure and enables
               it to recover a portion of any future amounts paid resulting from
               the indemnification of its officers and directors. In addition,
               the Company enters into indemnification agreements with other
               parties in the ordinary course of business. In some cases the
               Company has obtained liability insurance providing coverage that
               limits its exposure for these other indemnified matters. The
               Company has not incurred material costs to defend lawsuits or
               settle claims related to these indemnification agreements. The
               Company believes the estimated fair value of these
               indemnification agreements is minimal and has not recorded a
               liability for these agreements as of March 31, 2005.

     12.       SUBSEQUENT EVENTS

               Private Placements - On September 26, 2005, the Company completed
               a private placement with certain investors of the Company's
               Common Stock, comprised of a total of 19,910,950 shares of Common
               Stock and warrants (the "Warrants") to purchase a total of
               10,900,400 shares of the Company's Common Stock. The securities
               were sold at $0.32 per unit, with each unit consisting of one
               share of Common Stock and a warrant to purchase one-half of one
               share of Common Stock. The aggregate offering price was
               $6,045,000 and the aggregate placement fee was $191,360 and
               warrants to purchase 1,278,490 shares of Common Stock. Fifty
               percent (50%) of all Warrants issued are exercisable at $0.40 per
               share, and the remaining fifty percent (50%) are exercisable at
               $0.48 per share. All Warrants expire after three years, unless
               theretofore exercised, contain a call provision in favor of the
               Company at a price of $.01 if the stock price should exceed $2.00
               per share, and permit cashless exercise only if there is no
               registration statement in effect after one year. The proceeds of
               the private placement included $883,333 of principal and $23,765
               of accrued interest converted into Common Stock from short-term
               bridge financing. The conversion consisted of a total of
               3,779,700 shares of Common Stock at $0.24 per share.

               The private placement was effected through Common Stock and
               Warrant Purchase Agreements, dated as of September 26, 2005, by
               and among the Company and the private placement investors who are
               named

                                      F-26

<PAGE>

               therein (the "Purchase Agreements"). As a condition to the
               transaction, all shares of the Company's Series A Senior
               Preferred Convertible Stock (the "Senior A Stock") were converted
               into 20,632,952 Common Stock at a conversion ratio of 5.3685
               shares of Common Stock for each share of Senior A Stock, and a
               Warrant Exchange Agreement, dated as of September 26, 2005, was
               entered into with Middlebury Capital LLC under which the holders
               of warrants to purchase 264,775 shares at $3.06 per share
               exchanged their warrants for new warrants for 700,000 shares at
               $.40 per share. In addition, the Company executed a Registration
               Rights Agreement, dated as of September 26, 2005, by and among
               the Company and the private placement investors, wherein the
               Company agreed to register under the Securities Act of 1933, as
               amended (the "Securities Act") the shares of Common Stock
               acquired in the private placement and the shares issuable upon
               exercise of the Warrants issued in the private placement.

               The proceeds of the private placement will be used for working
               capital and general corporate purposes, including $120,904
               applied to the repayment of the balance of the convertible notes
               that were not converted as part of the transaction.

               Change in Control Personnel - Subsequent to March 31, 2005:

          -    Greg Duffel, Manijeh Moghis and R.B. (Rob) Hutchinson resigned
               from the Board of Directors,

          -    Manijeh Moghis was terminated from her employment as Chief
               Operating Officer, Joshua Feller resigned from his position as
               Sr. Vice President, Sales, David Wells was removed as Chief
               Financial Officer, and Randy Hagin resigned his position as Vice
               President, Sales.

          -    Kent Heyman, Alex Mashinsky and Greg Osborn were elected to the
               Board of Directors.

          -    Kent Heyman became Chairman of the Board of Directors, Alex
               Mashinsky became Vice Chairman of the Board, and Richard Liebman
               was appointed as interim Chief Financial Officer

               Litigation - On June 9, 2005, the Company received notice of a
               legal action commenced by Richard Dobies, an individual who
               allegedly purchased Common Stock in June 2003. Mr. Dobies did not
               timely respond to the Rescission Offer made by the Company in
               June 2004 (see Note 8, above) and, for that and other reasons,
               was excluded from participating in the Rescission Offer. The suit
               claims damages of approximately $400,000, plus interest from the
               time of investment. The Company intends to defend it vigorously
               and believes that the loss, if any, resulting from the suit will
               not have a material impact on the Company's financial position,
               results of operations, or cash flows in future years.

               Subsequent to March 31, 2005, the Company received notice of a
               legal action commenced by Manijeh Moghis related to her former
               employment with the Company. Ms. Moghis filed a complaint on June
               28, 2005 seeking damages of approximately $140,000 related to her
               offer of employment which allowed for continuation of benefits in
               the event of her termination. On October 26, 2005, the Company
               and Ms. Moghis entered into a settlement agreement whereby the
               Company will pay Ms. Moghis a total of $90,000, $50,000 of which
               was paid upon execution of the agreement, and the balance payable
               in installments through January 5, 2006.

               Subsequent to March 31, 2005, the Company received notice of a
               legal action commenced by Joshua Feller related to his former
               employment with the Company. Mr. Feller filed a claim with the
               Labor Commissioner of the State of California on July 12, 2005
               seeking damages of approximately $540,000 related to his
               employment. Mr. Feller claims that an oral agreement with the
               Company existed for the payment of performance and other bonuses
               of approximately $415,000, and that his resignation on June 3,
               2005 was for "Good Cause", therefore making him eligible for
               severance benefits of approximately $90,000. Mr. Feller also
               claims interest in stock options of the Company valued at
               approximately $33,000, although no agreement exists for those
               options. The Company believes the complaint is without merit and
               intends to defend it vigorously and believes that the loss, if
               any, resulting from the suit will not have a material impact on
               the Company's financial position, results of operations, or cash
               flows in future years.

                                      F-27

<PAGE>

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

          Effective as of October 20, 2005, the Company engaged Hein &
          Associates, LLP to serve as the Company's independent auditor. The
          Company's board of directors approved the engagement of Hein &
          Associates, LLP. Hein & Associates, LLP served as the Company's
          independent public accountants for the year ended March 31, 2004 and
          until the engagement of BDO Seidman, LLP ("BDO") as discussed below.
          During the period of BDO's engagement and all subsequent periods, the
          Company did not consult Hein & Associates, LLP with respect to the
          application of accounting principles to a specified transaction,
          either completed or proposed, or the type of audit opinion that might
          be rendered on the financial statements, or any other matters or
          reportable events described in Items 304(a)(2)(i) and (ii) of the
          Commission's Regulation S-B.

          On August 29, 2005, BDO notified the Vice President, Finance and
          Chairman of Board of the Company that BDO intended to resign as the
          Company's independent registered public accounting firm pending the
          filing of an amended Form 10-KSB for the year ended March 31, 2005 and
          filing of the Form 10-QSB for the quarter ended June 30, 2005.

          Except for a going concern modification stated in BDO's report dated
          June 13, 2005 which was included in the initial filing of the
          Company's annual report on Form 10-KSB for the fiscal year ended March
          31, 2005, BDO's report on the Company's financial statements did not
          contain an adverse opinion or disclaimer of opinion, nor was it
          qualified or modified as to uncertainty, audit scope or accounting
          principles. BDO served as the Company's independent registered public
          accounting firm only for the year ended March 31, 2005 and the first
          quarter of the ensuing fiscal year. During the period of its
          engagement and subsequent interim periods, there were (1) no
          disagreements with BDO on any matter of accounting principles or
          practices, financial statement disclosure, or auditing scope or
          procedure which, if not resolved to BDO's satisfaction, would have
          caused them to make reference to the subject matter of the
          disagreements in connection with their report on the financial
          statements; and (2) no other reportable events, as described in Item
          304(a)(1)(iv) of the Commission's Regulation S-B, except that, as
          previously disclosed by the Company in the initial filing of its
          Annual Report on Form 10-KSB for the year ended March 31, 2005, BDO
          advised the Company that the Company did not maintain effective
          internal control over its financial reporting as of March 31, 2005
          because of the following material weaknesses identified in
          management's assessment:

                         1. insufficient numbers of internal personnel
                    possessing the appropriate knowledge, experience and
                    training in applying US GAAP and in reporting financial
                    information in accordance with the requirements of the SEC;

                         2. insufficient numbers of internal personnel having
                    sufficient technical accounting expertise for certain
                    complex transactions, resulting in the Company's reporting
                    incorrect amounts in its financial statements; and

                         3. lack of audit committee to oversee the Company's
                    accounting and financial reporting processes, as well as
                    oversight of the Company's independent auditors.

               The Company has requested BDO to furnish it a letter addressed to
          the Securities and Exchange Commission stating whether it agrees with
          the above statements. A copy of that letter, is contained in the
          Company's Current Report on Form 8-K filed on October 26, 2005.

          On August 2, 2005 BDO informed the Company that the previously issued
          financial statements for the year ended March 31, 2005 included in the
          initial filing of the Company's Form 10-KSB for the year ended March
          31, 2005, should not be relied upon because of identified errors in
          the quarterly financial data reported in note 13 to such financial
          statements. The correct quarterly information was included in note 7
          to the Company's quarterly report on Form 10-QSB for the quarter ended
          June 30, 2005, but the quarterly report did not reconcile the
          incorrect figures reported in the Form 10-KSB. Since the initial
          filing of the Form 10-KSB for the year ended March 31, 2005, had not
          been amended as of that time to correct the numbers disclosed in note
          13 to the financial statements, BDO also informed management that its
          report dated June 13, 2005, contained in the Form 10-KSB for the year
          ended March 31, 2005, should no longer be relied upon. The Company's
          Vice President, Finance discussed this matter with BDO Seidman, LLP.

          As indicated above, Hein & Associates, LLP has now been engaged to
          serve as the Company's independent auditor. Since Hein & Associates,
          LLP was the Company's independent auditor for years prior to the year
          ended March 31, 2005, and since Hein & Associates, LLP has been
          reengaged for future periods, the Company has directed Hein &
          Associates, LLP to


                                      F-28
<PAGE>

          reaudit the financial statements for the year ended March 31, 2005, to
          assure consistency with prior and subsequent years. The re-audited
          financial statements are included in this Annual Report on Form
          10-KSB/A

ITEM 8A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of its senior management,
including the Chief Executive Officer and previous Principal Financial and
Accounting Officer, the Company in fiscal 2005 conducted an evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures, as defined in Rules 13a 15(e) and 15d 15(e) under the Exchange Act,
as of the end of the period covered by this Quarterly Report (the "Evaluation
Date").

Among other things, the Company evaluated its accounting procedures and control
processes related to material transactions to ensure they are recorded timely
and accurately in the financial statements. In connection with the audit of the
Company's consolidated financial statements for the fiscal year ended March 31,
2005, and the review of the quarter ended September 30, 2005, and in light of
new, recently issued interpretative guidance in relation to the assessment of
the operating effectiveness of internal controls, management and the Company's
independent registered public accounting firm, Hein & Associates LLP, identified
certain "material weaknesses" (as such term is defined under Public Company
Accounting Oversight Board Auditing Standard No. 2 ) in the Company's internal
controls.

The Company identified the following material weaknesses as of March 31, 2005,
which were still outstanding as of September 30, 2005:

     1.   insufficient numbers of internal personnel possessing the appropriate
          knowledge, experience and training in applying US GAAP and in
          reporting financial information in accordance with the requirements of
          the SEC;

     2.   insufficient numbers of internal personnel having sufficient technical
          accounting expertise for certain complex transactions, resulting in
          the Company's reporting incorrect amounts in its financial statements;

These material weaknesses may also constitute deficiencies in the disclosure of
controls and procedures. In light of these weaknesses, the Company's management,
including the Chief Executive Officer and Principal Financial and Accounting
Officer, have concluded that as of September 30, 2005, the disclosure controls
and procedures were not effective.

However, subsequent to September 30, 2005, the Company was in the process of
taking corrective actions, including the search for additional staff with
certain qualifications and independent internal reviews of key account
reconciliations, to ensure that the financial statements and other financial
information included in this annual report are complete and accurate in all
material respects. The Company also was successful in recruiting outside board
members that will qualify as the Audit Committee Financial Expert as defined in
Item 401(e)(2) of Regulation S B, in anticipation of establishing an audit
committee in accordance with Section 3(2)(58)(A) of the Exchange Act.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2005, the Company continued implementing
changes that it conceived during the fiscal year ended March 31, 2005. During
that period, following a comprehensive review, the Company concluded that the
weaknesses it had found, as noted above, were a direct result of its being
understaffed in its accounting area. The Company retained an outside firm of
accounting consultants to support and extend the capabilities of its internal


                                      F-29
<PAGE>

staff, and simultaneously employed additional experienced accounting staff
personnel. Additionally, the Company prepared a comprehensive set of accounting
procedures for use in connection with assuring the timely, complete and accurate
recording of all its transactions and the preparation and filing of its required
reports under the Exchange Act. The Company will continue to engage its outside
accounting consultants until its internal staff is adequate and has demonstrated
an ability to fulfill all the aforementioned requirements. Although the
Company's Chief Executive Officer and new Principal Financial and Accounting
Officer believed the Company had made material progress towards building
effective controls and procedures by September 30, 2005, they remained of the
view that additional work was required in connection with developing,
memorializing and implementing effective internal disclosure and control
policies, procedures and responsibilities.

The Company intends to continue to evaluate the remediation efforts addressing
the material weaknesses identified, and to take appropriate action to correct
the deficiencies identified. In addition, as part of the assessment of its
internal controls over financial reporting that it will undergo during its 2006
fiscal year in connection with the process required by Section 404 of the
Sarbanes-Oxley Act of 2002, the Company intends to continue to review, evaluate
and strengthen its controls and processes. The Board of Directors is performing
oversight of the implementation of enhancements and improvements to our internal
controls, and will transfer this responsibility to the Audit Committee.

ITEM 8B. OTHER INFORMATION

None


                                      F-30
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS

The names of the members of the Company's Board of Directors and other persons
who make a significant contribution to the Company's business, as well as
biographical information for those persons as of December 7, 2005, are set forth
below:

<TABLE>
<CAPTION>
NAME                       AGE          POSITIONS AND OFFICES HELD                 SINCE
------------------------   ---   ----------------------------------------   ------------------
<S>                        <C>   <C>                                        <C>
Jay Elliot                  66   Director, Chief Executive Officer          May 16, 2002
Kent Heyman                 50   Director, Chairman of the Board of         September 26, 2005
                                 Directors, Executive Chairman
Alex Mashinsky              40   Director, Vice Chairman of the Board       September 26, 2005
                                 of Directors
Greg Osborn                 41   Director                                   June 13, 2005
Richard Liebman             50   Interim Chief Financial Officer            September 26, 2005
Syed Aamer Azam             38   Vice President, Development                January 1, 2005
</TABLE>

THE FOLLOWING PERSONS WHO SERVED AS OFFICERS OR DIRECTORS OF THE COMPANY AS OF
MARCH 31, 2005, ARE NO LONGER WITH THE COMPANY:

<TABLE>
<S>                        <C>   <C>                                        <C>
Manijeh Moghis(1)           55   Director, Chief Operating Officer          November 1, 2004
Gregory Duffell(2)          43   Director, Sr. VP, International            May 16, 2002
R. B. (Rob) Hutchison(3)    48   Director                                   October 6, 2003
Joshua Feller(4)            45   Sr. Vice President, Business Development   April 1, 2003
David R. Wells(5)           42   Vice President, Finance                    January 1, 2004
Randy Hagin(6)              50   Vice President, Sales                      February 22, 2005
</TABLE>

----------
(1)  Subsequent to March 31, 2005, Ms. Moghis was terminated from her employment
     as Chief Operating Officer and she subsequently resigned from the Board of
     Directors.

(2)  Subsequent to March 31, 2005, Mr. Duffel was terminated from his employment
     as Sr. VP, International, and he subsequently resigned from his position as
     director of the Company.

(3)  Subsequent to March 31, 2005, Mr. Hutchinson resigned from his position as
     director of the Company.

(4)  Subsequent to March 31, 2005, Mr. Feller resigned from his position as Sr.
     Vice President, Business Development of the Company.

(5)  Subsequent to March 31, 2005, Mr. Wells was terminated from his position as
     Vice President, Finance of the Company.

(6)  Subsequent to March 31, 2005, Mr. Hagin resigned from his position as Vice
     President, Sales of the Company.

JAY ELLIOT, AGE 66

Mr. Elliot has been Chief Executive Officer of the Company since May 2002 and
served as the Chairman of the Board from May 2002 until September 2005. From
February to December 2001, Mr. Elliot was the Chief Executive Officer of New
Health Systems, a network technology company connecting physicians and vendors
to patients and affiliated hospitals.

Mr. Elliot has over 30 years operating experience with corporations including
IBM, Intel and Apple Computers. From 1980 to 1986, Mr. Elliot served as the
Executive Vice-President of Apple Computers, reporting directly to Steven Jobs,
founder and Chairman of the Board. In his role with Apple, Mr. Elliot was
responsible for Finance, Managed Information Services (MIS), Real Estate, Apple
Far East Sales, the Apple Foundation, and Corporate Planning. Mr. Elliot was
also the Chief Operating Officer of the Macintosh division.

<PAGE>

KENT HEYMAN, AGE 50

Kent Heyman joined our board of directors as executive chairman in September
2005. Mr. Heyman has served on the board of directors of Knova Software, Inc.
(formerly ServiceWare Technologies, Inc.) since February 2002 and served as its
president and chief executive officer from September 2001 until the consummation
of the merger with Kanisa in February 2005. From June 1996 to December 2000, he
served as senior vice president at Mpower Communications, a facilities-based
communications provider. Prior to his tenure at Mpower, Mr. Heyman served as
litigation department chairman and lead trial counsel for Dowling Magarian Aaron
and Heyman, a law firm in Fresno, California. Mr. Heyman earned a doctor of law
(J.D.) degree from the University of the Pacific's McGeorge School of Law, and
received a bachelor's degree from California State University, Fresno.

Mr. Heyman was elected to his current position with the Company pursuant to the
terms of the Common Stock and Warrant Purchase Agreements entered into in
connection with the Company's private financing in September 2005.

ALEX MASHINSKY, AGE 40

Alex Mashinsky has been the Managing Partner of VenturiFX, an early stage
venture capital firm for the last five years. Mr. Mashinsky founded several
companies including Qlimo in 2002, Qwireless in 2001, Elematics in 2000, and
Arbinet in 1996, where he served as its CEO until January 2000.

Mr. Mashinsky was elected to the Board pursuant to the terms of the Common Stock
and Warrant Purchase Agreements entered into in connection with the Company's
private financing in September 2005.

GREG OSBORN, AGE 41

Mr. Osborn was elected to the Company's Board of Directors in June 2005. Prior
to launching IndiGo Ventures, (formerly known as Middlebury Capital) Mr. Osborn
founded Seed Capital, which provided new business development, strategic
partnering and fundraising services for Internet companies, and served as head
of business development for FreeRide.com. His experience in finance and
investment includes employment at L.F. Rothschild & Co., Drexel, Burnham,
Lambert, Smith Barney Harris & Upham, Paine Webber, and Axiom Capital
Management. Mr. Osborn holds a B.S. in Finance and Economics from Ramapo College
of New Jersey. Mr. Osborn also serves on the Board of Directors of Icurie Inc
and Advanced Nanotech, which are public companies, and ideavilliage.com, a
private company

RICHARD LIEBMAN, AGE 50

Before joining PowerHouse, Mr. Liebman served as President of Liebman Capital
since March 2003. From January 2002 until March 2003, he served as Chief
Financial Officer of ServiceWare Technologies, Inc., a publicly held software
company, now known as Knova Software Inc. From October 1998 until January 2001,
Mr. Liebman was chief financial officer of eCal Corporation, a provider of
Internet-based calendar services. Mr. Liebman's investment banking experience
includes serving as a senior vice president of both Oppenheimer & Co. and
Pennsylvania Merchant Group, as well as being a Principal with L.F. Rothschild,
Unterberg Towbin. Mr. Liebman received his Bachelor of Arts degree in economics
from Brown University and his Masters in Business Administration from Columbia
Business School.

SYED AAMER AZAM, AGE 38

Mr. Azam joined the Company in January 2005 as Vice President, Development. From
April 2001 to January 2005, Mr. Azam was Sr. Vice President Engineering for
Clickmarks, Inc. From December 1999 to April 2001, he was CTO and Vice President
Engineering for Wordwalla, Inc. Mr. Azam holds a Masters degree from Princeton
University in computational physics, and has a Bachelors degree from the
California Institute of Technology.

THE FOLLOWING EXECUTIVES ARE NO LONGER WITH THE COMPANY;

MANIJEH MOGHIS

Ms. Moghis joined the Company in November 2004 as its Chief Operating Officer
and was elected as a Director in November 2004. From 2002 to October 2004, she
was the President of Commtec Consulting. During 2001 and 2002, she was the COO
of Onmobile Systems, Inc.

Subsequent to March 31, 2005, Ms. Moghis was terminated from her employment as
Chief Operating Officer and she subsequently

<PAGE>

resigned from the Board of Directors.

GREGORY DUFFELL, AGE 43

Mr. Duffell was elected to the Company's Board of Directors in May 2002, and
then in April 2003 joined as a full-time consultant in the role of Chief
Operating Officer and International President. His title was changed to Sr. Vice
President and International President in 2005. From January 2000, Mr. Duffell
consulted to various companies.

Subsequent to March 31, 2005, Mr. Duffel was terminated from his contract as Sr.
Vice President and International President, and subsequently resigned from the
Board of Directors.

R.B. (ROB) HUTCHINSON, AGE 48

Mr. Hutchinson was elected to the Company's Board of Directors and as Chairman
of the Audit Committee in October 2003. He has served as eCharge's President and
Chief Technical Officer from 1997 to 2002, and was the CEO of Applied DNA
Sciences in December 2003.

Subsequent to March 31, 2005, Mr. Hutchinson resigned from his position as a
Director and Chairman of the Audit Committee of the Company.

DAVID R. WELLS, AGE 42

Mr. Wells began working with the Company in July 2003 as a consultant of
Cadwalader, Wickersham & Taft, LLP assigned to the Company. In January 2004, Mr.
Wells ended his consulting assignment and accepted a full-time position with the
Company as Vice President, Finance Operations. His title was subsequently
changed to Vice President, Finance.

Subsequent to March 31, 2005, Mr. Wells was terminated from his position as
Chief Financial Officer of the Company.

JOSHUA FELLER, AGE 46

Mr. Feller joined the Company in April 2003 as the President and Chief Operating
Officer of Forward Solutions, Inc. His title was later changed to Sr. Vice
President, Sales when Forward Solutions, Inc., a wholly owned subsidiary, was
merged into the Company. His title was subsequently changed to Sr. Vice
President, Business Development. From 2000 to 2002, he was Chief Executive
Officer of milesandpoints.com.

Subsequent to March 31, 2005, Mr. Feller resigned from his position as Senior
Vice President, Business Development of the Company.

RANDY HAGIN, AGE 50

Mr. Hagin joined the Company in February 2005 as Vice President, Sales.
Beginning in 1999 to February 2005, Mr. Hagin was Vice President, Worldwide
Sales for Connectix Corporation.

Subsequent to March 31, 2005, Mr. Hagin resigned from his position as Vice
President, Sales of the Company.

AUDIT COMMITTEE FINANCIAL EXPERT

Due to limited resources, the Company does not yet have an audit committee
financial expert, as that term is defined in Item 401(e)(2) of Regulation S-B,
on its audit committee.

AUDIT COMMITTEE

Subsequent to March 31, 2005, the Company established an audit committee in
accordance with Section 3(2)(58)(A) of the Exchange Act, under the Chairmanship
of Mr. Greg Osborn, an independent Director of the Company.

STOCKHOLDER RECOMMENDATION OF BOARD NOMINEES

<PAGE>

The Company has not made any material changes to the procedures by which
security holders may recommend nominees to the Company's board of directors.

CODE OF ETHICS

Due to limited resources, the Company has not yet adopted a Code of Ethics. The
Company is in the process of approving Code of Ethics.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than 10% of our equity securities, to file
initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission. Such persons are required by the Exchange
Act to furnish us with copies of all Section 16(a) forms they file.

     Based on our review of the Commission's web site, we are unaware that any
such forms were filed in fiscal 2005. It is our understanding that any
individual first becoming an officer or director of the Company during the year
should have filed beneficial ownership reports as well as any executive officer
or director who acquired shares or options during the year. Greg Osborn was
elected a director of the Company on June 13, 2005, but has yet to file an
initial ownership report. Kent Heyman was elected an officer and director of the
Company on September 26, 2005, but filed his initial ownership report 26 days
late. Richard Liebman was elected an officer of the Company on September 26,
2005, but filed his initial ownership report 26 days late. Alex Mashinsky was
elected a director of the Company on September 26, 2005, but has yet to file his
initial ownership report. Jay Elliot received additional stock and options on
September 26, 2005, but filed his Form 4 report seven weeks late.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded, earned or paid for
services rendered in all capacities to the Company and its subsidiaries during
each of the fiscal years ended March 31, 2005 and 2004 to (i) the individual who
served as the Company's chief executive officer ("CEO") during fiscal year 2005;
and (ii) the Company's four most highly compensated employees other than the CEO
who were serving as executive officers as of March 31, 2005.

<PAGE>

                               ANNUAL COMPENSATION

<TABLE>
<CAPTION>
                                                                                     ANNUAL
NAME AND POSITION                   YEAR   SALARY ($)   BONUS ($)   OTHER ($)   COMPENSATION ($)
---------------------------------   ----   ----------   ---------   ---------   ----------------
<S>                                 <C>    <C>          <C>         <C>         <C>
Jay Elliot,                         2005     240,000        --            --           --
Chairman, CEO                       2004     240,000        --            --           --
                                    2003     200,000        --            --           --
Manijeh Moghis,                     2005      93,750        --            --           --
Chief Operating Officer             2004          --        --            --           --
                                    2003          --        --            --           --
Gregory Duffell,                    2005     200,000        --        19,264           --
Director, International President   2004     200,000        --        10,483           --
                                    2003          --        --            --           --
Joshua Feller,                      2005     175,000        --            --           --
Sr. Vice President, Sales           2004     175,000        --            --           --
                                    2003          --        --            --           --
David R. Wells,                     2005     160,000        --            --           --
Vice President, Finance             2004      40,000        --            --           --
                                    2003          --        --            --           --
Syed Aamer Azam,                    2005      37,500        --            --           --
Vice President, Engineering         2004          --        --            --           --
                                    2003          --        --            --           --
Randy Hagin,                        2005      15,600        --            --           --
Vice President, Sales               2004          --        --            --           --
                                    2003          --        --            --           --
</TABLE>

<PAGE>

                                LONG-TERM PAYOUTS

<TABLE>
<CAPTION>
                                        AWARD              PAYOUTS
                                    -------------   --------------------
                                      RESTRICTED
                                        STOCK         OPTIONS
                                    ($ AS OF DATE      (# OF      LTIP
                                    OF UNDERLYING    UNDERLING   PAYOUTS   ALL OTHER   COMPENSATION
NAME AND POSITION                       GRANT       SECURITIES     ($)        ($)           ($)
---------------------------------   -------------   ----------   -------   ---------   ------------
<S>                                 <C>             <C>          <C>       <C>         <C>
Jay Elliot,                                --              --       --         --           --
Chairman, CEO                              --              --       --         --           --
Manijeh Moghis,                          2005         500,000       --         --           --
Chief Operating Officer                    --              --       --         --           --
Gregory Duffell,                           --              --       --         --           --
Director, International President
Joshua Feller,                             --              --       --         --           --
Sr. Vice President, Sales                  --              --       --         --           --
David R. Wells,                          2005              --       --         --           --
Vice President, Finance                  2004         125,000       --         --           --
Syed Aamer Azam,                         2005         100,000       --         --           --
Vice President, Engineering
Randy Hagin,                             2005         100,000       --         --           --
Vice President, Sales
</TABLE>

OPTION/SAR GRANTS IN FISCAL YEAR 2005

The Company granted 840,000 stock options to all employees during the fiscal
year ended March 31, 2005. The Company did not grant any stock appreciation
rights ("SARs") during the fiscal year ended March 31, 2005.

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
                               [Individual Grants]

<TABLE>
<CAPTION>
                   NUMBER OF     PERCENT OF TOTAL
                   SECURITIES      OPTIONS/SARS
                   UNDERLYING       GRANTED TO
                  OPTIONS/SARS       EMPLOYEES      EXERCISE OR BASE
      NAME         GRANTED (#)    IN FISCAL YEAR      PRICE ($/SH)     EXPIRATION DATE
      (A)              (B)              (C)                (D)               (E)
---------------   ------------   ----------------   ----------------   ---------------
<S>               <C>            <C>                <C>                <C>
Jay Elliot                --
Manijeh Moghis       500,000          59.52%               n/a               n/a
Gregory Duffell           --
Joshua Feller             --
David R. Wells       125,000          14.88%               n/a               n/a
Syed Aamer Azam      100,000           11.9%               n/a               n/a
Randy Hagin          100,000           11.9%               n/a               n/a
</TABLE>

AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 2005 AND FISCAL YEAR 2005
OPTIONS/SAR VALUES

<PAGE>

   AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
                                   VALUES(1)

<TABLE>
<CAPTION>
                                                           NUMBER OF
                                                           SECURITIES         VALUE OF
                                                           UNDERLYING       UNEXERCISED
                                                          UNEXERCISED      IN-THE-MONEY
                                                        OPTIONS/SARS AT   OPTIONS/SARS AT
                                                           FY-END (#)        FY-END (4)
                  SHARES ACQUIRED ON   VALUE REALIZED     EXERCISABLE/      EXERCISABLE/
      NAME           EXERCISE (#)           ($)          UNEXERCISABLE     UNEXERCISABLE
      (A)                 (B)                (C)              (D)               (E)
---------------   ------------------   --------------   ---------------   ---------------
<S>               <C>                  <C>              <C>               <C>
Jay Elliot                --                 --                --                 --
Manijeh Moghis            --                 --                --                 --
Gregory Duffell           --                 --                --                 --
Joshua Feller             --                 --                --                 --
David R. Wells            --                 --                --                 --
Syed Aamer Azam           --                 --                --                 --
Randy Hagin               --                 --                --                 --
</TABLE>

(1) There were no exercises of options for the fiscal year ended March 31, 2005
and the Company did not adjust or amend the exercise price of stock options or
SARs previously awarded to any executive officer.

DIRECTOR COMPENSATION

For the year ended March 31, 2005, With the exception of R.B.(Rob) Hutchinson,
no directors are compensated for their services as directors. Mr. Hutchinson was
compensated with 40,000 shares of restricted Common Stock for his services
rendered as director of the Company.

EMPLOYMENT CONTRACTS

The Company has entered into an Employment Agreement with Jay Elliot as of
September 26, 2005, under which Mr. Elliot is to serve as President and Chief
Executive Officer of the Company. Under the provisions of Mr. Elliot's
employment agreement, Mr. Elliot is entitled to a base salary of $200,000 per
year with an annual bonus of up to $150,000 per year. In addition, Mr. Elliot
has been granted options to purchase 2,700,000 shares of common stock with
vesting over three years. In connection with the Employment Agreement, the
Company issued to Mr. Elliot 300,000 shares of restricted common stock which
will vest on January 1, 2007, or upon his termination of employment by the
Company without cause. Mr. Elliot is also entitled to participate in the
Company's benefit plans available to other executives. The Employment Agreement
provides that employment is terminable upon 30 days notice from either party.
Under his Employment Agreement, Mr. Elliot is entitled to a severance
compensation equal to one year's base salary if his employment is terminated by
the Company without cause or by Mr. Elliot for good reason. Additionally, 100%
of Mr. Elliot's stock options will vest if his employment is terminated by the
Company without cause or by Mr. Elliot for good reason.

The Company entered into an Agreement with Kent Heyman under which Mr. Heyman
became Executive Chairman of the Company's Board of Directors as of September
26, 2005. The initial term of the Agreement is from September 1, 2005 until
August 31, 2006, subject to renewal thereafter. Under the Agreement, Mr. Heyman
is to provide consulting services to the Company on a less than full-time basis
and receive compensation at the rate of $150,000 per year. Mr. Heyman has been
granted options to purchase 1,200,000 shares of the Company's common stock
vesting over an 18-month period and, if he commences full-time employment for
the Company by January 1, 2007, options to purchase an additional 1,500,000
shares of common stock vesting over an 18-month period from and after the date
his full-time employment commences. In connection with the Agreement, the
Company issued to Mr. Heyman 300,000 shares of restricted common stock which
will vest on January 1, 2007 or upon his removal from the Company's Board of
Directors without cause.

The Company has entered into an Agreement with Alex Mashinsky under which Mr.
Mashinsky became Vice Chairman of the Board as of September 26, 2005. The
initial term of the Agreement is for one year, subject to renewal thereafter.
Under the Agreement, Mr. Mashinsky is to provide consulting services to the
Company and receive compensation at the rate of $200,000 per year. Mr.

<PAGE>

Mashinsky has been granted options to purchase 1,020,000 shares of common stock,
vesting over an 18 month period. In connection with the Agreement, the Company
issued to Mr. Mashinsky 180,000 shares of restricted common stock which will
vest on January 1, 2007, or upon his removal from the Company's Board of
Directors without cause.

The Company has entered into an Agreement with Richard Liebman under which Mr.
Liebman will serve as the interim Chief Financial Officer of the Company as of
September 26, 2005. The Agreement is on a month to month basis, subject to
termination by either party at any time. Mr. Liebman will receive base
compensation at the rate of $160,000 per year. Mr. Liebman has been granted
options to purchase 750,000 shares vesting over a three year period.

On April 1, 2003, the Company entered into an employment agreement with Joshua
Feller, the President and Chief Executive Officer of the Company's wholly-owned
subsidiary, for a perpetual period terminable upon 30 days notice by either
party. During the year ended March 31, 2005, the Company and the Mr. Feller
agreed to mutually amend the employment agreement due to the dissolution of the
wholly-owned subsidiary. Mr. Feller was given the title Sr. Vice President,
Sales, and provided a 6-month continuation of compensation and benefits if
terminated from the Company without cause. The agreement calls for a salary at
the rate of $175,000 per annum and is subject to review no less than annually.
The agreement calls for an annual target bonus of 25% of the then current base
salary, pursuant to a bonus plan to be adopted by the Board of Directors. Mr.
Feller also received 100,000 shares of Common Stock as part of the compensation
package, and is eligible for a retention bonus at the discretion of the Board of
Directors. Subsequent to March 31, 2005, Mr. Feller voluntarily resigned from
the Company.

On July 15, 2003, the Company entered into a consulting agreement with Gregory
Duffell, the Company's then Chief Operating Officer and International President,
for a period of three years, subject to certain cancellation provisions
including a mutual 90-day notice period. The agreement calls for annual payments
of $200,000 paid semi-monthly, and provides for the reimbursement of approved
expenses including living expenses while in the United States. The agreement
restricts the consultant from engaging in other business activities while under
contract with the Company, and provides for other restrictions to protect the
intellectual and business property of the Company. During the year ended March
31, 2005, the consulting agreement was revised and Mr. Duffell's title became
Sr. Vice President and International President. Subsequent to March 31, 2005,
Mr. Duffel's consulting agreement with the Company was terminated.

On January 1, 2004, the Company entered into an employment agreement with David
Wells, the Company's Vice President Finance Operations, for a perpetual period
terminable upon 30 days notice by either party. The agreement calls for a salary
at the rate of $160,000 per annum and is subject to review no less than
annually. The agreement calls for an annual target bonus of 25% of the then
current base salary, pursuant to a bonus plan to be adopted by the Board of
Directors. Mr. Wells also received 125,000 options for the purchase of Common
Stock, which were approved by the Board of Directors on January 20, 2005. During
the year ended March 31, 2005, the agreement between Mr. Wells and the Company
was mutually amended. The amendment called for a new title as "Vice President,
Finance", and agreed to provide Mr. Wells a continuation of compensation and
benefits for a period of 6 months should he be terminated from the Company
without cause. Subsequent to March 31, 2005, Mr. Wells' employment with the
Company was terminated.

On November 1, 2004, the Company entered into an employment agreement with
Manijeh Moghis, the Company's Chief Operating Officer, terminable at any time
upon notice by either party. The agreement called for a salary at the rate of
$225,000 per annum. The agreement called for an annual target bonus of 50-100%
of the then current base salary, pursuant to a bonus plan to be adopted by the
Board of Directors. In addition, Ms. Moghis also received 500,000 options for
the purchase of Common Stock, which were approved by the Board of Directors on
January 20, 2005. The options began vesting over a period of three years over
the following schedule: 12.5% of the total shares of Common Stock underlying the
options shall vest three months from Ms/ Moghis' employment start date, which
was November 1, 2004, and thereafter, 1/36 of the total shares of Common Stock
underlying the options shall vest on the first date of each full month during
which Ms. Moghis remained employed with the Company during the 36-month vesting
period. Ms. Moghis was also nominated to the Company's Board of Directors, and
her nomination was approved by the Board of Directors. Subsequent to March 31,
2005, the Company terminated its employment agreement with Ms. Moghis, and
simultaneously Ms. Moghis resigned from the Company's Board of Directors. Prior
to her termination 131,944 of Ms. Moghis' stock options were vested. The option
agreement provides that she has three months from the date of termination to
exercise her options, at which point the option to purchase Common Stock
expires. Subsequent to March 31, 2005, Ms. Moghis was terminated from her
employment as Chief Operating Officer and she subsequently resigned from the
Board of Directors.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table sets forth the beneficial ownership of voting securities of
the Company as of November 28, 2005, by each person known by the Company to own
beneficially more than 5% of the outstanding voting securities. Except as
otherwise indicated, the

<PAGE>

address of each holder identified below is in care of the Company, 555 Twin
Dolphin Drive, Suite 650, Redwood City, California, 94065.

                 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

<TABLE>
<CAPTION>
                                                     AMOUNT BENEFICIALLY OWNED AND    PERCENTAGE
TITLE OF CLASS            NAME AND ADDRESS                NATURE OF OWNERSHIP          OF CLASS
--------------   ---------------------------------   ------------------------------   ----------
<S>              <C>                                 <C>                              <C>
Common Stock     Alex Mashinsky                      6,717,991--direct and indirect      14.4%
Common Stock     LB I Group, Inc. 399 Park Avenue,         4,395,395--direct              9.7%
                 New York, NY 10022
Common Stock     Jay Elliot                                 3,700,000-direct              8.1%
</TABLE>

Beneficial ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities. Except
as indicated by footnote, and subject to community property laws where
applicable, the persons named in the table below have sole voting and investment
power with respect to all shares of equity securities shown as beneficially
owned by them.

The following table sets forth the beneficial ownership of voting securities of
the Company as of November 28, 2005, by (a) each of the named executive officers
of the Company referred to above under Item 10, "Executive Compensation"; (b)
each director of the Company; and (c) all directors and executive officers as a
group. Except as otherwise indicated, the address of each holder identified
below is in care of the Company, 555 Twin Dolphin Drive, Suite 650, Redwood
City, California, 94065.

                        SECURITY OWNERSHIP OF MANAGEMENT

<TABLE>
<CAPTION>
                                              AMOUNT BENEFICIALLY OWNED AND      PERCENTAGE OF
TITLE OF CLASS         NAME AND ADDRESS            NATURE OF OWNERSHIP               CLASS
--------------   --------------------------   -----------------------------   ------------------
<S>              <C>                          <C>                             <C>
Common Stock     Jay Elliot                       3,7000,000--direct (3)              8.1%
Common Stock     Kent Heyman                      1,500,000 - direct (4)              3.3%
Common Stock     Alex Mashinsky                   6,717,991 - direct and             14.4%
                                                       indirect (5)
Common Stock     Greg Osborn                      1,315,420 - direct
                                                       and indirect                   2.8%
Common Stock     Gregory Duffell                      500,000--direct                 1.1%
Common Stock     Manijeh Moghis                    368,056--indirect(1)          Less than 1%
Common Stock     David Wells                            125,000(2)               Less than 1%
Common Stock     Joshua Feller                        100,000--direct            Less than 1%
Common Stock     Syed Aamer Azam                     100,000--indirect           Less than 1%
Common Stock     Randy Hagin                         100,000--indirect           Less than 1%
Common Stock     Robin Hutchison                      27,500--direct             Less than 1%
Common Stock     All officers and directors             12,024,085                   26.4%
                 as a group
</TABLE>

FOOTNOTES

(1)  Excludes options to purchase 131,944 shares of Common Stock, which expired
     on September 10, 2005.

(2)  Includes options to purchase 104,167 shares of Common Stock, which are
     exercisable within 60 days.

(3)  Includes 300,000 restricted shares that vest January 1, 2007 and 2,700,000
     shares pursuit to stock option grant that vest over three years ended
     September 26, 2008.

<PAGE>

(4)  Includes 300,000 restricted shares which vest on January 1, 2007, and
     1,200,000 shares pursuit to stock option grant that vest over an 18 month
     period.

(5)  Includes 180,000 of restricted shares that vest on January 1, 2007 and
     1,020,000 shares pursuit to stock option grant that vest over an 18 month
     period.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On June 18, 2004, the Company acquired First Person through a merger of First
Person with and into PowerHouse Acquisition with PowerHouse Acquisition
remaining as the surviving entity. At the time of the FPS Merger, Jay Elliot,
the Chief Executive Officer and the Chairman of the Board of the Company, which
at that time held approximately 46.43% of the fully diluted capital stock of
First Person, was a director of First Person. In connection with the FPS Merger,
the Company issued a total of 217,938 shares of Common Stock to former
stockholders of First Person. The shares were valued at $4.59 per share. The
closing market price of the Common Stock on June 17, 2004, the day immediately
prior to the transaction, was $5.25 per share.

During the year ended March 31, 2005, the Company repaid $267,083 in accrued
wages for certain officers and other employees. Also during the year ended March
31, 2005 the Company repaid $21,251 to its Chief Executive Officer for expenses
advanced since inception.

The Company entered into a placement agency agreement, dated as of April 7,
2004, with Middlebury Capital, LLC ("Middlebury Capital") in connection with the
Senior A Units Offering, pursuant to which, and in conjunction with other
underwriter compensation, Middlebury Capital was granted five-year warrants to
purchase up to 68,559 shares of Common Stock (the "Common Placement Agent
Warrants") and five-year warrants to purchase up to 264,775 shares of Senior A
Preferred Stock (the "Preferred Placement Agent Warrants" and together with the
Common Placement Agent Warrants, the "Placement Agent Warrants"). Greg Osborn, a
director of the Company, is a Principal Officer of Middlebury Capital.

See description of agreements with directors and officers described in Item 10,
above.

ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

Exhibits

<TABLE>
<S>     <C>
2.1     Agreement and Plan of Merger, dated as of May 28, 2004, by and among the
        Company, PowerHouse Acquisition, First Person, Christopher Neumann,
        David Brett Levine and Karl Jacob, acting solely as stockholder
        representative, hereby incorporated by reference from the Company's
        Current Report on Form 8-K filed on July 6, 2004.

3.1     Amended Articles of Incorporation, hereby incorporated by reference to
        Exhibit 3.1 of the Annual Report on Form 10-KSB filed with the SEC on
        July 14, 2004.

3.2     Bylaws, hereby incorporated by reference to Exhibit 3.2 of the Annual
        Report on Form 10-KSB filed with the SEC on July 14, 2004.

10.1    Development Agreement, dated March 30, 2005, between the Company and
        M-Systems Flash Disk Pioneers Ltd, hereby incorporated by reference to
        Exhibit 10.1 of the Annual Report on Form 10-KSB filed with the SEC on
        July 28, 2005

10.2    2004 Omnibus Stock Incentive Plan, hereby incorporated by reference to
        Exhibit 10.1 of the Quarterly Report on Form 10-QSB/A filed with the SEC
        on February 22, 2005.

10.3    Form of Common Stock and Warrant Purchase Agreement dated as of
        September 26, 2005, hereby incorporated by reference to Exhibit 10.1 of
        the Quarterly Report on Form 10-QSB filed with the SEC on
        December 14, 2005.

10.4    Form of Warrant dated September 26, 2005, hereby incorporated by
        reference to Exhibit 10.2 of the Quarterly Report on Form 10-QSB filed
        with the SEC on December 14, 2005.

10.5    Registration Rights Agreement dated as of September 21, 2005, hereby
        incorporated by reference to Exhibit 10.3 of the Quarterly Report on
        Form 10-QSB filed with the SEC on December 14, 2005.

10.6    Agreement dated September 26, 2005, between the Company and Kent Heyman,
        hereby incorporated by reference to Exhibit 10.4 of the Quarterly Report
        on Form 10-QSB filed with the SEC on December 14, 2005.
</TABLE>

<PAGE>

<TABLE>
<S>     <C>
10.7    Employment Agreement dated September 26, 2005, between the Company and
        Jay Elliot, hereby incorporated by reference to Exhibit 10.5 of the
        Quarterly Report on Form 10-QSB filed with the SEC on December 14, 2005.

10.8    Agreement dated September 26, 2005, between the Company and Alex
        Mashinsky, hereby incorporated by reference to Exhibit 10.6 of the
        Quarterly Report on Form 10-QSB filed with the SEC on December 14, 2005.

10.9    Agreement dated September 26, 2005, between the Company and Richard
        Liebman, hereby incorporated by reference to Exhibit 10.7 of the
        Quarterly Report on Form 10-QSB filed with the SEC on December 14, 2005.

10.10   Settlement Agreement dated September 26, 2005, between the Company, The
        Wall Street Group, Inc. and Wall Street Consultants, Inc., hereby
        incorporated by reference to Exhibit 10.8 of the Quarterly Report on
        Form 10-QSB filed with the SEC on December 14, 2005.

16.     Letter regarding the change in independent accountant, hereby
        incorporated by reference from the Company's Current Report on Form 8-K
        filed on October 26, 2005.

21.     List of subsidiaries

31.1.   Certification of Chief Executive Officer pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002.

31.2.   Certification of Chief Financial Officer pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002.

32.1.   Certification of Chief Executive Officer pursuant to Section 906 of the
        Sarbanes-Oxley Act of 2002.

32.2.   Certificate of Chief Financial Officer pursuant to Section 906 of the
        Sarbanes-Oxley Act of 2002.
</TABLE>

REPORTS ON FORM 8-K

The following Form 8-K reports were filed during the last quarter of the fiscal
year ended March 31, 2005 and are hereby incorporated by this reference:

Form 8-K filed on March 22, 2005, with respect to Item 4.01, Changes in
Registrant's Certifying Accountant.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth fees for services BDO provided during fiscal year
2005

<TABLE>
<CAPTION>
                          2005
                        --------
<S>                     <C>
Audit fees(1)           $128,228
Audit related fees(2)    $38,652
Tax fees                      --
All other fees                --
                        --------
   Total                $166,880
                        ========
</TABLE>

(1)  Represents fees for professional services provided in connection with the
     audit of the Company's annual financial statements and review of the
     Company's quarterly financials statements and advice on accounting matters
     that arose during the audit.

(2)  During fiscal year 2005 the Company did not incur fees for assurance
     services related to the audit of the Company's financials statements which
     services would be reported in this category.

The Company's Audit Committee has determined that the provision of non-audit
services by BDO is compatible with maintaining their independence, and none of
such services were pre-approved pursuant to the de minimis exception provided in
Section 10A(i)(1)(B) of the Exchange Act.

The following table sets forth fees for services Hein provided during fiscal
year 2004 and with respect to fiscal 2005:


<TABLE>
<CAPTION>
                          2004          2005
                        --------      --------
<S>                     <C>           <C>
Audit fees(1)           $79,332       $149,183
All other fees(2)        $5,000        $43,621
                        -------       --------
   Total                $84,332       $192,804
                        =======       ========
</TABLE>

(1)  Represents fees for professional services provided in connection with the
     audit of the Company's annual financial statements and review of the
     Company's quarterly financial statements and advice on accounting matters
     that arose during the audit.

(2)  Represents fees in connection with the Company's purchase of First Person
     Software, Inc. and for services in connection with filing Registration
     Statement.

Generally, the Audit Committee approves in advance audit and non-audit services
to be provided. In other cases, in accordance with Rule 2-01(c)(7) of Securities
and Exchange Commission Regulation S-X, the Audit Committee has delegated
pre-approval authority to the Chairman of the Audit Committee for matters which
arise or otherwise require approval between regularly scheduled meetings of the
Audit Committee, provided that the Chairman report such approvals to the Audit
Committee at the next regularly scheduled meeting of the Audit Committee.

<PAGE>

                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                POWERHOUSE TECHNOLOGIES GROUP, INC.


Date: December 21, 2005         By: /s/ Jay Elliot
                                    --------------------------------------------
                                    Jay Elliot
                                    Chief Executive Officer
                                    (Principal Executive Officer)


Date: December 21, 2005         By: /s/ Richard Liebman
                                    --------------------------------------------
                                    Richard Liebman
                                    Interim Chief Financial Officer
                                    (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.


Date: December 21, 2005         By: /s/ Jay Elliot
                                    --------------------------------------------
                                    Jay Elliot
                                    Chief Executive Officer


Date: December 21, 2005         By: /s/ Kent Heyman
                                    --------------------------------------------
                                    Kent Heyman
                                    Director


Date: December 21, 2005         By: /s/ Alex Mashinsky
                                    --------------------------------------------
                                    Alex Mashinsky
                                    Director


Date: December 21, 2005         By: /s/ Greg Osborn
                                    --------------------------------------------
                                    Greg Osborn
                                    Director