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

                                 _______________

                                   FORM 10-KSB
                        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, 2004

                                       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)

                        Delaware                  94-3334052
            (State or other jurisdiction of    (I.R.S. Employer
             incorporation or organization)   Identification No.)
              2694 Bishop Drive, Suite 270
                 San Ramon, California               94583
            (Address of principal executive       (Zip Code)
                        offices)

       Registrant's telephone number, including area code: (925) 328-1100


       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

<PAGE>

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. [X]

      State issuer's revenues for the most recent fiscal year: $345,585
      The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 31, 2004, was $8,107,806. The Company's common stock is
traded on the OTC Electronic Bulletin Board.

      There were 3,756,516 shares of common stock $0.0001 par value outstanding
as of March 31, 2004.

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

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<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS

PowerHouse Technologies Group, Inc. (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 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.

Subsequent to March 31, 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, $0.0001 par
value per share ("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, 2004" below). First Person is the developer of a patent
pending software system created for external memory technology and a key
component of the Company's Migo(R) product.

Company Technology: The Migo(R)

The Company has developed the Migo, a compact personal computing system that
combines the easy portability and functionality of USB memory-storage devices
with the Company's advanced synchronization, personalization and data management
software. 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. Small enough to fit conveniently on a key chain, 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 (i.e., "non-native") 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 was launched through channel and value-added reseller distributors
("VARs") in November 2003 and first sales have occurred. 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 new products and
upgrades to operate on Linux(R) and Mac(R) platforms, as well as other email
clients (e.g., Exchange, MSN(R), Lotus Notes(R)).

Following the launch of the Migo in the US market last year, the Company
received considerable positive press coverage, including coverage on major
television channels (e.g., CNN, CNBC, ABC), national and international
newspapers (e.g., The Wall Street Journal, The New York Times) and periodicals
(e.g., Business Week, Forbes, eWeek). The Company believes this favorable
attention has helped the Company promote its product in its early stages.

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<PAGE>

The Migo has also received favorable recognition in the technologies-related
industry and was PC World's "Best USB Drive" product for 2004, Laptop Magazine
Ultimate Choice's best "USB Memory Drive" for 2004, and "Best New Product
Software" at the Exchange Tech Innovators 2003 Awards conference. In addition,
the Company was voted one of the "Ten Technology Companies to Watch" in the
banking/finance industry by Bank Technology News in 2003.

The Company is in the process of researching and developing a range of Migo
devices including larger capacity USB Mini Disks (2-5GB), USB watches, mobile
cellular phones, PDAs and other mobile data communication platforms. The Company
believes these products will have potential use across a broad range of
industries, including the healthcare, insurance, banking and financial services
and education industries.

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.    Distributors/VARs. The Company has an agreement with a nation-wide firm to
      distribute its products through their centralized distribution system to a
      national network of VARs and System Integrators. The Company has entered
      into reseller agreements with these VAR's to distribute its products.

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

3.    Web-based sales. Additionally, the Company sells products directly to
      consumers through its website "www.4migo.com."

4.    Software-only sales. The Company anticipates entering into agreements to
      license its software into other applications and for other hardware. It
      also anticipates selling software upgrades and service contracts to
      existing users of its products and users of other USB Flash drive
      products.

5.    International sales. The Company anticipates entering into distribution
      and reseller agreements to sell its product outside the US, especially in
      Europe and Asia. The Company has already entered into such agreements in
      Canada and the United Kingdom.

International

The Company is planning to introduce its products to the international markets
through consultants, especially in Europe and Asia. The Company anticipates
first sales outside of the United States sometime in fiscal year 2005. In
addition, in June 2004, the Company signed a distribution agreement in Canada
and anticipates product sales in that country within a reasonable period of
time. 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

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<PAGE>

political issues affect foreign operations more significantly than domestic
operations. Further, all 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
small, portable memory devices, suitable for linkage with all common computer
hardware utilized by individual personal computer users. The Company has
undertaken a limited independent market study to determine whether or not the
market will accept such products. 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 new 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. There can be no
assurance that the Company will find OEMs or software solutions providers
willing to partner with it.

Competitive Business Environment

Competition 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
considerably 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 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.

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<PAGE>

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 data storage 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 products, and develop new
products and services, all on a timely basis. There is no guarantee that the
Company will be successful in 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

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<PAGE>

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, its
USB mini disc drive device, 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 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 should a disruption in the
relationship occur.

In May, 2004, the Company added Hana Micron, a Korean-based electronics
manufacturer, as the principal manufacturer of the Company's products. As part
of the contract, the manufacturer will preinstall the Company's software onto
various hardware devices, as selected by the Company, and will quality check the
products prior to shipments to the 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

                                       7
<PAGE>

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. In addition, 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, unauthorized
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 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

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<PAGE>

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 $108,392 in fiscal 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

The Company has 16 full-time employees, as well as a number of consultants who
provide 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.
Linux(R), is a registered trademark of Linus Torvalds. Mac(R), is a registered
trademark of Apple Computer, Inc.
________________________________________________________________________________

For accounting and financial purposes, PowerHouse Studios is considered the
Company's predecessor, and the Company prepares and reports on its financial
statements, including those contained in this Annual Report on Form 10K-SB, 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's principal facilities are located in San Ramon, California and
occupy approximately 3,700 square feet of office space. The Company entered into
a sub-lease agreement in April 2003 which extends through December 2004, and is
currently in negotiations to extend the sublease past this date. The sublease
includes the use of all equipment and fixtures that existed in the leased space
at the time we occupied the premises.

ITEM 3. LEGAL PROCEEDINGS

Proctor, et. al. and Related Matters

On September 15, 2003, the Company filed a complaint in the Superior Court of
the State of California in and for the County of Los Angeles, South West
District (the "Superior Court") captioned PowerHouse Technologies Group, Inc. v.
Proctor, et. al., (case no: YC047491) (the "Proctor Litigation"). Named as
defendants therein are Joseph Ford Proctor, the Chief Executive Officer of
MayFair Capital Group Limited, BrickHouse Capital Venture Limited
("BrickHouse"), Julie Holfinger, and others. The complaint alleges that the
defendants, in connection with a capital-raising effort for the Company,
diverted a significant amount of funds from the Company. The complaint seeks to
recover the diverted funds and to enjoin the transfer, sale or exercise of
voting rights with respect to approximately seven (7) million shares of Common
Stock claimed by the defendants, which would represent approximately 67% of the
total shares of Common Stock

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currently outstanding (the "Proctor Group Shares"). On November 5, 2003, the
Superior Court, without prejudice, declined to continue the temporary
restraining order granted to the Company on September 15, 2003. Trial is
tentatively set for November 2004. The status of this litigation is uncertain
since Joseph Proctor terminated his lawyers and recently obtained new counsel.

The Company and its Board of Directors believes, based upon a review of all
relevant information available to the Company and after consulting with the
Company's counsel, that the Proctor Group Shares were illegally and invalidly
issued and therefore, the Board of Directors of the Company has determined that
the Proctor Group Shares are, and are to be deemed to be, not validly issued and
outstanding and that the holders of those shares shall not be entitled to
exercise any of the voting and other rights and privileges of stockholders of
the Company in respect of such shares. The Board of Directors of the Company has
taken actions it believes to be necessary and appropriate to implement the
foregoing determinations. However, an unsuccessful result in the Proctor
Litigation or potential shareholder actions against the Company's officers and
directors may have an adverse impact on the market for and the value of the
Company's securities and the Company's ability to raise additional funds and
continue its operations.

By letters dated November 20, 2003, and December 2, 2003, BrickHouse demanded
payment by the Company of $5,000 for monthly consultant services for July 2003
and August 2003 and $622,354.86 for expenses allegedly advanced to, or for the
benefit of, the Company. The Company has declined the request for payment and
has informed BrickHouse that such amounts that may be owed to or from BrickHouse
and its affiliates, or the Company and its affiliates, are the subject of the
Proctor Litigation pending in the Superior Court.

By letters dated May 9, 2003, and June 9, 2003, six persons indicated that in
2001 they invested approximately $179,450, at $1.00 per share, in the Company
"through Joseph Proctor and Julie Holfinger". The alleged investors informed the
Company that they have not received confirmation of their investments nor any
stock certificates despite sending "numerous" communications to Mr. Proctor and
Ms. Holfinger. The alleged investors advised the Company that they will pursue
criminal and civil actions against the Company. Despite requests made to the
alleged investors, the Company has not received any documentation evidencing the
investments. The Company is investigating this matter and intends to formulate a
response in light of the results of its investigation and whatever additional
documentation may be produced by the parties involved.

Draft, Inc. and Related Matters

On December 1, 2003, the Company and its subsidiary, Forward Solutions, Inc.,
were served a complaint filed in the Superior Court of the State of California
and for the County of Los Angeles, Central District by Draft, Inc., ("Draft"), a
Delaware corporation (case no. BC306660), alleging breach of contract and
related claims pursuant to an alleged contract to develop and implement a direct
marketing program for the Company. The suit claims damages of approximately
$445,000 plus an alleged bonus based on product sales. 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.

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On May 21, 2004, the Company filed a Cross-Complaint against Draft and its Chief
Executive Officer, Howard Draft, alleging negligent misrepresentation, breach of
oral contract and the covenant of good faith and fair dealing, and unjust
enrichment. The Cross-Complaint seeks to recover $85,000 that the Company paid
to Draft for its services and an additional unspecified amount based on the
negligence claim.

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

No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the fiscal year ended March 31, 2004.

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Common Stock currently trades on the Pink Sheets under the symbol "PWHT."
The Company is currently awaiting approval of its Form 15c2-11 Application to
gain a listing on the Nasdaq Over-the-Counter Bulletin Board ("OTC Bulletin
Board"). Although acceptance of Form 15c2-11 and the subsequent listing of the
Common Stock on the Nasdaq OTC Bulletin Board market would provide access to a
much broader base of investors, there is no guaranty that the Company's Form
15c2-11 will be accepted. Until that time, investors may find it more difficult
to obtain accurate quotations of the market value of the Common Stock and to
dispose of shares of the Common Stock in the secondary market.

The following table sets forth the quarterly high and low sales prices of the
Common Stock for fiscal year 2003 and fiscal year 2004. Such prices represent
prices between dealers and do not include retail mark-ups, markdowns or
commissions and may not represent actual transactions.

FISCAL YEAR 2003     HIGH       LOW       FISCAL YEAR 2004      HIGH       LOW
----------------     -----     ------     ----------------     ------     -----
First Quarter*       $0.03     $0.005     First Quarter        $15.24     $2.00
Second Quarter       $0.07     $0.07      Second Quarter       $11.00     $1.05
Third Quarter        $0.10     $0.02      Third Quarter        $5.25      $1.72
Fourth Quarter       $0.09     $0.03      Fourth Quarter       $4.00      $2.75

*On May 19, 2003, the Company completed the Agate/PowerHouse Studios combination
transaction (including a 1:122 reverse-stock-split and name change to
"PowerHouse Technologies Group, Inc."), and current management began its control
of the Company.

The market price of the Common Stock, like the price of shares of technology
companies generally, has been and may continue to be volatile. From October 2003
through April 2004, the closing bid price of the Common Stock has varied from a
high of $5.25 to a low of $1.72 per share. The closing price of the Common Stock
on March 31, 2004 was $3.50. If the Company's future operating results are below
the expectations of stock market analysts and investors, its stock price may
decline. Public

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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:

      o     shortfalls in revenues or cash flows from operations;

      o     failure to attain and maintain profitability;

      o     failure to qualify or maintain the qualification for the Common
            Stock to trade on the Nasdaq OTC Bulletin Board;

      o     a finding in the Proctor Litigation that the stock held or claimed
            to be held by the Proctor Group was validly issued and is currently
            outstanding;

      o     conversions of preferred stock into Common Stock;

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

      o     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, 2004, there were approximately 650 holders of record of the
Common Stock. We believe 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. Accordingly, the Company does not anticipate or
contemplate paying dividends in the foreseeable future.

Recent Issuances of Unregistered Securities

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The following is a description of unregistered securities sold by the Company
within the last three years. Those transactions marked with an asterisk (*) were
conducted prior to the May 19, 2003 Agate/PowerHouse Studios business
combination and prior to current management's assumption of control of the
Company. The Company has been unable to obtain verification of the transactions
noted with an asterisk from prior management or the Company's prior professional
and other representatives, and therefore, for purposes of this Annual Report in
Form 10-KSB, is relying on the previous disclosure of these transactions as set
forth in its Form 10-KSB filed for the fiscal year ended March 31, 2003, which
was prepared by former management.

*In 2001, the Company sold 285,714 shares of its Common Stock for 0.035 cents
per share, raising $10,000. This offering was made pursuant to an exemption
granted by Rule 506 promulgated under the Securities Act of 1933, as amended
(the "Securities Act").

*In May 2002, the Company issued 3,121,644 restricted shares of Common Stock to
a certain party who elected to convert to Common Stock pursuant to the terms of
a convertible note issued on October 1, 2001.

*In May 2002, the Company issued 10,902,200 restricted shares of its Common
Stock to certain related parties who elected to convert to Common Stock pursuant
to the terms of a convertible note issued on October 1, 2001. The convertible
note matured on November 3, 2002 bearing an interest rate of 12% per annum and
the conversion was agreed to by the holders when the Company could not repay
certain promissory notes.

*In June 2002, the Company issued 2,737,500 restricted shares of Common Stock to
convert 1,825,000 preferred shares to common shares pursuant to the terms of a
Preferred Stock Agreement.

*On July 23 2002, the Board of Directors authorized the issuance of 7,952,060
restricted shares of Common Stock to ChinatrustUSA for settlement of an
outstanding bank debt.

*On July 23, 2002, the Company issued 1,000,000 shares of Common Stock under a
Registration Statement on S-8 filing under the Securities Act to the Law Offices
of Dieterich and Associates for legal services provided to the Company.

*On July 23, 2002, the Board of Directors authorized the issuance of a total of
32,822,853 restricted shares of Common Stock to Agate Technologies, Inc.,
California for 25,620,775 restricted shares of Common Stock, ei Corp California
for 877,180 restricted shares of Common Stock, and CSF Partners, Inc. for
6,324,898 restricted shares of Common Stock. All issuances were made pursuant to
an agreement signed with CSF Partners Inc. for the sale of the Company's
subsidiaries.

*On August 20, 2002, the Company issued 21,937,890 restricted shares of Common
Stock to the Company's officers for deferred compensation owed.

*On September 13, 2002, the Company issued 5,691,260 restricted shares of Common
Stock to Gordon Pan in settlement of a shareholder loan. Of this amount, 800,000
restricted shares of Common Stock are currently being held in escrow pursuant to
a debt-for-shares agreement, but are considered to be owned by Mr. Pan.

                                       13
<PAGE>

The number of shares set forth in the preceding, asterisk-marked paragraphs,
which aggregate 86,451,121 shares, does not reflect the 1:122 reverse stock
split effected by the Company after May 19, 2003, when new management took
control of the Company. Following that reverse stock split, the number of such
shares was reduced to, and currently remains, approximately 708,615 shares,
which represents 18.9 % of the Company's outstanding Common Stock, including
shares reserved for issuance upon conversion of currently outstanding
convertible preferred stock but not including any shares held by members of the
Proctor Group.

*From June 2002 through July 2003, the Company issued 1,248,192 shares of Common
Stock to shareholders in connection with the Private Placement Memorandum
offered by the Proctor Group (see Item 3 "Legal Proceedings" above). For
purposes hereof, this number of shares reflects the 1:122 reverse stock split.
Following a rescission offer made to the holders thereof in June 2004, a total
of 56,998 shares of such Common Stock remain outstanding. The balance were
either retired through cash payments or were exchanged for shares of Series A
Junior Convertible Preferred Stock of the Company by the holders thereof. The
completion of the rescission offer occurred after March 31, 2004, and the
issuance of securities thereunder was not registered under the Securities Act in
reliance on the exemption therefrom afforded by Section 4(2) thereof and
Regulation D promulgated thereunder (see Item 6, Management's Discussion and
Analysis or Plan of Operation, under the caption "Events Subsequent to Fiscal
Year Ended March 31, 2004" below).

On December 23, 2003, the Company issued 60,000 shares of Common Stock to
certain employees, past employees and directors for services rendered to the
Company. By agreement of the parties, the shares were valued at $5.00 per share.
The market price at the time of the transaction was $3.50 per share. The shares
were acquired for investment only, and not for distribution. 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 15, 2004, the Company issued 40,000 shares of Common Stock to The
Hoffman Agency as payment for customary public relations and promotional
services rendered to the Company. The shares were valued at $3.00 per share. The
market price at the time of the transactions was $3.10 per share. 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, 2004, the Company issued 50,000 shares of Common Stock to certain
individuals who operate as a group, Red Centre Consulting Limited, performing
sales and marketing services in western Europe. The shares were valued at $3.50
per share. The market price at the time of the transaction was $3.50 per share.
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, 2004, 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 shares were valued at $3.50 per share. The market
price at the time of the transaction was $3.50 per share. 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.

                                       14
<PAGE>

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. This Annual Report on Form 10-KSB, 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, which we have described in this Annual Report on Form 10-KSB
under this Item 6 and 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.

Significant Events During Fiscal 2004

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 this fiscal year and will have a
significant influence on our condition in future reporting periods.

Convertible Note / Bridge Financing

In October 2003, the Company offered up to $10,000,000 of secured convertible
notes, bearing 10% interest per annum with a maturity of 10 years (the
"Convertible Notes"). At the time of issuance, the Convertible Notes were
secured by all of the Company's intellectual property and tangible assets,
current and future. The terms of the Convertible Notes provide that the holder
of the Convertible Notes, at its option, could convert the principal and
interest of the Convertible Notes into Common Stock at any time at an initial
conversion price of $4.00 per share. As of March 31, 2004, the Company had
issued approximately $444,000 of Convertible Notes.

In March 2004 and in conjunction with the commencement of the Company's offering
of up to $15 million of Series A Senior Units (the "Senior Units"), composed of
shares of the Company's Series A Senior Convertible Preferred Stock (the "Senior
Preferred Stock") and Series A Common Stock Purchase Warrants (the "Warrants"
and the offering of such Senior Preferred Stock, together with the Warrants, the
"Senior A Units Offering"), 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
ninety (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
March 2, 2005, unless repaid in conjunction with the Senior A Units Offering. In
conjunction with the Bridge Financing, the Company and the holders of the
Convertible Notes agreed to exchange the Convertible Notes for Bridge Notes. As
of March 31, 2004, the Company had received $1,240,000 under the Bridge
Financing. Subsequent to March 31, 2004, the Senior A Units Offering was
completed, and in accordance therewith, all of the Bridge Notes then
outstanding, including the Convertible Notes

                                       15
<PAGE>

that had been exchanged for Bridge Notes, were, by agreement between the Company
and the holders of the Bridge Notes, exchanged into Senior Units (see Item 7,
"Financial Statements" under note 10, Subsequent Events, of notes to the
financial statements). None of the sales of Convertible Notes, Bridge Notes, and
Senior Units were registered under the Securities Act, in reliance on the
exemption therefrom provided by Section 492) thereof, and Regulation D
promulgated thereunder.

Critical Accounting Policies

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

The Company's significant accounting policies are more fully described in Note 1
to our consolidated financial statements. Certain of these policies are
particularly important to the portrayal of our 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

Revenue is recognized when persuasive evidence of an arrangement exists
(generally a purchase order), product has been delivered, the fee is fixed and
determinable, and collection of the resulting account is probable.

      o     Revenue from packaged product sales to distributors/resellers is
            recorded at the time the product is sold from the
            distributor's/reseller's inventory.

      o     Revenue from packaged product sales to end users through our website
            is recorded at the termination of the return period. Currently, the
            Company's return policy is good for 30 days from the date the
            product is shipped to the customer.

      o     Revenue from corporate sales is recorded based on the terms of the
            specific contracts entered.

Reserve For Returns, Price Discounts And Rebates

The Company's revenue recognition policies are such that reserves for returns
are not required. Our return policy generally allows our distributors to return
purchased products primarily in exchange for new products or for credit towards
future purchases as part of stock balancing programs. This would occur prior to
the Company recognizing revenue on these items. These returns are subject to
certain limitations that may exist in the contract with an individual
distributor, governing, for example, aggregate return amounts, and the age,
condition and packaging of returned product. Under certain circumstances, such
as terminations or when a product is defective, distributors could receive a
cash refund if returns exceed amounts owed.


                                       16
<PAGE>
Substantial Doubt About Our 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, 2004, 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. The Company's auditor has therefore recognized
that there is substantial doubt about the Company's ability to continue as a
going concern.

Subsequent to March 31, 2004, the Company successfully completed the sale of
Senior Units composed of shares of the Company's Senior Preferred Stock and
Warrants. Through June 30, 2004, the Company had raised approximately $8,722,605
from this offering. According to the terms of the offering, the Company could
raise up to $15,000,000. The Company's management is continuing their efforts to
raise additional funds under the terms of this offering.

Results Of Operations

Three months ended March 31, 2004 and 2003

From its inception, the Company has never been profitable and has sustained
substantial net losses from operations. The Company's revenues were $106,970 for
the three months ended March 31, 2004, and the Company had no revenues for the
corresponding period ended March 31, 2003. Most of the Company's revenue for the
three months ended March 31, 2004, came from online sales. The Company did,
however, also sell its products through our distribution channels. The Company
reported no direct sales for the quarter. The Company's costs related to product
sales were $48,291.

                                       17
<PAGE>

The Company's spending for the three months ended March 31, 2004, increased from
the same period in 2003 due to several factors. The Company's initial product
was introduced to the market in this period, which resulted in aggregate Company
spending for sales and marketing related expenses of $493,095 for the three
months ended March 31, 2004, up from $137,638 in the corresponding three month
period in 2003. The Company continued our relationships with certain
professional services firms to assist our development of strategies and related
materials to successfully market and sell our products. Also, the Company's
general and administrative expenses increased to $1,330,608 from $164,500 due to
expense increases for staffing to meet the Company's expanded and anticipated
operations, and costs associated with the litigation against the Proctor Group
and the issues related to the fraudulent activities we allege with respect to
the Proctor Group.

Twelve months ended March 31, 2004 and 2003

The Company had revenues of $345,585 for the twelve months ended March 31, 2004,
and no revenues for the corresponding period ended March 31, 2003. During the
twelve months ended March 31, 2004, the Company sold a private-labeled version
of our product, which resulted in revenue of $115,220. The Company also
recognized $116,310 of revenue through distributor channels. The balance of our
revenue came from online sales and totaled $114,055. The Company's costs related
to product sales were $214,671.

The Company's spending for the twelve months ended March 31, 2004 increased from
the same period in 2003 as the Company continued to increase operations of the
company in anticipation of our anticipated achievement of increased levels of
regular operations. The Company's sales and marketing expenses were $1,782,344
due mainly to costs associated with the hiring of a President and Chief
Operating Officer of Forward Solutions, Inc., our wholly-owned subsidiary, the
hiring of additional employees for Forward Solutions, Inc., development of a
public relations strategy, and initial spending on product branding expenses.
General and administrative costs totaled $2,611,467, and were comprised of
employment-related expenses and office operations, all of which were related to
our continued business expansion, and expenses related to the Proctor Group
litigation. They also consisted of stock-based compensation for outside
consultants and the granting of shares to one of the Company's directors.

The Company's loss due to the theft we allege in the Proctor Litigation was
$1,789,411 for the twelve months ended March 31, 2004. The Company's total
losses to date, due to that matter is $3,142,759. No additional losses due to
theft are anticipated to be incurred in connection with the activities of the
Proctor Group; costs of the litigation, however, are expected to continue. The
Company cannot predict the amount of these costs or when or whether we will be
successful in the Proctor Litigation.

Liquidity and Capital Resources

At March 31, 2004, the Company had working capital of ($2,550,515) as compared
to working capital of ($2,698,891) at March 31, 2003. During the twelve months
ended March 31, 2004, net cash used in operations was $3,802,779 and consisted
principally of a net loss of $6,398,093 and was offset by stock-based
compensation and services of $1,203,650. The increase in Accounts Payable of
$807,510 was due mainly to legal services related to the Proctor Group
litigation. The Company also accrued compensation for officer wages of $267,083
during that period.

                                       18
<PAGE>

The Company's current cash on hand at March 31, 2004, would not be 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. Although the Company's recent Bridge Financing and Senior Units
financing provides sufficient operating capital to continue the business and
fund its minimal overhead expenses, the Company will need to rely upon continued
borrowing and/or sales of additional equity instruments to support its continued
growth. The Company's management believes it will be able to obtain sufficient
cash resources and working capital to meet the Company's present cash
requirements through debt and/or equity-based fund raising. Following the fiscal
year ended March 31, 2004, the Company has been successful in closing upon
approximately $8,722,605 on the sale of Senior Units in the Senior A Units
Offering, which includes approximately $1,240,000 received under the Bridge
Financing and approximately $2,639,000 principal amount of the Convertible Notes
that were converted into shares of Senior Preferred Stock in connection with the
Senior A Units Offering (see Item 6, Management's Discussion and Analysis or
Plan of Operation, under the caption "Events Subsequent to Fiscal Year Ended
March 31, 2004" below). The Company contemplates additional sales of Senior
Units, although whether it will be successful in doing so, and the additional
amounts it will receive as a result, cannot be assumed or predicted.

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, 2003, the Company incurred a net pre-tax loss of $2,327,360 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, 2004 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 proceeds to the Company from the Senior A Units
Offering will satisfy all of its capital requirements in 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

                                       19
<PAGE>

detrimental to existing shareholders. In order to meet its capital requirements,
the Company may continue to offer equity securities for sale, and shareholders
will experience additional dilution. Any new equity securities we issue may have
rights, preferences or privileges senior to those of existing holders of the
Securities.

Events Subsequent to Fiscal Year Ended March 31, 2004

Placement Agency Agreement

On April 23, 2004, the Company entered into a Placement Agency Agreement with
Middlebury Capital, LLC 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 Units
in the Senior A Units Offering. In conjunction with the Senior A Units Offering,
the Company's Convertible Notes and Bridge Notes will automatically convert into
shares of Senior Preferred Stock on the first closing of the Senior A Units
Offering. Approximately $1,240,000 received under the Bridge Financing and
approximately $2,639,000 principal amount of the Convertible Notes, following
the conversion of the Convertible Notes into shares of Senior Preferred Stock in
connection with the Senior A Units Offering, will be included in the calculation
of the minimum offering and maximum offering.

The holders of the Senior Preferred Stock, valued by agreement in connection
with the Senior A Units Offering at $3.06 per share, have the right to convert
the Senior Preferred Stock into Common Stock at any time, and may be required to
convert into Common Stock by the Company upon the occurrence of certain events.
The Senior Preferred Stock accrues a dividend of 8% paid semi-annually.
Additionally, for each four shares of Senior Preferred Stock, the holder will
receive one Warrant, exercisable for one share of Common Stock at an exercise
purchase price of $3.83. The Warrants contain customary anti-dilution provisions
for stock dividends, stock splits and the like.

Closing of First Tranche of Equity Placement

On June 14, 2004, the Company closed on approximately $8,722,605 million in
funding of Senior Units with certain institutional investors. The amount
includes approximately $1,240,000 received under the Bridge Financing and
approximately $2,639,000 principal amount of the Convertible Notes, following
the conversion of the Convertible Notes into shares of Senior Preferred Stock in
connection with the Senior A Units Offering. Middlebury Capital, LLC served as
the placement agent on the transaction and IndiGo Ventures LLC acted as the
Company's financial advisor. The Company has not yet closed the equity round in
anticipation of the closing of the sale of additional Senior Units on or around
June 30, 2004.

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 before the Agate/PowerHouse Studios combination
(and after May 19, 2003, by the Company) the opportunity to rescind the purchase
of such shares for either the cash consideration paid for the shares, with
interest, or Junior Units, consisting of shares of Series A Junior Convertible
Preferred Stock, convertible at $3.06 per share (the "Junior Preferred Stock")
and Series A Junior Common Stock Purchase Warrants, exercisable for one (1)
share of Common Stock

                                       20
<PAGE>

at an exercise purchase price of $3.83 (the "Junior Warrants" and the offerings
referred to, the "Rescission Offer" and "New Junior A Units Offering").

The Junior Preferred Stock has certain preferences over Common Stock including
an anti-dilution provision in the event the Company is unsuccessful in its
current litigation with the Proctor Group (see caption "Legal Matters" above).
The Junior Warrants contain customary anti-dilution provisions for stock
dividends, stock splits and the like.

The Rescission Offer was completed on June 7, 2004 and holders of approximately
975,144 shares of Common Stock accepted the Rescission Offer in exchange for
Junior Units and holders of approximately 51,500 shares of Common Stock accepted
the Rescission Offer for cash consideration. Holders of approximately 56,998
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 releases with
respect to barring claims that would be based on securities law violations. The
Company understands that the Securities and Exchange Commission takes the
position that acceptance or rejection of an offer of rescission may not bar
shareholders from asserting claims for alleged violations of federal securities
laws. Further, under California's Blue Sky law, which would apply to
shareholders 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 terminate any 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 New Junior A Units Offering to bar any claims based on
allegations of fraud or other federal or state securities law violations that
the shareholders 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 shareholders 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 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, our business, financial
condition and results of operations could all be harmed. The amount of shares of
Common Stock held by investors who were offered rescission under the Rescission
Offer but did not accept the Rescission Offer aggregate 56,998 shares, each of
which was purchased at a price of $5.00. Even if we are successful in defending
those claims under applicable securities laws, their mere assertion could result
in costly litigation and significant diversions of effort by management.

                                       21
<PAGE>

Merger with First Person Software, Inc.

On June 18, 2004, the Company entered into an agreement (the "FPS Merger
Agreement") with First Person and its shareholders (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 "Acquisition"). The consideration includes a certain amount
of cash that is currently being held in escrow by an authorized agent and that
will be released only upon the satisfactory completion of a review by the
Company of First Person's financial statements and further includes a certain
number of shares of Common Stock that are also being held in escrow by the same
agent and that will only be released upon the satisfactory achievement by the
Company of certain performance milestones within the applicable periods
specified in the FPS Merger Agreement. Immediately prior to the Acquisition, 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 Company expects its Acquisition of First Person to enable it to develop and
further enhance the software behind its products, more effectively control the
underlying intellectual property and develop additional intellectual property
around its core software. All the employees of First Person were offered, and
accepted, employment in the Company.

The Company intends to consider additional acquisitions as part of its expansion
planning. The Company is not currently engaged in any acquisition-related
negotiations. Should the Company acquire other businesses, the Company may be
exposed to risks associated with acquisitions, such as and including the
Acquisition of First Person, including integration risks and risks associated
with methods of financing and the impact of accounting treatment. In addition,
the process of completing an acquisition may take a significant amount of time,
therefore putting further financial strain on the Company to sustain current
operations. Furthermore, there is no guarantee that an acquisition will enhance
the business of the Company. Another risk associated with acquisitions is the
risk that financial data provided for the acquired company proves inaccurate.

The Company entered into an agreement with a professional services firm in which
the firm agreed to provide future services to the Company in return for the
issuance of 15,000 shares of restricted Common Stock of the Company. The shares
were issued June 9, 2004 in full satisfaction for all services rendered to the
Company.

                                       22
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

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

FOR THE YEAR ENDED MARCH 31, 2004,
THE PERIOD FROM MAY 16, 2002 (INCEPTION)TO MARCH 31, 2003
AND THE PERIOD FROM MAY 16, 2002 (INCEPTION)TO MARCH 31, 2004

                                       23
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

                                                                            PAGE

Independent Auditor's Report..................................................25

Consolidated Balance Sheet - As of March 31, 2004.............................26

Consolidated Statements of Operations -For the Year Ended March 31, 2004,
the Period from May 16, 2002 (inception) to March 31, 2003 and the Period
from May 16, 2002 (inception) to March 31, 2004...............................27

Consolidated Statements of Stockholders' Equity (Deficit) - For the Period
from May 16, 2002 (inception) to March 31, 2004...............................28

Consolidated Statements of Cash Flows - For the Year Ended March 31, 2004,
the Period from May 16, 2002 (inception) to March 31, 2003 and the Period
from May 16, 2002 (inception) to March 31, 2004...............................29

Notes to the Financial Statements.............................................30





















                                       24


<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
PowerHouse Technologies Group, Inc.
San Ramon, CA

We have audited the accompanying consolidated balance sheet of Powerhouse
Technologies Group, Inc. (A Development Stage Company) (the "Company") as of
March 31, 2004 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the year ended March 31, 2004,
the period from May 16, 2002 (inception) to March 31, 2003 and the period from
May 16, 2002 (inception) to March 31, 2004. 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Powerhouse
Technologies Group, Inc. as of March 31, 2004 and the results of its operations
and its cash flows for the year ended March 31, 2004, the period from May 16,
2002 (inception) to March 31, 2003 and the period from May 16, 2002 (inception)
to March 31, 2004, 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 losses from operations and has an
accumulated deficit that raises substantial doubt about the Company's 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 these uncertainties.



HEIN & ASSOCIATES LLP

Orange, California
June 10, 2004



                                       25
<PAGE>

                       POWERHOUSE TECHNOLOGIES GROUP, INC.
                          (A Development Stage Company)
                           CONSOLIDATED BALANCE SHEET
                                 MARCH 31, 2004

                                     ASSETS

CURRENT ASSETS:

    Cash and cash equivalents                                       $   807,484
    Accounts receivable                                                  22,938
    Inventory                                                            16,088
    Deferred loan costs                                                 172,042
    Other current assets                                                 20,000

        Total current assets                                          1,038,552

    OTHER ASSETS:

        License fee                                                     208,418
        Investment in equity investee                                   318,511
        Other assets                                                      2,049

        Total other assets                                              528,978

TOTAL ASSETS                                                        $ 1,567,530

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:

    Convertible debt, net of debt discount                          $ 1,492,758
    Accounts payable                                                    930,063
    Finders' fee payable                                                 60,825
    Accrued compensation                                                332,083
    Due to officer                                                       21,251
    Accrued liabilities                                                 752,087

        Total current liabilities                                     3,589,067

TOTAL LIABILITIES                                                     3,589,067

COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)

STOCKHOLDERS' EQUITY (DEFICIT):

    Common stock, $.0001 par value; 200,000,000 shares authorized;
        3,756,516 shares issued and outstanding
                                                                            376

    Additional paid in capital in excess of par value                 6,843,990
    Deferred consulting compensation                                   (139,650)
    Deficit accumulated in development stage                         (8,726,253)

        Total stockholders' equity (deficit)                         (2,021,537)

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                $ 1,567,530

                 The accompanying notes are an integral part of
                     the consolidated financial statements.


                                       26
<PAGE>

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

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                          FOR THE           FOR THE
                                                        PERIOD FROM       PERIOD FROM
                                                        MAY 16, 2002      MAY 16, 2002
                                      FOR THE YEAR      (INCEPTION)       (INCEPTION)
                                      ENDED MARCH         TO MARCH        TO MARCH 31,
                                        31, 2004          31, 2003            2004
                                      ------------      ------------      ------------
<S>                                   <C>               <C>               <C>
REVENUES                              $    345,585      $         --      $    345,585

COST OF SALES                              214,671                --           214,671
                                      ============      ============      ============

GROSS PROFIT                               130,914                --           130,914
                                      ============      ============      ============
OPERATING EXPENSES:
   Research and development                108,392           211,180           319,572
   Sales and marketing                   1,782,344           186,812         1,969,156
   General and administrative            2,611,467           542,881         3,154,348
                                      ============      ============      ============
     Total operating expenses            4,502,203           940,873         5,443,076

NON-OPERATING EXPENSES:
   Loss due to theft                     1,789,411         1,353,348         3,142,759
   Equity in loss of investee              152,345            29,144           181,489
   Interest                                 63,884             3,995            67,879
   Other expense                            20,364                --            20,364
                                      ============      ============      ============
     Total non-operating expenses        2,026,004         1,386,487         3,412,491

LOSS BEFORE INCOME TAXES                (6,397,293)       (2,327,360)       (8,724,653)

PROVISION FOR INCOME TAXES                     800               800             1,600
                                      ============      ============      ============

NET LOSS                              $ (6,398,093)     $ (2,328,160)     $ (8,726,253)
                                      ============      ============      ============
NET LOSS PER COMMON SHARE -
   BASIC AND DILUTED                  $      (1.95)     $      (2.07)
                                      ============      ============
WEIGHTED AVERAGE COMMON SHARES -
   BASIC AND DILUTED                     3,285,107         1,127,425
                                      ============      ============
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                       27
<PAGE>

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

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
         FOR THE PERIOD FROM MAY 16, 2003 (INCEPTION) TO MARCH 31, 2004

<TABLE>
<CAPTION>
                                                                                                    DEFICIT
                                                                                                  ACCUMULATED
                                                  COMMON       ADDITIONAL        DEFERRED              IN
                                   COMMON         STOCK          PAID-IN        CONSULTING        DEVELOPMENT
                                   SHARES        AMOUNTS         CAPITAL       COMPENSATION          STAGE             TOTAL
                                  ---------     ----------     -----------     -------------      ------------      -----------
<S>                               <C>           <C>            <C>             <C>                <C>               <C>
BALANCE, May 16, 2002                    --     $       --     $        --     $          --      $         --      $        --
(inception)
  Issuance of shares for
    services to officers and
    consultant                    1,250,000            125              --                --                --              125
  Issuance of shares related
    to investment in equity
    investee in November 2002        40,000              4          99,996                --                --          100,000
                                  ---------     ----------     -----------     -------------      ------------      -----------
  Net loss                               --             --              --                --        (2,328,160)      (2,328,160)

BALANCE, March 31, 2003           1,290,000            129          99,996                --        (2,328,160)      (2,228,035)

  Issuance of stock for
    employee compensation at
    $5.00 per share                 100,000             10         499,990                --                --          500,000
  Effect of reverse merger
    with Agate Technologies,
    Inc. upon closing, May
    19, 2003                        888,525             89        (280,515)               --                --         (280,426)
  Issuance of stock for cash      1,248,191            125       5,442,234                --                --        5,442,359
  Issuance of stock for
    professional services at
    $4.65 per share                  60,000              6         278,994                --                --          279,000
  Issuance of stock for
    professional services at
    $5.00 per share                  50,000              5         174,995                --                --          175,000
  Issuance of stock for
    professional services at
    $3.50 per share                  79,800              8         279,292          (139,650)               --          139,650
  Issuance of stock for
    professional services at
    $2.75 per share                  40,000              4         109,996                --                --          110,000
  Estimated value of
    beneficial conversion of
    convertible notes                    --             --         239,008                --                --          239,008
  Net loss                               --             --              --                --        (6,398,093)      (6,398,093)
                                  ---------     ----------     -----------     -------------      ------------      -----------

BALANCE,  March 31, 2004          3,756,516     $      376     $ 6,843,990     $    (139,650)     $ (8,726,253)     $(2,021,537)
                                  =========     ==========     ===========     =============      ============      ===========
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                       28
<PAGE>

                       POWERHOUSE TECHNOLOGIES GROUP, INC.
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                FOR THE          FOR THE
                                                              PERIOD FROM      PERIOD FROM
                                               FOR THE       MAY 16, 2002      MAY 16, 2002
                                             YEAR ENDED       (INCEPTION)      (INCEPTION)
                                              MARCH 31,      TO MARCH 31,      TO MARCH 31,
                                                2004             2003              2004
                                             -----------     -------------     -----------
<S>                                          <C>             <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                  $(6,398,093)    $  (2,328,160)    $(8,726,253)

   Adjustments to Reconcile Net Loss to
   Net Cash Used in Operating
   Activities:
      Common stock issued for services         1,203,650               125       1,203,775
      Equity in loss of investee                 152,345            29,144         181,489
      Interest expense related to debt
      issuance costs                              21,261                --          21,261
      Interest expense related to
         amortization of debt discount            37,766                --          37,766

      Changes in operating liabilities:
         Accounts receivable                     (22,938)               --         (22,938)
         Inventory                               (16,088)               --         (16,088)
         Other current assets                    (20,000)               --         (20,000)
         License fee                            (118,418)               --        (118,418)
         Other assets                             (2,049)               --          (2,049)
         Accounts payable                        807,510           122,553         930,063
         Accrued compensation                    267,083            65,000         332,083
         Due to officer                          (72,416)           93,667          21,251
         Accrued liabilities                     357,608                --         357,608
                                             ===========     =============     ===========

   Net cash used in operating activities      (3,802,779)       (2,017,671)     (5,820,450)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Investment in equity of investee                   --          (130,000)       (130,000)
                                             ===========     =============     ===========

   Net cash used in investing activities              --          (130,000)       (130,000)
                                             ===========     =============     ===========

CASH FLOWS FROM FINANCING ACTIVITIES:
   Payment of finders' fee                       (50,000)               --         (50,000)
   Payment of debt issuance costs                (98,425)               --         (98,425)
   Principal payments on note payable
      to equity investee                        (183,995)          (86,005)       (270,000)
   Advances on common stock
   subscriptions                                      --         2,233,676       2,233,676
   Proceeds from convertible notes             1,684,000                --       1,684,000
   Proceeds from sale of common stock          3,258,683                --       3,258,683
                                             ===========     =============     ===========

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                       29
<PAGE>

   Net cash provided by financing
   activities                                  4,610,263         2,147,671       6,757,934
                                             ===========     =============     ===========

NET DECREASE IN CASH AND CASH
EQUIVALENTS                                      807,484                --         807,484

CASH AND CASH EQUIVALENTS, beginning of
year                                                  --                --              --
                                             ===========     =============     ===========

CASH AND CASH EQUIVALENTS, end of year       $   807,484     $          --     $   807,484
                                             ===========     =============     ===========

NON-CASH INVESTING ACTIVITY:
   Purchase of investment in equity
     investee through a note payable         $               $     270,000     $   270,000
                                             ===========     =============     ===========
   Issuance of common stock in exchange
     for an investment in equity
     investee                                $               $     100,000     $   100,000
                                             ===========     =============     ===========
   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
                                             ===========     =============     ===========
</TABLE>

1.    ORGANIZATION AND NATURE OF OPERATIONS

      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 and was incorporated under the laws of the State of
      Delaware on May 16, 2002 as PowerHouse Studios. On May 19, 2003, the
      Company completed a combination with Agate Technologies, Inc. and
      conducted a 1-for-122 reverse split of the Agate Technologies, Inc. common
      stock. Concurrent with this transaction, the company amended its Articles
      of Incorporation changing its name to PowerHouse Technologies Group, Inc.

      The Company has limited operating history and limited revenues. The
      Company's business is to acquire, develop and market computing software
      and infrastructure technologies designed to improve the way personalized
      mobile information is stored, carried and accessed.

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, 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. 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

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                       30
<PAGE>

      might be necessary should the Company be unable to continue as a going
      concern.

      Subsequent to March 31, 2004, the Company successfully completed the sale
      of Senior Units composed of shares of the Company's Series A Senior
      Convertible Preferred Stock and Series A Common Stock Purchase Warrants.
      Through June 30, 2004, the Company had raised approximately $8,722,605
      from this offering. According to the terms of the offering, the Company
      could raise up to $15,000,000. The Company's management is continuing
      their efforts to raise additional funds under the terms of this offering.

      Management estimates that the current funds available and on-hand will be
      adequate to fund operations throughout fiscal 2005. The Company
      anticipates that revenue from the sale of its current product line will
      begin increasing during the first half of its fiscal year 2005, and will
      have a material impact offsetting operating expenses during the second
      half of fiscal 2005. In addition to the anticipated increase in revenue,
      Company's management intends to raise additional funds through
      debt-financing based on available short-term assets. The Company has not
      yet negotiated with any banks or lending institutions, and may not be able
      to arrange for loans or financings on favorable terms.

      Principles of Consolidation - The consolidated financial statements
      include the accounts of the Company and its subsidiary. All significant
      intercompany accounts and transactions have been eliminated in
      consolidation.

      Use of Estimates - The preparation of financial statements in conformity
      with accounting principles generally accepted in the United States ("US
      GAAP") requires management to make estimates and assumptions that affect
      the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements,
      and the reported amounts of revenues and expenses during the 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.

      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, 2004, management believes that all amounts are collectible.

      Inventory - Inventory is valued at the lower of cost or market with cost
      determined by the first-in, first-out method. Inventory consists mainly of
      finished goods, media, and packaging supplies. At March 31, 2004,
      inventory represented finished goods.

      Impairment of Long-Lived Assets - In the event that facts and
      circumstances indicate that the cost of long-lived assets used in
      operations might be impaired, an evaluation of recoverability would be
      performed. If an evaluation were required, the estimated


                                       31
<PAGE>

      undiscounted cash flows estimated to be generated by those assets would be
      compared to their carrying amounts to determine if a write-down to market
      value or discounted cash flows is required.

      Revenue Recognition Policy - The Company recognizes revenue from
      distributors when the product has been sold to third party customers.
      Revenue from sales through the Company's website is recognized after the
      30 day return period has lapsed.

      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 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 is computed in the same
      way as basic loss per common share except that the denominator is
      increased to include the number of additional common shares that would be
      outstanding if all potential common shares had been issued and if the
      additional common shares were dilutive.

      Stock-Based Compensation - SFAS No. 123, Accounting for Stock-Based
      Compensation, encourages, but does not require, companies to record
      compensation cost for stock-based employee compensation at fair value. The
      Company has elected to account for stock-based compensation using the
      intrinsic value method prescribed in Accounting Principles Board Opinion
      No. 25, Accounting for Stock Issued to Employees, and related
      Interpretations.

      In accordance with SFAS 123, the Company discloses the impact of the fair
      value accounting of employee stock options. Transactions in equity
      instruments with non-employees for goods or services have been accounted
      for using the fair value method as prescribed by SFAS 123.

      There were no stock-based employee compensation awards granted as of March
      31, 2004.

      Research and Development - Research and development costs are charged to
      expense as incurred.

      Fair Value of Financial Instruments - The estimated fair values for
      financial instruments under FASB 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, 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. 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


                                       32
<PAGE>

      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. At March
      31, 2004, the Company had cash accounts with several financial
      institutions with a combined balance of $707,579, which were not
      guaranteed by the Federal Deposit Insurance Corporation. The Company has
      not experienced any losses in such accounts 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%. See 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.

      Recently Issued Accounting Pronouncements - In January 2003, the FASB
      issued FASB Interpretation ("FIN") 46, "Consolidation of Variable Interest
      Entities." FIN 46 establishes accounting guidance for consolidation of a
      variable interest entity ("VIE"), formerly referred to as special purpose
      entities. FIN 46 applies to any business enterprise, both public and
      private, that has a controlling interest, contractual relationship or
      other business relationship with a VIE. FIN 46 provides guidance for
      determining when an entity ("Primary Beneficiary") should consolidate a
      VIE that functions to support the activities of the Primary Beneficiary.
      The Company has no contractual relationship or other business relationship
      with a VIE and, therefore, the adoption of FIN 46 will not have an effect
      on its financial position, results of operations, or cash flows.

      In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
      Instruments with Characteristics of both Liabilities and Equity." SFAS 150
      represents the first phase of the FASB's project to clarify the accounting
      treatment of certain instruments that possess characteristics of both
      liabilities and equity. SFAS 150 generally requires that freestanding
      financial instruments that obligate the issuer to redeem the holders'
      shares, or are indexed to such an obligation, and are settled in cash or
      settled with shares meeting certain conditions be treated as liabilities.
      The provisions of SFAS 150 are effective immediately for instruments
      entered into or modified after May 31, 2003, and to all other instruments
      that exist as of the beginning of the first interim financial reporting
      period


                                       33
<PAGE>

      beginning after June 15, 2003, with the exception of mandatorily
      redeemable instruments of non-public companies, which become subject to
      SFAS 150 for fiscal periods beginning after December 15, 2003. As of March
      31, 2004, the Company had no freestanding financial instruments subject to
      redemption.

3.    INVESTMENT IN EQUITY INVESTEE

      During fiscal year 2003, the Company purchased a 49% interest of the then
      outstanding shares of First Person Software, Inc. ("First Person"). The
      total purchase price of the investment in First Person was $500,000, which
      included the promissory note in the amount of $270,000 (Note 4), a cash
      payment of $130,000 and 4 of the Company's common shares in exchange for
      912,265 shares of First Person's common shares, representing 49% of First
      Person. This transaction has been accounted for under the equity method.

      The following summarizes information as to the assets, liabilities,
      equity, and results of the investee's operations:

                                                 March 31, 2004
                                                  (unaudited)
                                                 --------------
                 Current assets                  $       40,611
                                                 ==============
                 Total assets                    $      192,368
                                                 ==============

                 Total liabilities               $      236,823
                                                 ==============

                 Total stockholders' deficit     $       44,455
                                                 ==============

                 Total liabilities and
                 stockholders' deficit           $      192,368
                                                 ==============

                 Revenues                        $       34,584
                                                 ==============
                 Loss from operations            $      314,708
                                                 ==============
                 Net loss                        $      310,908
                                                 ==============

      For the year ended March 31, 2004, the period from May 16, 2002
(inception) to March 31, 2003 and the period from May 16, 2002 (inception) to
March 31, 2004, the Company recorded a loss of $152,345, $29,144 and $181,789,
respectively, for the Company's 49% interest in First Person's net loss.

4.    DEBT

      Note Payable to Equity Investee - During fiscal 2003, the Company entered
      into a promissory note in the amount of $270,000 for the purchase of 49%
      of the then outstanding shares of First Person. The note bore interest at
      the rate of 6% per annum. Assets were not required to be collateralized.
      As of March 31, 2004, the note was paid.

      As of March 31, 2004, the Company incurred interest expense of $7,113 and
      had not


                                       34
<PAGE>

      repaid this amount. Subsequent to March 31, 2004 the Company acquired the
      remaining outstanding stock of First Person and assumed this asset of
      First Person. See Note 10.

      Bridge Loan - In March 2004, the Company issued $1,240,000 in secured
      convertible notes under a Bridge Loan agreement with Middlebury Capital,
      in which the principal balance of the notes and accrued and unpaid
      interest will automatically convert into units of equity upon a qualified
      equity financing of not less than $8 million at the lower of 75% of the
      price per share paid in the qualified equity financing or $2.69 per share.
      The convertible notes and accrued interest are convertible at the option
      of the holder at any time at $2.69 per share. Interest on the convertible
      notes accrues at 10% per annum beginning of the 90th day following the day
      after the date of the convertible notes. The convertible notes are due
      approximately one year from the date of the notes. At March 31, 2004, the
      amounts owing under the secured convertible notes were $1,240,000.

      Subsequent to March 31, 2004, the Company had an initial closing following
      a qualified equity financing for which the secured convertible debt was
      converted into equity. See Note 10.

      Secured Convertible Notes - In October 2003, the Company offered up to
      $10,000,000 in its 10% secured convertible notes, bearing interest per
      annum with a maturity of 10 years. The notes are collateralized by all of
      the Company's intellectual property and tangible assets of the Company,
      current and future. The notes were convertible at any time, at the
      holder's option and at an initial conversion price of $4.00 per share.
      During March 2004, the Company effectively exchanged these notes under
      terms as to the Bridge Loan convertible notes. At March 31, 2004, the
      amount owing under the secured convertible notes were $444,000.

      Interest expense of $1,739 was accrued and payable at March 31, 2004.

      Beneficial Conversion Feature and Deferred Loan Costs - The Bridge Loan
      convertible notes and secured convertible notes contain a beneficial
      conversion feature, as the notes are convertible into equity at prices
      that are less than the market prices at the date of the note issuances.
      The beneficial conversion feature and related deferred loan costs are
      being amortized over the life of the convertible notes and charged to
      interest expense.

5.    INCOME TAXES

      As of March 31, 2004, the Company had net operating loss carryforward of
      approximately $8,726,253, which begins to expire in 2023. The tax
      provision for the year ended March 31, 2004, the period from May 16, 2002
      (inception) to March 31, 2003 and the period from May 16, 2002 (inception)
      to March 31, 2004 in the accompanying statements of operations represent
      the California franchise tax.

      A valuation allowance has been recorded against the Company's deferred tax
      assets, as the Company cannot yet determine that it is probable that the
      assets will be realized. Any future benefits recognized from the reduction
      of the valuation allowance will result in a reduction of income tax
      expense.


                                       35
<PAGE>

6.    STOCKHOLDERS' EQUITY

      Common Stock - As of March 31, 2004, the Company had 200,000,000 common
      shares authorized and 3,756,516 shares outstanding. The holders of common
      stock are entitled to one vote per share.

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

      Issuance of Shares for Common Stock Purchases - From the Company's
      inception, May 16, 2002, to March 31, 2003, the Company received amounts
      totaling $2,183,676, which represented common stock subscriptions for the
      purchase of shares in the combined Agate/PowerHouse Studios entity. The
      combination was completed and deemed effective on May 19, 2003. The
      amounts received for the common stock subscriptions were recorded as a
      liability at March 31, 2003, and were relieved on May 19, 2003 upon the
      effectiveness of the combination for which the Company issued 501,995
      shares of its common stock. From April 1, 2003 to July 31, 2003, the
      Company received an additional $3,258,683, net of stock issuance costs,
      for common stock purchases.

      These shares were issued at $5.00 per share based on the Company's private
      placement offering of 4,000,000 shares of the Company's common stock. The
      private placement was terminated in August 2003.

      Common Stock Issued for Compensation and Consulting Services - 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
      wholly-owned subsidiary. Compensation expense of $500,000 was recorded in
      the year ended March 31, 2004 related to these shares. See Note 7.

      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.


                                       36
<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 $139,650 was recorded related
      to these shares, and $139,650 was recorded in stockholders' equity as
      deferred consulting compensation for future services.

      As of March 31, 2004, the Company had not issued any stock options.
      However, in anticipation of the Board of Directors and stockholders
      adopting a stock option plan, the Company has offered certain employees
      and consultants options for the purchase of the Company's common stock. In
      addition, certain vendors have been granted options for the purchase of
      the Company's common stock based on contractual arrangements.

7.    OPTIONS

      Stock Option Plan - As of March 31, 2004, the Company had not formalized a
      stock option plan. However, in anticipation of the Board of Directors and
      stockholders adopting a stock option plan, the Company has offered certain
      employees options for the purchase of the Company's common stock upon the
      Company's adoption of a formalized stock option plan. Options offered to
      employees as of March 31, 2004, contingent upon a formalized stock option
      plan, were 180,000. Subsequent to March 31, 2004, the Company offered
      30,000 options to employees upon the Company's adoption of a stock option
      plan.

      Consultants - In April 2003, the Company entered into an agreement for
      financial public relations services. This agreement calls for monthly cash
      payments of $7,500, plus reimbursement of out-of-pocket expenses as
      approved by the Company. The agreement also provided for stock options
      equal to $150,000 (but not less than 60,000 shares) based on the closing
      price of the Company's stock as of April 15, 2003. Absent of a signed
      option agreement, the options were not effectively issued for which the
      Company accrued a liability of $270,588 for the fair value of the options
      at March 31, 2004. As provided under this agreement, upon the anniversary
      of the agreement, April 15, 2004, additional options were to be granted on
      as many shares that could be purchased on the open market for $150,000.

      During 2004, the Company granted a total of 23,500 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,
      2004 for which the Company accrued a liability of $80,057.

8.    RELATED PARTY TRANSACTIONS

      Advances from Officer and Accrued Compensation - Pursuant to an employment
      agreement, during the year ended March 31, 2004, the Company accrued
      $91,000 in wages for its Chief Executive Officer. As of March 31, 2004,
      total accrued wages owed to the Company's Chief Executive Officer was
      $156,000. The Company has not yet paid this amount.

      Pursuant to a consulting agreement, during the year ended March 31, 2004,
      the Company accrued $75,000 in wages for its Chief Operating Officer and
      International President.


                                       37
<PAGE>

      The Company has not yet paid this amount.

      Pursuant to an employment agreement, during the year ended March 31, 2004,
      the Company accrued $65,000 in wages for the President and Chief Executive
      Officer of Forward Solutions, Inc., the Company's wholly-owned subsidiary.
      The Company has not yet paid this amount.

      Pursuant to an employment agreement, during the period from July 1, 2003
      to March 31, 2004, the Company accrued $27,500 in wages for its Vice
      President Finance Operations. The Company has not yet paid this amount.

      Also during the period from January 1, 2004 to March 31, 2004, the Company
      accrued $8,583 in wages for certain other employees. The Company has paid
      these amounts.

      During the period from May 16, 2002 (inception) to March 31, 2003, the
      Company accrued $93,667 in expenses paid for in advance by its Chief
      Executive Officer. During the period from April 1, 2003 to March 31, 2004,
      the Company repaid $72,416 of these expenses. As of March 31, 2004,
      $21,251 remained unpaid. The Company has paid this amount.

      Employment/Consulting Contracts - In May 2002, the Company entered into an
      employment agreement with its 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 the Chief Executive
      Officer was granted 700,000 shares of the Company's common stock at May
      16, 2002, the Company's inception.

      On April 1, 2003, the Company entered into an employment agreement with
      the President and Chief Executive Officer of its wholly-owned subsidiary
      for a perpetual period terminable upon 30 days notice by either party. 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. For the period from April 1,
      2003 to March 31, 2004, the Company has incurred $175,000 of compensation
      expense relating to this contract of which $65,000 has been accrued at
      March 31, 2004. The President and Chief Executive Officer of Forward
      Solutions, Inc. 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. Compensation expense of $500,000 was
      recorded in the year ended March 31, 2004 related to these shares.

      On July 15, 2003, the Company entered into a consulting agreement with its
      Chief Operating Officer and International President for a period of 3
      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


                                       38
<PAGE>

      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.

      On January 1, 2004, the Company entered into an employment agreement with
      its 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. For the period from April 1, 2003 to March 31, 2004,
      the Company has incurred $40,000 of compensation expense relating to this
      contract of which $10,000 has been accrued at March 31, 2004. In addition,
      the Vice President Finance Operations was paid $61,910 for prior
      consulting services during the period ending March 31, 2004. Pursuant to
      the employment agreement, the Vice President Finance Operations also
      received 125,000 options for the purchase of common stock, which as of
      March 31, 2004 were subject to approval by the Board of Directors.

      Licensing Agreement - On May 28, 2003, the Company entered into a Business
      Alliance and Software Licensing Agreement (the "Licensing Agreement") with
      First Person Software, Inc. The agreement grants the Company an exclusive
      license for the distribution of the PocketLogin software developed by
      First Person Software, Inc. This exclusive license is valid for 6 months
      beginning 30 days after the acceptance of the software by the Company. The
      agreement also calls for the good faith negotiation of future licenses for
      the referenced product, and for the development of future products. The
      Company is also obligated to pay First Person Software, Inc. a royalty
      equal to 10% of gross revenue for each product sold that consists of a
      hardware and software system, and in any event no less than $5.00 per unit
      sold. The Company is also obligated to pay 50% of gross revenue for
      software-only sales. In anticipation of unit sales, the Company agreed to
      royalty prepayments of $243,000 from May 15, 2003 through October 15,
      2003.

      As of March 31, 2004, $90,000 of the prepayment was due. Subsequent to
      March 31, 2004, the Company acquired the remaining outstanding stock of
      First Person Software, Inc. and has since assumed this liability. See Note
      10.

9.    COMMITMENTS AND CONTINGENCIES

      Sub-lease Agreement - In April 2003, the Company entered into a 20 month
      sub-lease agreement with a third party for 2,186 square feet of office
      space located in San Ramon, California. The agreement commenced May 1,
      2003 and requires monthly sub-lease payments of $3,607 through December
      31, 2004. The payments include the use of existing furniture and equipment
      located on the premises. The agreement also provided a right of first
      refusal to sub-lease an additional 1,519 square feet that was optioned to
      the Company on August 15, 2003. The Company agreed to sub-lease the
      additional space for an additional monthly payment of $2,506. The
      termination of this portion of the sub-lease is also December 31, 2004.


                                       39
<PAGE>

      Future minimum sublease payments under this operating lease as of March
      31, 2004, are as follows:

                  2005                             $    55,017
                                                   ===========
                  Total                            $    55,017
                                                   ===========

      Total rent expense for the year ended March 31, 2004, the period from May
      16, 2002 (inception) to March 31, 2003 and the period from May 16, 2002
      (inception) to March 31, 2004, was $51,905, $0, and $51,905, respectively.

      Litigation - On September 15, 2003, the Company filed a complaint in the
      Superior Court of the State of California in and for the County of Los
      Angeles, South West District (the "Superior Court") captioned PowerHouse
      Technologies Group, Inc. v. Proctor, et. al., (case no: YC047491) (the
      "Proctor Litigation"). Named as defendants therein are Joseph Ford
      Proctor, the Chief Executive Officer of MayFair Capital Group Limited,
      BrickHouse Capital Venture Limited ("BrickHouse"), Julie Holfinger, and
      others. The complaint alleges that the defendants, in connection with a
      capital-raising effort for the Company, diverted a significant amount of
      funds from the Company. The complaint seeks to recover the diverted funds
      and to enjoin the transfer, sale or exercise of voting rights with respect
      to approximately 7 million shares of Company Common Stock claimed by the
      defendants, which would represent approximately 67% of the total shares of
      Common Stock currently outstanding (the "Proctor Group Shares"). On
      November 5, 2003, the Superior Court, without prejudice, declined to
      continue the temporary restraining order granted to the Company on
      September 15, 2003. Trial is tentatively set for November 2004. The status
      of this litigation is uncertain since Joseph Proctor terminated his
      lawyers and recently obtained new counsel.

      The Company and its Board of Directors believes, based upon a review of
      all relevant information available to the Company and after consulting
      with the Company's counsel, that the Proctor Group Shares were illegally
      and invalidly issued and therefore, the Board of Directors of the Company
      has determined that the Proctor Group Shares are, and are to be deemed to
      be, not validly issued and outstanding and that the holders of those
      shares shall not be entitled to exercise any of the voting and other
      rights and privileges of stockholders of the Company in respect of such
      shares. The Board of Directors of the Company has taken actions it
      believes to be necessary and appropriate to implement the foregoing
      determinations.

      By letters dated November 20, 2003, and December 2, 2003, BrickHouse
      demanded payment by the Company of $5,000 for monthly consultant services
      for July 2003 and August 2003 and $622,354.86 for expenses allegedly
      advanced to, or for the benefit of, the Company. The Company has declined
      the request for payment and has informed BrickHouse that such amounts that
      may be owed to or from BrickHouse and its affiliates, or the Company and
      its affiliates, are the subject of the Proctor Litigation pending in the
      Superior Court.


                                       40
<PAGE>

      By letters dated May 9, 2003 and June 9, 2003, five persons indicated that
      in 2001 they purchased approximately 179,450 shares of Common Stock in the
      Company "through Joseph Proctor and Julie Holfinger". The alleged
      investors informed the Company that they have not received confirmation of
      their investments nor any stock certificates despite sending "numerous"
      communications to Mr. Proctor and Ms. Holfinger. The alleged investors
      advised the Company that they will pursue criminal and civil actions
      against the Company. Despite requests made to the alleged investors, the
      Company has not received any documentation evidencing the investments.
      Additionally, one person indicated that $25,000 in unpaid salary, 10,000
      shares of Common Stock and 25,000 options to purchase shares of Common
      Stock had not been paid pursuant to an alleged employment agreement. The
      Company is investigating these matters and intends to formulate a response
      in light of the results of its investigation and whatever additional
      documentation may be produced by the parties involved.

      On December 1, 2003, the Company and Forward Solutions, Inc. were served a
      complaint filed in the Superior Court of the State of California and for
      the County of Los Angeles, Central District by Draft, Inc., ("Draft"), a
      Delaware corporation (case no. BC306660), alleging breach of contract and
      related claims pursuant to an alleged contract to develop and implement a
      direct marketing program for the Company. The suit claims damages of
      approximately $445,000 plus an alleged bonus based on product sales. 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.

      On May 21, 2004, the Company filed a Cross-Complaint against Draft and its
      Chief Executive Officer, Howard Draft, alleging negligent
      misrepresentation, breach of oral contract and the covenant of good faith
      and fair dealing, and unjust enrichment. The Cross-Complaint seeks to
      recover $85,000 that the Company paid to Draft for its services and an
      additional unspecified amount based on the negligence claim.

      The Company is involved in certain other legal actions and claims arising
      in the ordinary course of business. Management believes, based on
      discussions with legal counsel, that such litigation and claims will be
      resolved without material effect on the Company's consolidated financial
      position.

10.   SUBSEQUENT EVENTS

      Sale of Series A Senior Convertible Preferred Stock - On April 22, 2004,
      the Company entered into an agreement with Middlebury Capital, LLC for the
      sale of up to $15 million of the Company's Series A Senior Units. The
      offering is conditioned upon selling a minimum of $8 million of Series A
      Senior Units. The Series A Senior Units are composed of four (4) shares of
      Series A Senior Convertible Preferred Stock and one (1) Warrant. The
      offering price is $3.06 per unit. The shares accrue a dividend at a rate
      of 8% per annum which is payable on a semi-annual basis. In addition to
      certain benefits over common shares, the Series A Senior Convertible
      Preferred Stock also has a liquidation preference in the event the Company
      is unsuccessful in the Proctor Litigation and shares of common stock are
      awarded to any defendant of the Proctor Group. See Note 9. In June 2004,
      the Company and Middlebury Capital, LLC agreed to an initial closing on
      approximately $8,722,605 under the terms of this agreement. The units
      contemplated in this offering were still available for sale as of June 30,
      2004.

      Additionally, this agreement provided for a Bridge Loan. See Note 4. The
      terms of the notes were interest only for 12 months payable after 90 days
      at a rate of 10%. The notes were automatically converted into Series A
      Senior Units as described above at a rate of $2.29 per


                                       41
<PAGE>

      share upon the first closing. The Company was successful raising
      $2,100,000 under the terms of the Bridge Loan. Upon the initial closing,
      the convertible notes at March 31, 2004 of $1,684,000, together with
      accrued and unpaid interest were converted into the Senior Units. At the
      conversion date, the Company will record additional beneficial conversion
      of approximately $169,000 that will be charged to interest expense as of
      the date of conversion.

      Merger with First Person Software, Inc. - On June 18, 2004, the Company
      entered into an agreement 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
      cash consideration is currently being held in escrow by an authorized
      agent and that will be released only upon the satisfactory review by the
      Company of First Person's financial statements. A certain number of shares
      of Common Stock are also being held in escrow by the same agent, which
      will only be released upon the satisfactory achievement by the Company of
      certain performance milestones related to the ongoing First Person
      operations within the applicable periods specified in the Merger
      Agreement. Immediately prior to the Acquisition, the Company owned
      approximately 49% of the outstanding shares of First Person stock, which
      shares were originally purchased by the Company in November 2002. See Note
      3.

      Warrants - Subsequent to March 31, 2004, the Company issued 5,000 warrants
      for consulting services.

      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 either the cash consideration paid for the
      shares, with interest, or Junior Units, consisting of shares of Series A
      Junior Convertible Preferred Stock, convertible at $3.06 per share (the
      "Junior 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 "New Junior A Units Offering").

      The Junior Preferred Stock has certain preferences over common stock
      including an anti-dilution provision in the event the Company is
      unsuccessful in its current litigation with the Proctor Group (see caption
      "Legal Matters" above). The Junior Warrants contain customary
      anti-dilution provisions for stock dividends, stock splits and the like.

      The Rescission Offer was completed on June 4, 2004 and holders of
      approximately 975,144 shares of Common Stock accepted the Rescission Offer
      in exchange with Junior Units and holders of approximately 51,500 shares
      of Common Stock accepted the Rescission Offer for cash consideration.
      Holders of approximately 56,998 shares of Common Stock retained their
      ownership of Common Stock as originally purchased.

      The Company entered into an agreement with a professional services firm in
      which the firm agreed to provide future services to the Company in return
      for the issuance of 15,000 shares of restricted Common Stock of the
      Company. The shares were issued June 9, 2004 in full satisfaction for all
      services rendered to the Company.


                                       42
<PAGE>

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

Previous Independent Accountant

As reported in the Company's Report on Form 8-K filed under the Securities
Exchange Act of 1934 on November 21, 2003, effective November 19, 2003, the
Company dismissed Kenny H. Lee, CPA Group, Inc. ("Lee") as the Company's
independent accountant.

Lee had served as the Company's principal independent accountant to audit the
Company's financial statements for the fiscal years ended March 31, 2002, and
March 31, 2003. Lee's audit reports for fiscal years ended March 31, 2002, and
March 31, 2003, and Note 2 to the corresponding financial statements, contained
a qualification regarding the Company's ability to continue as a going concern
due to incurred net losses, accumulated deficits, defaults in lines of credit
due to recurring losses from operations, and the inability to obtain adequate
financing and such audit reports stated these factors raised "substantial doubt"
about the Company's ability to continue as a going concern (the "Going Concern
Qualifications"). The audited financial statements of the Company for the fiscal
years ended March 31, 2002, and March 31, 2003, did not include any adjustments
in respect of the Going Concern Qualifications.

Other than the Going Concern Qualifications, the audit reports of Lee on the
financial statements of the Company for the fiscal years ended March 31, 2002,
and March 31, 2003, and any subsequent interim period, did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles.

The dismissal of Lee was approved by the Audit Committee of the Board of
Directors of the Company on November 14, 2003.

In connection with the audits of the financial statements of the Company for the
fiscal years ended March 31, 2002, and March 31, 2003, and any subsequent
interim period, the Company had no disagreement with Lee on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement(s), if not resolved to the satisfaction
of Lee, would have caused Lee to make reference to the subject matter of the
disagreement(s) in connection with Lee's reports.

During the Company's fiscal years ended March 31, 2002, and March 31, 2003, and
all subsequent interim periods, Lee did not advise the Company of any of the
matters identified in paragraph (a)(1)(iv) of Item 304 of Regulation S-B.

The Company requested that Lee furnish it with a letter addressed to the
Securities and Exchange Commission stating whether Lee agreed with the above
statements and, if not, stating the respects in which Lee did not agree. A
letter from Lee expressing his agreement with the statements contained in the
Form 8-K filed on November 14, 2003 is attached hereto as Exhibit 16.1.

New Independent Accountant

As of November 14, 2003, the Company engaged Hein & Associates LLP ("Hein") as
its new


                                       43
<PAGE>

independent accountants. The engagement of Hein was approved by the Audit
Committee of the Board of Directors of the Company on November 14, 2003.

During the fiscal years ended March 31, 2002, and March 31, 2003, and all
subsequent interim periods prior to the engagement of Hein, neither the Company
nor anyone acting on the Company's behalf consulted Hein regarding either of the
following: (1) 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 Company's financial statement, and neither a written
report nor oral advice was provided by Hein to the Company that Hein concluded
was an important factor considered by the Company in reaching a decision as to
any such accounting, auditing or financial reporting issue; or (2) any matter
that was either the subject of a "disagreement," as that term is defined in Item
304(a)(l)(iv) of Regulation S-B and the related instructions to Item 304 of
Regulation S-B, or a "reportable event," as that term is defined in Item
304(a)(l)(iv) of Regulation S-B.

ITEM 8A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our senior management,
including our chief executive officer and chief financial officer, we conducted
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered
by this Annual 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. Based on this evaluation, our Chief Executive Officer and Principal
Financial and Accounting Officer concluded as of the Evaluation Date that our
disclosure controls and procedures were, to the best of their knowledge,
effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that
occurred during the quarter ended March 31, 2004, that have materially affected
or are reasonably likely to materially affect our internal control over
financial reporting.

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

On October 6, 2003, James Palmer resigned as a director of the Company. On
October 6, 2003, Robin Hutchison was appointed as a director.

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 June 24, 2004, are set forth
below:


                                       44
<PAGE>


<TABLE>
<CAPTION>
NAME                    AGE     POSITIONS AND OFFICES HELD              SINCE
-------------------     ---     -----------------------------------     ---------------
<S>                      <C>    <C>                                     <C>
Jay Elliot               65     Director, Chief Executive Officer       May 16, 2002
                                and Chairman of the Board
Gregory Duffell          42     Director, International President       May 16, 2002
Robin Hutchison (1)      48     Director                                October 6, 2003
Joshua Feller            46     President, Forward Solutions, Inc.      April 1, 2003
David Wells              41     Vice President - Finance Operations     January 1, 2004
</TABLE>

(1) Member of the Audit Committee.

Jay Elliot, Age 65

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, reporting directly
to Steven Jobs as president. When Mr. Elliot joined Apple in 1980, sales were
$150 million and at his departure in 1986 sales were in excess of $1.0 billion
dollars.

Previous to his tenure with Apple, Mr. Elliot served as a Site Director of IBM
from 1977 to 1979, as well as heading the 16,000 person software division. In
1979, Mr. Elliot left IBM to join Intel. Mr. Elliot also served as a Site
Director of Intel from 1979 to 1980 and was the creator of the Intel Foundation.
In addition to his substantial technology background, Mr. Elliot also has
extensive experience in both the entertainment and healthcare industries. From
1988 to 1994, Mr. Elliot served as the Chief Executive Officer of San Francisco
Studios where he produced the Academy Award-nominated documentary, "Berkeley in
the Sixties," as well as the NBC television series, "Midnight Caller" and
numerous sports programs for NBC, CBS, and ABC, including the Barcelona Olympic
Games. From 1994 to 1998, Mr. Elliot also served as President of Acclaim West,
producing programs for Fox, UPN, the Playboy Channel and Telemundo.

On the healthcare side, Mr. Elliot was the Chief Executive Officer of New Health
Systems from 2000 to 2001, a network technology company connecting physicians
and vendors to patients and affiliated hospitals.

Gregory Duffell, Age 42

Mr. Duffell is a senior executive with 20 years of international business
experience in Europe,


                                       45
<PAGE>

the Middle East and the Asia Pacific region. In 1983, after serving as a pilot
in the Royal Australian Air Force, Mr. Duffell embarked on an extensive business
development and franchise career, with Budget Rent-A-Car International initially
in Australia and later relocated to Singapore. From 1987 to 1994, Mr. Duffell
was the Regional Director - Asia Pacific, and was credited with opening over 200
franchise office locations during his 11 years with Budget. After a few years
consulting in US technology transfers to Asia, Mr. Duffell in 1997 became the
General Manager for the Thomas Cook Group - Worldwide Network, based in London,
UK responsible for developing and implementing an Internet eCommerce solution in
more than 120 countries and 3000 travel agencies. Upon returning to Asia in 2000
Mr. Duffell consulted to a number of technology projects including interactive
kiosks; Bancassurance turnkey solutions and teleradiology diagnostic healthcare.

R.B. (Rob) Hutchison, Age 48

Mr. Hutchison is a technology innovator and business entrepreneur providing
guidance for strategic business development. Mr. Hutchison has more than 23
years of experience in the field of information technology. Most recently, in
December 2003, Mr. Hutchison joined the management team of Applied DNA Sciences
as CEO.

Mr. Hutchison is the founder of several companies, including eCharge Corporation
of Seattle, Wash., specialists in alternative payment methods for the Internet.
From 1997 to 2002, Mr. Hutchison served as eCharge's President and Chief
Technical Officer and played an integral role in raising in excess of $90
million in private financing. Mr. Hutchison pioneered, and holds the patent
pending on, unique digital certificate technology using Bio-metrics that enabled
eCharge to provide secure Internet commerce transactions. He remains on the
Board of Directors of eCharge, after retiring from the company in 2002 to assist
in the development of several start-up and mature technology companies,
including Bit Learning, Via Vis Technologies Inc., One Person Health Inc. and
Applied DNA Canada.

Mr. Hutchison is also a member of the Board of Directors of Golden Goliath
Resources and Serebra Learning Corporations.

Prior to co-founding eCharge, Mr. Hutchison was president of Canada-based SNI
Corporation from 1994 to 1997, specialists in the integration of SUN
Microsystems UNIXbased systems and Internet and computer firewall security. SNI
served as lead architects of BC Telephone's Sympatico Internet service. From
1990 to 1993, Mr. Hutchison also served as the Western Regional Director of
Sales & Operations for Everex Canada Inc., and as Vice President and co-founder
of Vivox International Inc.

Joshua Feller, Age 46

Mr. Feller is president and chief operating officer of Forward Solutions, Inc.
Mr. Feller is actively supervising the Company's operations related to the
creation and distribution of a family of mobile computing devices dubbed the
"Migo". Mr. Feller brings to the Company more than 25 years' experience as a
senior executive of high-tech corporate development, sales and operations for
both traditional and startup companies. Mr. Feller spent 15 years (from 1982 to
1997) with ComputerLand Corp., where he served in various roles, including Chief
Operating


                                       46
<PAGE>

Officer and Vice President of Franchise Operations. There he managed that
company's sales and franchise operations and affiliate distribution program,
increasing sales by more than $350 million with 700 new dealers in its first
year. He then oversaw the growth of the business to more than $1.2 billion in
subsequent years. More recently, he spent three years commencing 1997 as
Managing Director of Martin Wolf Associates, representing companies in both buy
and sell side merger transactions and from 2000 to 2002 was Chief Executive
Officer of milesandpoints.com, a travel-related Internet company.

David Wells, Age 41

Mr. Wells has 19 years of experience in financial and corporate management, with
particular emphasis as a negotiator, moderator, decision-maker and motivator
with operations and administrative matters in finance, human resources,
facilities management and intellectual property. In July, 2003, Mr. Wells came
to the Company from Insurance Services of America, where he was acting Chief
Operating Officer and Chief Financial Officer from May 2002 to June 2003. He
previously served as Vice President, Finance and Administration for three
companies: BroadStream, Inc. (November 2000-January 2002); Hollywood Stock
Exchange, an internet gaming company (January 1999-September 2000); and ITE
USA/Webchoice (July 1998 to January 1999). Before that he was the Chief
Financial Officer of HSO Business Systems (1997) and held positions as a Senior
Business Analyst, Controller, Sales Representative and Commercial/Corporate
Lending officer with a number of California firms. He holds an MBA from
Pepperdine University and a BA from Seattle Pacific University.

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

The Company has a separately-designated standing audit committee established in
accordance with Section 3(2)(58)(A) of the Exchange Act. Robin Hutchison
currently is the sole audit committee member.

Shareholder Recommendation of Board Nominees

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 expects to adopt its Code of Ethics before September 30, 2004.

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,


                                       47
<PAGE>

2004 and 2003 to (i) the Company's chief executive officer ("CEO") during fiscal
2004; and (ii) the Company's three most highly compensated employees other than
the CEO who were serving as executive officers at the end of fiscal 2004.

Summary Compensation Table

<TABLE>
<CAPTION>
                                    Annual Compensation
                                    -------------------




                                              Bonus        Other Annual
Name and Position     Year     Salary ($)      ($)       Compensation ($)
-----------------     ----     ----------     ------     ----------------
<S>                   <C>         <C>            <C>                  <C>
Jay Elliot,           2004        240,000        ---                  ---
Chairman, CEO         2003        240,000        ---                  ---

Gregory Duffell,      2004        200,000        ---                  ---
Director,
International
President

Joshua Feller,        2004        175,000        ---                  ---
President,
COO--Forward
Solutions, Inc.

David R. Wells,       2004        160,000        ---                  ---
VP Finance
Operations
<CAPTION>
                                                   Long-term Payouts
                                                   -----------------
                                Awards                 Payouts
                                ------                 -------
                      Restricted      Options (#
                      Stock ($ as         of
                      of date of      underlying     LTIP payouts         All Other
Name and Position       grant)        securities          ($)          Compensation ($)
-----------------     -----------     ----------     -------------     ----------------
<S>                           <C>            <C>               <C>                  <C>
Jay Elliot,                   ---            ---               ---                  ---
Chairman, CEO                 ---            ---               ---                  ---

Gregory Duffell,              ---            ---               ---                  ---
Director,
International
President

Joshua Feller,                ---            ---               ---                  ---
President,
COO--Forward
Solutions, Inc.

David R. Wells,               ---        125,000               ---                  ---
VP Finance
Operations
</TABLE>

Option/SAR Grants in Fiscal Year 2004

The Company did not grant any stock options or stock appreciation rights
("SARs") during the fiscal year ended March 31, 2004.

Aggregated Option/SAR Exercises in Fiscal Year 2004 and Fiscal Year 2004
Options/SAR Values

There were no exercises of options for the fiscal year ended March 31, 2004 and
the Company did not adjust or amend the exercise price of stock options or SARs
previously awarded to any executive officer.

Employment Contracts


                                       48
<PAGE>

On May 16, 2002, the Company entered into an employment agreement with its
President and 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. The President
and Chief Executive Officer also received 700,000 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.

On April 1, 2003, the Company entered into an employment agreement for the
President and Chief Executive Officer of Forward Solutions, Inc. for a perpetual
period terminable upon 30 days notice by either party. 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. The President and Chief Executive Officer of Forward Solutions, Inc.
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.

On July 15, 2003, the Company entered into a consulting agreement with its
International President for a period of 3 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.

On January 1, 2004, the Company entered into an employment agreement with its
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. In addition, the Vice
President Finance Operations was due $17,500 for prior consulting services
during the period ending March 31, 2004. The Vice President Finance Operations
also received 125,000 options for the purchase of common stock, to be approved
by 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 Common Stock of the
Company as of March 31, 2004, by (a) each person known by the Company to own
beneficially more than 5% of the outstanding Common Stock; (b) each of the named
executive officers of the Company referred to above under Item 10, "Executive
Compensation"; (c) each director of the Company; and (d) 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, 2694 Bishop Drive, Suite
270, San Ramon, CA 94583.


                                       49
<PAGE>

<TABLE>
<CAPTION>
                                            Amount Beneficially Owned
Title of Class       Name and Address        and Nature of Ownership      Percentage of Class
--------------     --------------------     -------------------------     ----------
<S>                <C>                           <C>                      <C>
Common Stock            Jay Elliot               700,000--direct                 18.6%
Common Stock         Gregory Duffell             500,000--direct                 13.3%
Common Stock          Joshua Feller              100,000--direct                  2.7%
Common Stock         Robin Hutchison             25,000--direct           less than 1%
Common Stock           David Wells                  50,000 (1)            less than 1%
Common Stock         All officers and           1,450,000--direct                38.6%
                   directors as a group
</TABLE>

FOOTNOTES

(1) This does not include options expected to be granted by the Board of
Directors to buy 75,000 shares of Common Stock at a price to be determined (see
Item 7 "Financial Statements" under note 7, Options, of notes to the financial
statements).

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As of March 31, 2004, the Company was in discussion concerning a proposed
transaction with First Person Software. The proposed transaction consisted of
First Person merging with and into PowerHouse Acquisition, a newly created
wholly-owned subsidiary of the Company, with PowerHouse Acquisition remaining as
the surviving entity. Jay Elliot is a director of First Person and is the Chief
Executive Officer and the Chairman of the Board of the Company, which holds
approximately 46.43% of the fully diluted capital stock of First Person. In
addition, each of Christopher Neumann and David Brett Levine, directors and
executive officers of First Person, hold approximately 22.90% of the fully
diluted capital stock of First Person and, at the effective time of the
contemplated merger, each would become an employee of the Company and would
receive compensation and benefits from the Company. Subsequent to March 31,
2004, the merger with First Person was consummated (see Item 6, Management's
Discussion and Analysis or Plan of Operation, under the caption "Merger with
First Person Software, Inc." above).

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

Exhibits

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 shareholder representative, hereby
incorporated by reference from the Company's Current Report on Form 8-K filed on
July 6, 2004.

3.1  Company's Amended Articles of Incorporation


                                       50
<PAGE>

3.2  Company's Bylaws

9. Letter regarding the change in independent accountant, hereby incorporated by
reference from the Company's Current Report on Form 8-K filed on December 10,
2003.

11. 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.


Reports On Form 8-K

The following Form 8-K reports were filed during the last quarter of the fiscal
year ended March 31, 2004 and are hereby incorporated by this reference:

Form 8-K/A filed on January 28, 2004, with respect to Item 7(a) "Financial
Statements of Businesses Acquired" and Item 7(b) "Pro Forma Financial
Information"

Form 8-K filed on March 31, 2004, with respect to Item 5 "Other Events" and Item
7(c) "Exhibits"

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth fees for services Hein provided during fiscal
years 2004 and 2003:

                                              2004     2003
                                           -------     ----
                     Audit fees(1)         $79,332     $---
                     Audit related             ---      ---
                     fees(2)                  `         `
                     Tax fees(3)               ---      ---
                     All other fees(4)      $5,000      ---
                        Total              $84,332     $---

 (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 2004 and 2003 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.

(3) Represents fees for services and advice provided in connection with
preparation of the Company's federal and state tax returns.


                                       51
<PAGE>

(4) Represents fees in connection with the Company's purchase of First Person
Software, Inc.

The Company's Audit Committee has determined that the provision of non-audit
services by Hein 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 Securities Exchange Act of 1934.

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.


                                       52
<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: July 14, 2004       By: /s/ Jay Elliot
                              --------------------------------------------------
                              Jay Elliot
                              Chairman of the Board and Chief Executive Officer
                              (Principal Executive Officer)



Date: July 14, 2004       By: /s/ David R. Wells
                              --------------------------------------------------
                              David R. Wells
                              Vice President Finance Operations
                              (Principal Financial and Accounting Officer)


                                       53