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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) |  |                                                                                              
|o          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934.    
|          
|OR        
|          
|þ          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934.
|          
|           |  | For the transition period from April 1, 2005 to
    December 31, 2005                        

Commission File
No. 333-5278-NY


POWERHOUSE TECHNOLOGIES GROUP, INC.


(Name of small business issuer in its charter)


|                                                                                                       |  |                                         
|------------------------------------------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                                                               |  | 94-3334052                              
|(State or other jurisdiction of
    incorporation or organization)                                     |  | (I.R.S. Employer
    Identification No.)
|555 Twin Dolphin Drive, Suite 650
    Redwood City, California(Address of principal executive offices) |  | 94065(Zip Code)                         

Issuers telephone number:


(650) 232-2600


Securities registered pursuant to Section 12(b) of the
Act:


NONE


Securities registered pursuant to Section 12(g) of the
Act:


NONE


o þ


þ o


S-B 10-KSB 10-KSB. o


12b-2 o þ








o þ










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TABLE OF CONTENTS



|                                                        |                                                                                                                          |  |  |  |  |  |  | 
|------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I.                                                
|                                                        | ITEM 1. DESCRIPTION OF BUSINESS                                                                                         
|Risk Factors                                           
|                                                        | ITEM 2. DESCRIPTION OF PROPERTY                                                                                         
|                                                        | ITEM 3. LEGAL PROCEEDINGS                                                                                               
|                                                        | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                             
|PART II.                                               
|                                                        | ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES  
|                                                        | ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                                                       
|                                                        | ITEM 7. FINANCIAL STATEMENTS                                                                                            
|INDEX TO FINANCIAL STATEMENTS                          
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|                                                        | ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                            
|                                                        | ITEM 8A. CONTROLS AND PROCEDURES                                                                                        
|                                                        | ITEM 8B. OTHER INFORMATION                                                                                              
|PART III                                               
|                                                        | ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
|                                                        | ITEM 10. EXECUTIVE COMPENSATION                                                                                         
|                                                        | ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                 
|                                                        | ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                 
|                                                        | ITEM 13. EXHIBITS                                                                                                       
|                                                        | ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                         
|SIGNATURES                                             
|POWER OF ATTORNEY                                      
|LIST OF SUBSIDIARIES                                   
|CERTIFICATION                                          
|CERTIFICATION                                          
|CERTIFICATION                                          
|CERTIFICATION                                          



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PART I.


10-KSB 10-KSB. 10-KSB


10-KSB




® ® ® ® ® ®







|        |                        
|------- | -----------------------
|ITEM 1. | DESCRIPTION OF BUSINESS



Our Technology: The
Migo®


®


® ® e-mail,


® ® ® ® ® ®


2



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Agreement with M Systems Flash Disk Pioneers Ltd.


M-Systems


Sales Channels






| |    |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Partnership Agreements: 
     We have entered into an agreement to license our software for
    distribution by M-Systems. We expect to enter into additional
    software licensing contracts with other hardware manufacturers
    and distributors. We also anticipate selling software upgrades
    and service contracts to existing users of our products and
    users of other USB Flash drive products.
|
| | 2. | Web-based sales: 
     We are currently selling Migo software and bundled products
    directly to consumers through our website, www.migosoftware.com.                                                                                                                                                                                                                                                         
|
| | 3. | International sales: 
     We have entered into distribution and reseller agreements to
    sell our products in Japan and are seeking other resellers
    outside the United States.                                                                                                                                                                                                                           

Patents, Proprietary Technology and Other Intellectual
Property








3



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Governmental Regulation






Product Development




Employees




History


10-KSB,


4



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Risk Factors


10-KSB.




| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | We have a history of losses, and we expect to incur
    significant losses for an indefinite period of time.





| |                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to obtain additional capital when needed,
    we may not be able to achieve the objectives of our current
    business strategy, which could force us to delay, curtail or
    eliminate our product and service development programs, which
    would materially adversely affect our business.







| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Failure to achieve market acceptance of our products would
    materially adversely affect our business.





| |                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because of the importance of technology to our business,
    our inability to maintain our technological position in the
    mobile data and data storage industry could result in lower
    revenues and higher research and development expenditures, which
    could materially adversely affect our results of operations and
    our ability to achieve profitability.





| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

5



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| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.











| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As we rely on third parties to bundle our software for
    sale to end users, our business may suffer if our partners fail
    to deliver their products in a reliable, timely and
    cost-efficient manner.



6



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| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | Our common stock price is subject to significant
    volatility, which could result in losses for investors.





| |   |                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | shortfalls in revenues or cash flows from operations;                                                                                                                                                                                                                                 
|
| |  | failure to attain and maintain profitability;                                                                                                                                                                                                                                         
|
| |  | failure to maintain the qualification for the Common Stock to
    trade on the NASD
    Over-the-Counter
    Bulletin Board (OTC Bulletin Board);                                                                                                                                   
|
| |  | delays in development or roll-out of our products and
    services; and                                                                                                                                                                                                               
|
| |  | failure to maintain our competitive position, whether as a
    result of our failure to deliver new and innovative products in
    response to marketplace demands or new product introductions,
    acquisitions or technological innovations by one or more
    competitors of ours.









| |                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Legal and regulatory developments regarding product
    approval or imports and exports could increase our costs or
    adversely affect our competitive position, which could have
    adverse consequences for our business.



7



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As our proprietary intellectual property rights are
material to our success, misappropriation of those rights or
claims of infringement or legal actions related to intellectual
property could materially adversely impact our financial
condition and operations.












| |                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Since we may continue to have potential liability for
    violations of federal securities laws and Californias blue
    sky law even after the completion of the rescission offer, we
    could be exposed to the costs of litigation from such violations
    and an adverse legal outcome could result in damages that could
    materially adversely affect our cash position.



8



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| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Since we may seek to accelerate the growth of our business
    through acquisitions, the failure to achieve the desired results
    or the completion of an acquisition on unfavorable terms could
    have an adverse impact on us.








|        |                        
|------- | -----------------------
|ITEM 2. | DESCRIPTION OF PROPERTY



25-month







|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS





9



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






PART II.







|        |                                                                                                                   
|------- | ------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
    SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

Over-the




|               |  |      |      |  |     |   |      | 
|-------------- |  | ---- | ---- |  | --- | - | ---- | 
|2004           |  | High |      |  | Low |  
|               |  |      |      |  |     |  
|First Quarter  |  | $    | 4.00 |  |     | $ | 2.00 | 
|Second Quarter |  | $    | 5.80 |  |     | $ | 3.25 | 
|Third Quarter  |  | $    | 5.00 |  |     | $ | 3.00 | 
|Fourth Quarter |  | $    | 5.60 |  |     | $ | 3.00 | 

|               |  |      |      |  |     |   |      | 
|-------------- |  | ---- | ---- |  | --- | - | ---- | 
|2005           |  | High |      |  | Low |  
|               |  |      |      |  |     |  
|First Quarter  |  | $    | 3.20 |  |     | $ | 1.00 | 
|Second Quarter |  | $    | 2.45 |  |     | $ | 0.90 | 
|Third Quarter  |  | $    | 1.00 |  |     | $ | 0.47 | 
|Fourth Quarter |  | $    | 1.19 |  |     | $ | 0.57 | 





| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | shortfalls in revenues or cash flows from operations;                                             
|
| |  | failure to attain and maintain profitability;                                                     
|
| |  | failure to maintain the qualification for our Common Stock to
    trade on the OTC Bulletin Board;
|
| |  | delays in development or roll-out of our products and
    services; and                           

10



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| |   |                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 ours.



Common Stock Holders




Dividends






EQUITY COMPENSATION PLAN INFORMATION


|                                                           |  |                         |            |  |                      |                         |     |                         |  |  |           | 
|---------------------------------------------------------- |  | ----------------------- | ---------- |  | -------------------- | ----------------------- | --- | ----------------------- |  |  | --------- | 
|                                                           |  |                         |            |  |                      | Number of Securities    |    
|                                                           |  |                         |            |  |                      | Remaining Available for |    
|                                                           |  | Number of Securities to |            |  | Weighted-Average     |                         |     | Future Issuance Under   | 
|                                                           |  | be Issued Upon          |            |  | Exercise Price of    |                         |     | Equity Compensation     | 
|                                                           |  | Exercise of Outstanding |            |  | Outstanding Options, |                         |     | Plans (Excluding        | 
|                                                           |  | Options, Warrants, and  |            |  | Warrants, and        |                         |     | Securities Reflected in | 
|                                                           |  | Rights                  |            |  | Rights               |                         |     | Column (a))             | 
|                                                           |  | (a)                     |            |  | (b)                  |                         |     | (c)                     | 
|                                                           |  |                         |            |  |                      |                         |     |                         | 
|Equity compensation plans approved by security holders     |  |                         | 4,980,000  |  |                      | $                       | .33 |                         |  |  | 4,395,000 | 
|Equity compensation plans not approved by security holders |  |                         | 25,430,377 |  |                      | $                       | .40 |                         |  |  |          | 
|Total                                                      |  |                         | 30,410,377 |  |                      | $                       | .38 |                         |  |  | 4,395,000 | 








|        |                                                              
|------- | -------------------------------------------------------------
|ITEM 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF
    OPERATION

10-KSB. 10-KSB, 10-KSB


11



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®


® ® ® ® ® ®


Significant Events Since April 1, 2005




Control Personnel: Changes since April 1, 2005:




| |   |                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Kent Heyman, Alex Mashinsky and Greg Osborn were elected to the
    Board of Directors.                                                                                                                                                                                                    
|
| |  | As of January 9, 2006, Kent Heyman became Co-Chairman of
    the Board of Directors and Chief Executive Officer, Jay Elliot
    became Co-Chairman of the Board of Directors and Chief Strategic
    Officer.                                                                              
|
| |  | Alex Mashinsky became Vice Chairman of the Board, and Richard
    Liebman was appointed Chief Financial Officer.                                                                                                                                                                           
|
| |  | Greg Duffel, Manijeh Moghis and R.B. (Rob) Hutchinson resigned
    from the Board of Directors,                                                                                                                                                                                            
|
| |  | Manijeh Moghis was terminated from her employment as Chief
    Operating Officer, Joshua Feller resigned from his position as
    Senior Vice President, Sales, David Wells was removed as Chief
    Financial Officer, and Randy Hagin resigned his position as Vice
    President, Sales.



September 2005 Equity Private Placement




12



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December 2005 Equity Private Placement








13



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2004 Convertible Note/ Bridge Financing and Senior A Units
Private Placement




2003-2004




5-year


5-year


14



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Rescission Offer














15



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Acquisition of First Person






Equity Compensation Plans






S-8


Agreement with M-Systems






Critical Accounting Policies




16



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Revenue Recognition


Software Revenue
Recognition Revenue Recognition.




Inventories


first-in,


Impairment of Long-Lived Assets




Stock-Based Compensation


Share Based Payment


17



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Accounting for Stock-Based Compensation Accounting for Stock
Issued to Employees


Results of Operations




| |                                                                               
| | ------------------------------------------------------------------------------
| | Nine months ended December 31, 2005 and twelve months
    ended March 31, 2005







| |                                
| | -------------------------------
| | Liquidity and Capital Resources







| |                           
| | --------------------------
| | Recent and Expected Losses



18



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| |                                                            
| | -----------------------------------------------------------
| | Satisfaction of Current and Future Capital
    Requirements





| |                                                             
| | ------------------------------------------------------------
| | Events Subsequent to Fiscal Year ended December 31,
    2005



| |                                    
| | -----------------------------------
| | March 2006 Equity Private Placement







19



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|        |                     
|------- | --------------------
|ITEM 7. | FINANCIAL STATEMENTS




INDEX TO FINANCIAL STATEMENTS


|                                                                                                                                                  |  |      |     | 
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                                  |  | PAGE |    
|                                                                                                                                                  |  |      |    
|Report of Independent Registered Public Accounting Firm                                                                                           |  |      | F-2 | 
|Consolidated Balance Sheets  As of
    December 31, 2005 and March 31, 2005                                                                      |  |      | F-3 | 
|Consolidated Statements of Operations  For the
    Nine Months Ended December 31, 2005, and the Year Ended
    March 31, 2005                    |  |      | F-4 | 
|Consolidated Statements of Stockholders Equity
    (Deficit)  For the Nine Months Ended
    December 31, 2005 and the Year Ended March 31, 2005 |  |      | F-5 | 
|Consolidated Statements of Cash Flows  For the
    Nine Months Ended December 31, 2005 and the Year Ended
    March 31, 2005                     |  |      | F-6 | 
|Notes to the Consolidated Financial Statements                                                                                                    |  |      | F-7 | 

F-1



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


















F-2



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POWERHOUSE TECHNOLOGIES GROUP, INC.


CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                                            |                                                                                   |                                      |             |           |                |   |             |           |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------ | ----------- | --------- | -------------- | - | ----------- | --------- | --------- | 
|                                                                                                                                                                                            |                                                                                   | As of                                |             |           | As of          |  
|                                                                                                                                                                                            |                                                                                   | December 31, 2005                    |             |           | March 31, 2005 |  
|                                                                                                                                                                                            |                                                                                   |                                      |             |           |                |  
|ASSETS                                                                                                                                                                                     
|Current Assets:                                                                                                                                                                             |                                                                                   |                                      |             |           |                |   |             |          
|                                                                                                                                                                                            | Cash and cash equivalents                                                         |                                      | $           | 2,510,704 |                |   | $           | 423,729   |          
|                                                                                                                                                                                            |                                                                                   | Short-term investments               |             |           | 2,875,000      |   |             |           |          | 
|                                                                                                                                                                                            | Accounts receivable                                                               |                                      |             | 25,368    |                |   |             | 34,411    |          
|                                                                                                                                                                                            | Inventory                                                                         |                                      |             | 15,755    |                |   |             | 86,063    |          
|                                                                                                                                                                                            | Other current assets                                                              |                                      |             | 82,983    |                |   |             | 41,300    |          
|                                                                                                                                                                                            |                                                                                   |                                      |             |           |                |  
|Total current assets                                                                                                                                                                        |                                                                                   |                                      | 5,509,810   |           |                |   | 585,503     |          
|                                                                                                                                                                                            |                                                                                   |                                      |             |           |                |  
|PROPERTY AND EQUIPMENT, net of accumulated depreciation of
    $7,924 and $3,485                                                                                                            |                                                                                   |                                      | 7,923       |           |                |   | 12,362      |          
|OTHER ASSETS:                                                                                                                                                                               |                                                                                   |                                      |             |           |                |   |             |          
|                                                                                                                                                                                            | Software technology, net of accumulated amortization of $857,236
    and $433,751 |                                      |             | 1,965,101 |                |   |             | 2,388,586 |          
|                                                                                                                                                                                            | Other assets                                                                      |                                      |             | 39,475    |                |   |             | 39,975    |          
|                                                                                                                                                                                            |                                                                                   |                                      |             |           |                |  
|TOTAL ASSETS                                                                                                                                                                                |                                                                                   | $                                    | 7,522,309   |           |                | $ | 3,026,426   |          
|                                                                                                                                                                                            |                                                                                   |                                      |             |           |                |  
|                                                                                                                                                                                           
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                             
|Current Liabilities:                                                                                                                                                                        |                                                                                   |                                      |             |           |                |   |             |          
|                                                                                                                                                                                            | Accounts payable                                                                  |                                      | $           | 1,104,157 |                |   | $           | 1,177,767 |          
|                                                                                                                                                                                            | Accrued compensation                                                              |                                      |             | 78,084    |                |   |             | 53,446    |          
|                                                                                                                                                                                            | Accrued liabilities                                                               |                                      |             | 1,271,640 |                |   |             | 665,199   |          
|                                                                                                                                                                                            | Dividends payable                                                                 |                                      |             |          |                |   |             | 261,570   |          
|                                                                                                                                                                                            |                                                                                   |                                      |             |           |                |  
|                                                                                                                                                                                            |                                                                                   | Total current liabilities            |             |           | 2,453,881      |   |             |           | 2,157,982 | 
|                                                                                                                                                                                            |                                                                                   |                                      |             |           |                |  
|Non-current liabilities:                                                                                                                                                                    |                                                                                   |                                      |             |           |                |   |             |          
|                                                                                                                                                                                            | Warrant liability                                                                 |                                      |             | 3,882,672 |                |   |             |          |          
|                                                                                                                                                                                            |                                                                                   |                                      |             |           |                |  
|                                                                                                                                                                                            |                                                                                   | Total Liabilities                    |             |           | 6,336,553      |   |             |           | 2,157,982 | 
|                                                                                                                                                                                            |                                                                                   |                                      |             |           |                |  
|Commitments and contingencies (Notes 8 and 11)                                                                                                                                              |                                                                                   |                                      |             |           |                |   |             |          
|Temporary Equity,Common Stock, 27,879,700 shares
    issued and outstanding                                                                                                                 |                                                                                   |                                      | 5,908,036   |           |                |   |            |          
|                                                                                                                                                                                            |                                                                                   |                                      |             |           |                |  
|Stockholders Equity (Deficit):                                                                                                                                                             |                                                                                   |                                      |             |           |                |   |             |          
|Senior A Preferred stock, $.0001 par value;
    10,000,000 shares authorized, 0 and 3,723,832 shares
    issued and outstanding;                                                            |                                                                                   |                                      |            |           |                |   | 372         |          
|Junior A Preferred stock, $.0001 par value;
    5,000,000 shares           authorized,
    790,250 and 795,250 shares issued and outstanding;
    preference upon liquidation of $2,600,000 |                                                                                   |                                      | 79          |           |                |   | 80          |          
|Common stock, $.0001 par value; 100,000,000 shares
    authorized; 26,598,180 and 3,864,364 and shares issued and
    outstanding                                                           |                                                                                   |                                      | 2,660       |           |                |   | 387         |          
|Additional paid in capital in excess of par value                                                                                                                                           |                                                                                   |                                      | 29,344,416  |           |                |   | 28,613,909  |          
|Deferred Compensation Expense                                                                                                                                                               |                                                                                   |                                      | (462,694    | )         |                |   |            |          
|Treasury Stock                                                                                                                                                                              |                                                                                   |                                      | (386,400    | )         |                |   | (183,600    | )        
|Accumulated Deficit                                                                                                                                                                         |                                                                                   |                                      | (33,220,341 | )         |                |   | (27,562,704 | )        
|                                                                                                                                                                                            |                                                                                   |                                      |             |           |                |  
|                                                                                                                                                                                            |                                                                                   | Total stockholders equity (deficit) |             |           | (4,722,280     | ) |             |           | 868,444   | 
|                                                                                                                                                                                            |                                                                                   |                                      |             |           |                |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                        |                                                                                   | $                                    | 7,522,309   |           |                | $ | 3,026,426   |          
|                                                                                                                                                                                            |                                                                                   |                                      |             |           |                |  



F-3



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POWERHOUSE TECHNOLOGIES GROUP, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                             |                               |                              |            |           |                |   |             |           |           | 
|---------------------------------------------------------------------------- | ----------------------------- | ---------------------------- | ---------- | --------- | -------------- | - | ----------- | --------- | --------- | 
|                                                                             |                               | Nine Months                  |            |           |               
|                                                                             |                               | Ended                        |            |           | Year Ended     |  
|                                                                             |                               | December 31, 2005            |            |           | March 31, 2005 |  
|                                                                             |                               |                              |            |           |                |  
|Revenues                                                                     |                               | $                            | 194,199    |           |                | $ | 308,189     |          
|Cost of Sales                                                                |                               |                              | 555,059    |           |                |   | 702,163     |          
|                                                                             |                               |                              |            |           |                |  
|Gross Loss                                                                   |                               |                              | (360,860   | )         |                |   | (393,974    | )        
|                                                                             |                               |                              |            |           |                |  
|Operating Expenses                                                           |                               |                              |            |           |                |   |             |          
|                                                                             | Research and development      |                              |            | 590,291   |                |   |             | 425,679   |          
|                                                                             | Sales and marketing           |                              |            | 771,175   |                |   |             | 1,975,132 |          
|                                                                             | General and administrative    |                              |            | 3,192,783 |                |   |             | 5,496,035 |          
|                                                                             |                               |                              |            |           |                |  
|                                                                             |                               | Total operating expenses     |            |           | 4,554,249      |   |             |           | 7,896,846 | 
|                                                                             |                               |                              |            |           |                |  
|Non-operating Expenses (Income)                                              |                               |                              |            |           |                |   |             |          
|                                                                             | Equity in loss of investee    |                              |            |          |                |   |             | 24,365    |          
|                                                                             | Interest                      |                              |            | 296,251   |                |   |             | 2,145,302 |          
|                                                                             | Decrease in warrant liability |                              |            | (151,164  | )              |   |             |          |          
|                                                                             | Other                         |                              |            | 227,937   |                |   |             | (317,970  | )        
|                                                                             |                               |                              |            |           |                |  
|                                                                             |                               | Total non-operating expenses |            |           | 373,024        |   |             |           | 1,851,697 | 
|                                                                             |                               |                              |            |           |                |  
|Loss Before Income Taxes                                                     |                               |                              | (5,288,133 | )         |                |   | (10,142,517 | )        
|Provision for Income Taxes                                                   |                               |                              | 800        |           |                |   | 2,658       |          
|                                                                             |                               |                              |            |           |                |  
|Net Loss                                                                     |                               |                              | (5,288,933 | )         |                |   | (10,145,175 | )        
|                                                                             |                               |                              |            |           |                |  
|Deemed and Regular Preferred Stock Dividend                                  |                               |                              | (368,704   | )         |                |   | (8,691,275  | )        
|                                                                             |                               |                              |            |           |                |  
|Net Loss Attributable to Holders of common shares                            |                               | $                            | (5,657,637 | )         |                | $ | (18,836,450 | )        
|                                                                             |                               |                              |            |           |                |  
|Basic and Diluted net loss attributable to common stockholders
    per share |                               | $                            | (0.31      | )         |                | $ | (5.70       | )        
|                                                                             |                               |                              |            |           |                |  
|Weighted Average Shares Outstanding Basic and Diluted                        |                               |                              | 18,201,612 |           |                |   | 3,305,360   |          
|                                                                             |                               |                              |            |           |                |  



F-4



---



##### Table of Contents





POWERHOUSE TECHNOLOGIES GROUP, INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)


FOR THE NINE MONTHS ENDED DECEMBER 31, 2005 AND


THE YEAR ENDED MARCH 31, 2005


|                          |                                                                                                                        |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            |            |   |   |          |          |   |   |             |             |   |   |            |             |  
|------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ------------ | ---------- | ---------- | ------------------ | - | ----- | ------------------ | - |  | -------- | --------- | ---------- | ------- | -- | --- | -------- |  | --------- | ----------- | - |  | ------- | ---- | - | ------------ | -------- | -------- | ------- | - | ---------- | ---------- | - | - | -------- | -------- | - | - | ----------- | ----------- | - | - | ---------- | ----------- | -
|                          |                                                                                                                        | Common Stock |            |            | Junior A Preferred |   |       | Senior A Preferred |   |  |          |           | Additional |         |    |     |          |  |           |            
|                          |                                                                                                                        |              |            |            |                    |   |       |                    |   |  | Treasury |           |            | Paid-In |    |     | Deferred |  |           | Accumulated |   |  |        
|                          |                                                                                                                        | Shares       |            |            | Amounts            |   |       | Shares             |   |  | Amounts  |           |            | Shares  |    |     | Amounts  |  |           | Stock       |   |  | Capital |      |   | Compensation |          |          | Deficit |   |            | Total      |  
|                          |                                                                                                                        |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            |            |  
|Balance,April 1, 2004     |                                                                                                                        |              | 3,756,516  |            |                    | $ | 376   |                    |   |  |         |           |            |         |   |     |          |  |          |             |   |  |        |      |   |              |         |          |         | $ | 6,843,990  |            |   | $ | (139,650 | )        |   | $ | (8,726,253  | )           |   | $ | (2,021,537 | )          
|                          | Issuance of Senior A Preferred Stock upon conversion of
    convertible notes                                          |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           | 1,154,248   |   |  | $       | 115  |   |              |          |          |         |   |            | 2,648,885  |   |   |          |          |   |   |             |            |   |   |            | 2,649,000   |  
|                          | Issuance of Senior A Preferred Stock for cash                                                                          |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           | 2,572,435   |   |  |         | 257  |   |              |          |          |         |   |            | 7,871,396  |   |   |          |          |   |   |             |             |   |   |            | 7,871,653   |  
|                          | Payment of equity financing costs                                                                                      |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | (1,355,438 | ) |   |          |          |   |   |             |             |   |   |            | (1,355,438  | )
|                          | Beneficial conversion feature of Senior A Preferred Stock                                                              |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | 5,576,182  |   |   |          |          |   |   |             | (5,576,182  | ) |   |            |            |  
|                          | Beneficial conversion and interest costs associated with Bridge
    and Convertible Debt                               |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | 1,717,726  |   |   |          |          |   |   |             |             |   |   |            | 1,717,726   |  
|                          | Issuance of Common Stock for services                                                                                  |              |            | 313,907    |                    |   |       | 32                 |   |  |          |          |            |         |    |    |          |  |           |            |   |  |         |     |   |              |          |         |         |   |            | 1,250,888  |   |   |          |         |   |   |             |            |   |   |            | 1,250,920   |  
|                          | Amortization of deferred stock-based compensation                                                                      |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            |            |   |   |          | 139,650  |   |   |             |             |   |   |            | 139,650     |  
|                          | Issuance of Common Stock related to the purchase of First Person
    Software, Inc.                                    |              |            | 272,420    |                    |   |       | 28                 |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | 1,196,107  |   |   |          |          |   |   |             |            |   |   |            | 1,196,135   |  
|                          | Repurchase of Common Stock related to First Person Software,
    Inc. acquisition                                      |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              | $        | (183,600 | )       |   |            |            |   |   |          |          |   |   |             |            |   |   |            | (183,600    | )
|                          | Repurchase of Common Stock related to Rescission Offer                                                                 |              |            | (43,000    | )                  |   |       | (4                 | ) |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | (214,996   | ) |   |          |          |   |   |             |            |   |   |            | (215,000    | )
|                          | Exchange of Common shares of Junior A Preferred Shares
    related to Rescission Offer                                 |              |            | (1,010,250 | )                  |   |       | (101               | ) |  |          | 1,010,250 |            |         | $  | 101 |          |  |           |            |   |  |         |     |   |              |          |         |         |   |            |           |   |   |          |         |   |   |             |            |   |   |            |            |  
|                          | Beneficial conversion feature of Junior A Preferred Stock                                                              |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | 880,354    |   |   |          |          |   |   |             | (880,354    | ) |   |            |            |  
|                          | Amortization of discount related to Warrants issued with
    Junior A Preferred Stock                                  |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | 880,354    |   |   |          |          |   |   |             | (880,354    | ) |   |            |            |  
|                          | Dividends on Senior A Preferred Stock ($261,570 outstanding at
    March 31, 2005)                                     |              |            | 10,001     |                    |   |       | 1                  |   |  |          |           |            |         |    |     |          |  |           | 111,726     |   |  |         | 11   |   |              |          |          |         |   |            | 372,472    |   |   |          |          |   |   |             | (634,054    | ) |   |            | (261,570    | )
|                          | Dividends on Senior A Preferred Stock for penalty related to
    non-effective status of Registration Statement (SB-2) |              |            | 21,033     |                    |   |       | 2                  |   |  |          |           |            |         |    |     |          |  |           | 214,160     |   |  |         | 21   |   |              |          |          |         |   |            | 720,309    |   |   |          |          |   |   |             | (720,332    | ) |   |            |            |  
|                          | Conversion of Senior A Preferred and Junior A Preferred
    Stock to Common Stock                                      |              |            | 543,737    |                    |   |       | 53                 |   |  |          | (215,000  | )          |         |    | (21 | )        |  |           | (328,737    | ) |  |         | (32  | ) |              |          |         |         |   |            |           |   |   |          |         |   |   |             |            |   |   |            |            |  
|                          | Stock-based compensation                                                                                               |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | 225,680    |   |   |          |          |   |   |             |            |   |   |            | 225,680     |  
|                          | Net loss                                                                                                               |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            |            |   |   |          |          |   |   |             | (10,145,175 | ) |   |            | (10,145,175 | )
|                          |                                                                                                                        |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            |            |  
|Balance,March 31, 2005    |                                                                                                                        |              | 3,864,364  |            |                    |   | 387   |                    |   |  | 795,250  |           |            |         | 80 |     |          |  | 3,723,832 |             |   |  | 372     |      |   |              | (183,600 | )        |         |   | 28,613,909 |            |   |   |         |          |   |   | (27,562,704 | )           |   |   | 868,444    |            
|                          | Issuance of Common Stock for services                                                                                  |              |            | 194,858    |                    |   |       | 19                 |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | 166,729    |   |   |          |          |   |   |             |             |   |   |            | 166,748     |  
|                          | Issuance of warrants for services                                                                                      |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | 245,699    |   |   |          |          |   |   |             |             |   |   |            | 245,699     |  
|                          | Dividends on Senior A Preferred Stock                                                                                  |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           | 194,895     |   |  |         | 20   |   |              |          |          |         |   |            | 630,254    |   |   |          |          |   |   |             | (368,704    | ) |   |            | 261,570     |  
|                          | Conversion of Senior A Preferred and Junior A Preferred
    Stock to Common Stock                                      |              |            | 20,738,958 |                    |   |       | 2,074              |   |  |          | (5,000    | )          |         |    | (1  | )        |  |           | (3,918,727  | ) |  |         | (392 | ) |              |          |          |         |   |            | (1,681     | ) |   |          |          |   |   |             |             |   |   |            |            |  
|                          | Payment of equity financing costs                                                                                      |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | (2,176,749 | ) |   |          |          |   |   |             |             |   |   |            | (2,176,749  | )
|                          | Beneficial conversion and interest costs associated with Bridge
    and Convertible Debt                               |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | 294,444    |   |   |          |          |   |   |             |             |   |   |            | 294,444     |  
|                          | Stock options exercised                                                                                                |              |            | 1,020,000  |                    |   |       | 102                |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | 176,298    |   |   |          |          |   |   |             |             |   |   |            | 176,400     |  
|                          | Repurchase of Common Stock                                                                                             |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          | (202,800 | )       |   |            |            |   |   |          |          |   |   |             |             |   |   |            | (202,800    | )
|                          | Restricted Common Stock issued                                                                                         |              |            | 780,000    |                    |   |       | 78                 |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | 584,922    |   |   |          | (585,000 | ) |   |             |             |   |   |            |            |  
|                          | Amortization of stock-based compensation                                                                               |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            |            |   |   |          | 122,306  |   |   |             |             |   |   |            | 122,306     |  
|                          | Stock-based compensation                                                                                               |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            | 810,591    |   |   |          |          |   |   |             |             |   |   |            | 810,591     |  
|                          | Net loss                                                                                                               |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            |            |   |   |          |          |   |   |             | (5,288,933  | ) |   |            | (5,288,933  | )
|                          |                                                                                                                        |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            |            |  
|Balance,December 31, 2005 |                                                                                                                        |              | 26,598,180 |            |                    | $ | 2,660 |                    |   |  | 790,250  |           |            | $       | 79 |     |          |  |          |             |   |  |        |      |   | $            | (386,400 | )        |         | $ | 29,344,416 |            |   | $ | (462,694 | )        |   | $ | (33,220,341 | )           |   | $ | (4,722,280 | )          
|                          |                                                                                                                        |              |            |            |                    |   |       |                    |   |  |          |           |            |         |    |     |          |  |           |             |   |  |         |      |   |              |          |          |         |   |            |            |  



F-5



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##### Table of Contents



POWERHOUSE TECHNOLOGIES GROUP, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


Nine Months Ended December 31, 2005 and Year Ended
March 31, 2005


|                                                     |                                                                                                |                                                                                          |                                           |            |                |            |          |             |           |            |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ----------------------------------------- | ---------- | -------------- | ---------- | -------- | ----------- | --------- | ---------- | -
|                                                     |                                                                                                | Nine Months                                                                              |                                           |            | Year           |           
|                                                     |                                                                                                | Ended                                                                                    |                                           |            | Ended          |           
|                                                     |                                                                                                | December 31, 2005                                                                        |                                           |            | March 31, 2005 |           
|                                                     |                                                                                                |                                                                                          |                                           |            |                |           
|Cash Flows from Operating Activities:                |                                                                                                |                                                                                          |                                           |            |                |            |          |            
|                                                     | Net loss                                                                                       |                                                                                          | $                                         | (5,288,933 | )              |            | $        | (10,145,175 | )        
|                                                     | Adjustments to reconcile net loss to net cash used in operating
    activities:                |                                                                                          |                                           |            |                |            |          |             |          
|                                                     |                                                                                                | Common stock and options issued for services                                             |                                           |            | 412,447        |            |          |             | 1,250,920 |           
|                                                     |                                                                                                | Inventory write-downs                                                                    |                                           |            | 12,183         |            |          |             | 70,914    |           
|                                                     |                                                                                                | Equity in loss of investee                                                               |                                           |            |               |            |          |             | 24,365    |           
|                                                     |                                                                                                | Depreciation and amortization                                                            |                                           |            | 427,924        |            |          |             | 430,473   |           
|                                                     |                                                                                                | Amortization of Deferred compensation                                                    |                                           |            | 122,306        |            |          |             |          |           
|                                                     |                                                                                                | Interest expense relating to amortization of debt issuance costs                         |                                           |            |               |            |          |             | 201,242   |           
|                                                     |                                                                                                | Interest expense relating to amortization of debt discount and
    beneficial conversion |                                           |            | 294,444        |            |          |             | 1,889,768 |           
|                                                     |                                                                                                | Remeasurement of warrants to fair value                                                  |                                           |            | (151,164       | )          |          |             |          |           
|                                                     |                                                                                                | Stock based compensation                                                                 |                                           |            | 810,591        |            |          |             | 225,680   |           
|                                                     | Changes in operating assets and liabilities:                                                   |                                                                                          |                                           |            |                |            |          |             |          
|                                                     |                                                                                                | Accounts receivable                                                                      |                                           |            | 9,043          |            |          |             | (11,473   | )         
|                                                     |                                                                                                | Inventory                                                                                |                                           |            | 58,126         |            |          |             | (140,889  | )         
|                                                     |                                                                                                | Other current assets                                                                     |                                           |            | (41,683        | )          |          |             | (21,300   | )         
|                                                     |                                                                                                | Other assets                                                                             |                                           |            | 500            |            |          |             | (37,926   | )         
|                                                     |                                                                                                | Accounts payable                                                                         |                                           |            | (73,610        | )          |          |             | 247,704   |           
|                                                     |                                                                                                | Accrued compensation                                                                     |                                           |            | 24,638         |            |          |             | (278,637  | )         
|                                                     |                                                                                                | Accrued liabilities                                                                      |                                           |            | 184,471        |            |          |             | 29,225    |           
|                                                     |                                                                                                | Other non-current liabilities                                                            |                                           |            |               |            |          |             | (21,251   | )         
|                                                     |                                                                                                |                                                                                          |                                           |            |                |           
|                                                     |                                                                                                |                                                                                          | Net cash used in operating activities     |            |                | (3,198,717 | )        |             |           | (6,286,360 | )
|                                                     |                                                                                                |                                                                                          |                                           |            |                |           
|Cash Flows from Investing Activities:                |                                                                                                |                                                                                          |                                           |            |                |            |          |            
|                                                     | Purchases of available-for-sale investments                                                    |                                                                                          |                                           | (3,725,640 | )              |            |          |            |          
|                                                     | Proceeds from sale of available-for-sale investments                                           |                                                                                          |                                           | 850,640    |                |            |          |            |          
|                                                     | Acquisition of First Person Software                                                           |                                                                                          |                                           |           |                |            |          | (1,276,937  | )        
|                                                     | Purchase of equipment                                                                          |                                                                                          |                                           |           |                |            |          | (15,847     | )        
|                                                     |                                                                                                |                                                                                          |                                           |            |                |           
|                                                     |                                                                                                |                                                                                          | Net cash used in investing activities     |            |                | (2,875,000 | )        |             |           | (1,292,784 | )
|                                                     |                                                                                                |                                                                                          |                                           |            |                |           
|Cash Flows from Financing Activities:                |                                                                                                |                                                                                          |                                           |            |                |            |          |            
|                                                     | Payment of finders fee                                                                        |                                                                                          |                                           |           |                |            |          | (60,825     | )        
|                                                     | Payment of debt issuance costs                                                                 |                                                                                          |                                           |           |                |            |          | (1,355,438  | )        
|                                                     | Proceeds from convertible notes                                                                |                                                                                          |                                           | 1,000,000  |                |            |          | 955,000     |          
|                                                     | Repayment of convertible notes                                                                 |                                                                                          |                                           | (116,667   | )              |            |          |            |          
|                                                     | Payments upon rescission of common stock                                                       |                                                                                          |                                           | (26,400    | )              |            |          | (215,000    | )        
|                                                     | Payment of equity financing costs                                                              |                                                                                          |                                           | (408,241   | )              |            |          |            |          
|                                                     | Proceeds from sale of common stock                                                             |                                                                                          |                                           | 7,712,000  |                |            |          |            |          
|                                                     | Proceeds from sale of preferred stock                                                          |                                                                                          |                                           |           |                |            |          | 7,871,652   |          
|                                                     |                                                                                                |                                                                                          |                                           |            |                |           
|                                                     |                                                                                                |                                                                                          | Net cash provided by financing activities |            |                | 8,160,692  |          |             |           | 7,195,389  |  
|                                                     |                                                                                                |                                                                                          |                                           |            |                |           
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                                |                                                                                          | 2,086,975                                 |            |                |            | (383,755 | )          
|CASH AND CASH EQUIVALENTS, Beginning of period       |                                                                                                |                                                                                          | 423,729                                   |            |                |            | 807,484  |            
|                                                     |                                                                                                |                                                                                          |                                           |            |                |           
|CASH AND CASH EQUIVALENTS, End of period             |                                                                                                | $                                                                                        | 2,510,704                                 |            |                | $          | 423,729  |            
|                                                     |                                                                                                |                                                                                          |                                           |            |                |           
|Non-cash investing and financing activity:           |                                                                                                |                                                                                          |                                           |            |                |            |          |            
|                                                     | Issuance of shares for dividends                                                               |                                                                                          | $                                         | 630,254    |                |            | $        | 1,092,816   |          
|                                                     | Issuance of Common stock in connection with the conversion of
    debt                         |                                                                                          |                                           | 883,333    |                |            |          |            |          
|                                                     | Issuance of common stock in connection with the acquisition of
    First Person Software, Inc. |                                                                                          |                                           |           |                |            |          | 1,196,135   |          
|                                                     | Issuance of senior A preferred stock in connection with
    conversion of debt                 |                                                                                          |                                           |           |                |            |          | 2,649,000   |          
|Supplemental Disclosure of cash paid for :           |                                                                                                |                                                                                          |                                           |            |                |            |          |            
|                                                     | Interest                                                                                       |                                                                                          |                                           |           |                |            |          |            |          
|                                                     | Income Taxes                                                                                   |                                                                                          |                                           | 800        |                |            |          | 2,658       |          



F-6



---



##### Table of Contents



POWERHOUSE TECHNOLOGIES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                                          
|-- | -----------------------------------------
|1. | Organization and
    Nature of Operations

1-for-122






www.migosoftware.com




|                                                                             |                               |                                |            |             |           |   |             |           |           | 
|---------------------------------------------------------------------------- | ----------------------------- | ------------------------------ | ---------- | ----------- | --------- | - | ----------- | --------- | --------- | 
|                                                                             |                               | Nine Months Ended December 31, |           
|                                                                             |                               |                                |           
|                                                                             |                               | 2005                           |            |             | 2004      |  
|                                                                             |                               |                                |            |             |           |  
|                                                                             |                               |                                |            | (Unaudited) |          
|Revenues                                                                     |                               | $                              | 194,199    |             |           | $ | 234,643     |          
|Cost of Sales                                                                |                               |                                | 555,059    |             |           |   | 162,169     |          
|                                                                             |                               |                                |            |             |           |  
|Gross Profit (Loss)                                                          |                               |                                | (360,860   | )           |           |   | 72,474      |          
|                                                                             |                               |                                |            |             |           |  
|Operating Expenses                                                           |                               |                                |            |             |           |   |             |          
|                                                                             | Research and development      |                                |            | 590,291     |           |   |             | 254,621   |          
|                                                                             | Sales and marketing           |                                |            | 771,175     |           |   |             | 1,655,845 |          
|                                                                             | General and administrative    |                                |            | 3,192,783   |           |   |             | 4,244,712 |          
|                                                                             |                               |                                |            |             |           |  
|                                                                             |                               | Total operating expenses       |            |             | 4,554,249 |   |             |           | 6,155,178 | 
|                                                                             |                               |                                |            |             |           |  
|Non-operating Expenses                                                       |                               |                                |            |             |           |   |             |          
|                                                                             | Equity in loss of investee    |                                |            |            |           |   |             | 24,365    |          
|                                                                             | Interest                      |                                |            | 296,251     |           |   |             | 2,146,966 |          
|                                                                             | Decrease in warrant liability |                                |            | (151,164    | )         |   |             |          |          
|                                                                             | Other (income) expense        |                                |            | 227,937     |           |   |             | (35,734   | )        
|                                                                             |                               |                                |            |             |           |  
|                                                                             |                               | Total non-operating expenses   |            |             | 373,024   |   |             |           | 2,135,597 | 
|                                                                             |                               |                                |            |             |           |  
|Loss Before Income Taxes                                                     |                               |                                | (5,288,133 | )           |           |   | (8,218,301  | )        
|Provision for Income Taxes                                                   |                               |                                | 800        |             |           |   | 800         |          
|                                                                             |                               |                                |            |             |           |  
|Net Loss                                                                     |                               |                                | (5,288,933 | )           |           |   | (8,219,101  | )        
|                                                                             |                               |                                |            |             |           |  
|Deemed and Regular Preferred Stock Dividend                                  |                               |                                | (368,704   | )           |           |   | (8,491,687  | )        
|                                                                             |                               |                                |            |             |           |  
|Net Loss Attributable to Holders of common shares                            |                               | $                              | (5,657,637 | )           |           | $ | (16,710,788 | )        
|                                                                             |                               |                                |            |             |           |  
|Basic and Diluted net loss attributable to Common stockholders
    per share |                               | $                              | (0.31      | )           |           | $ | (5.35       | )        
|Weighted Average Shares Outstanding Basic and Diluted                        |                               |                                | 18,201,612 |             |           |   | 3,124,716   |          

F-7



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                               
|-- | ----------------------------------------------
|2. | Summary of
    Significant Accounting Policies

Basis of Presentation




Principles of Consolidation


Use of Estimates


Cash, Cash Equivalents


Accounts Receivable


Inventory first-in,




F-8



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Property and Equipment


Software Technology Assets


Impairment of Long-Lived Assets


Revenue Recognition Software Revenue
Recognition Revenue Recognition.






Basic and Diluted Loss Per Share


F-9



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Comprehensive Loss


Stock-Based Compensation Share Based
Payment Accounting for Stock-Based Compensation Accounting for Stock
Issued to Employees


Advertising


Research and Development


Fair Value of Financial Instruments Disclosures about Fair Value of
Financial Instruments


Concentrations of Credit Risk




F-10



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Financial Instruments


Short-term Investments Accounting for Certain Investments in Debt and Equity
Securities,


Investment in Affiliated Companies


Business Combinations


Income Taxes Accounting for Income Taxes


Recently Issued Accounting
Pronouncements Exchanges of Non-monetary
Assets. Accounting for Non-monetary
Transactions


The Effect of
Contingently Convertible Instruments on Diluted Earnings per
Share. 04-8


Accounting Changes and Error Corrections


F-11



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Accounting for Certain Hybrid Financial Instruments Accounting for Derivative
Instruments and Hedging Activities Accounting or the Impairment or
Disposal of Long-Lived Assets.




|   |                                               
|-- | ----------------------------------------------
|3. | Acquisition of First
    Person Software, Inc.











|                                                 |  |   |           |  
|------------------------------------------------ |  | - | --------- | -
|Cash                                             |  | $ | 403       |  
|Stock of the Company (to become treasury shares) |  |   | 183,600   |  
|Software technology (Note 4)                     |  |   | 2,327,502 |  
|Accounts payable                                 |  |   | (56,054   | )
|                                                 |  |   |          
|                                                 |  | $ | 2,455,451 |  
|                                                 |  |   |          

F-12



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


4.     Intangible
Assets




|                          |  |                   |           |   |                |   |           |  
|------------------------- |  | ----------------- | --------- | - | -------------- | - | --------- | -
|                          |  | December 31, 2005 |           |   | March 31, 2005 |  
|                          |  |                   |           |   |                |  
|Software technology asset |  | $                 | 2,822,337 |   |                | $ | 2,822,337 |  
|Accumulated amortization  |  |                   | (857,236  | ) |                |   | (433,751  | )
|                          |  |                   |           |   |                |  
|                          |  | $                 | 1,965,101 |   |                | $ | 2,388,586 |  
|                          |  |                   |           |   |                |  





|                                |  |   |           | 
|------------------------------- |  | - | --------- | 
|For the Year Ended December 31, |  |  
|                                |  |  
|2006                            |  | $ | 564,469   | 
|2007                            |  |   | 564,469   | 
|2008                            |  |   | 564,469   | 
|2009                            |  |   | 271,694   | 
|                                |  |   |          
|                                |  | $ | 1,965,101 | 
|                                |  |   |          



|   |     
|-- | ----
|5. | Debt

Bridge Loan 5-year 12-month 00-27,


5-year


F-13



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


12-month 00-27,
















F-14



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


6.     Accrued
Liabilities




|                                   |  |                   |           |  |                |   |         | 
|---------------------------------- |  | ----------------- | --------- |  | -------------- | - | ------- | 
|                                   |  | December 31, 2005 |           |  | March 31, 2005 |  
|                                   |  |                   |           |  |                |  
|Settlements payable                |  | $                 | 345,000   |  |                | $ | 484,386 | 
|Fair Value of Options to be issued |  |                   | 246,971   |  |                |   | 95,284  | 
|Accrued operating expenses         |  |                   | 679,669   |  |                |   | 85,529  | 
|                                   |  |                   |           |  |                |  
|                                   |  | $                 | 1,271,640 |  |                | $ | 665,199 | 
|                                   |  |                   |           |  |                |  

7.     Income
Taxes






|                                                            |  |             |       |    |          |  |       |   
|----------------------------------------------------------- |  | ----------- | ----- | -- | -------- |  | ----- | --
|                                                            |  | December 31 |       |    | March 31 | 
|                                                            |  |             |       |    |          | 
|Statutory U.S. federal rate                                 |  |             | 34.0  | %  |          |  | 34.0  | % 
|State income taxes, net of federal effect                   |  |             | 5.2   | %  |          |  | 4.5   | % 
|Interest related to debt discount and beneficial conversion |  |             | (1.9  | )% |          |  | (6.4  | )%
|Decrease in warrant liability                               |  |             | 1.0   | %  |          |  |       |   
|Stock option expense                                        |  |             | (3.0  | )% |          |  | (0.8  | )%
|Other                                                       |  |             | (0.1  | )% |          |  | (1.0  | )%
|Valuation allowance                                         |  |             | (35.2 | )% |          |  | (30.3 | )%
|                                                            |  |             |       |    |          | 
|Effective Tax Rate                                          |  |             |      | %  |          |  |      | % 
|                                                            |  |             |       |    |          | 



|                                  |  |             |            |   |          |   |            |  
|--------------------------------- |  | ----------- | ---------- | - | -------- | - | ---------- | -
|                                  |  | December 31 |            |   | March 31 |  
|                                  |  |             |            |   |          |  
|Net operating losses              |  | $           | 7,705,000  |   |          | $ | 5,823,440  |  
|Other, primarily accrued expenses |  |             | 14,000     |   |          |   | 20,780     |  
|                                  |  |             |            |   |          |  
|                                  |  |             | 7,719,000  |   |          |   | 5,844,220  |  
|Less: Valuation allowance         |  |             | (7,719,000 | ) |          |   | (5,844,220 | )
|                                  |  |             |            |   |          |  
|Net deferred tax assets           |  | $           |           |   |          | $ |           |  
|                                  |  |             |            |   |          |  





F-15



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






8.     Stockholders
Equity




| |             
| | ------------
| | Common Stock









F-16



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














Common Stock Issued for Compensation and Consulting
Services








F-17



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


































F-18



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Common Stock Issued in Connection with Acquisition of
First Person Software






| |                                
| | -------------------------------
| | Senior A Senior Preferred Stock

5-year


5-year




00-27,


5-year


F-19



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                                                                           
| | --------------------------------------------------------------------------
| | Junior A Preferred Stock Issued in Conjunction with a
    Rescission Offer



5-year 5-year 00-27,






F-20



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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





| |                 
| | ----------------
| | Deemed Dividends



|                                                                                            |                                                                               |             |         |   |               |   |           |         | 
|------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ----------- | ------- | - | ------------- | - | --------- | ------- | 
|                                                                                            |                                                                               | Nine Months |         |   | Twelve Months |  
|                                                                                            |                                                                               | Ended       |         |   | Ended         |  
|                                                                                            |                                                                               | 12/31/05    |         |   | 3/31/05       |  
|                                                                                            |                                                                               |             |         |   |               |  
|Deemed dividend related to beneficial conversion feature on
    Senior A Preferred Stock    |                                                                               | $           |        |   |               | $ | 5,576,181 |        
|Deemed dividend related to beneficial conversion feature of
    Junior A Preferred Stock    |                                                                               |             |        |   |               |   | 880,534   |        
|Amortization of debt discount related to Series A Junior
    Common Stock Purchase Warrants |                                                                               |             |        |   |               |   | 880,534   |        
|Dividends related to Penalties paid to Senior A                                             |                                                                               |             |         |   |               |   |           |        
|                                                                                            | Preferred Stockholders for non-effective status of Registration
    Statement |             |         |  |               |   |           | 720,332 | 
|                                                                                            |                                                                               |             |         |   |               |  
|Total Deemed Dividends                                                                      |                                                                               |             |        |   |               |   | 8,057,221 |        
|Senior A Preferred Stock Dividends                                                          |                                                                               | $           | 368,704 |   |               |   | 634,054   |        
|                                                                                            |                                                                               |             |         |   |               |  
|Total Deemed and Regular Dividends                                                          |                                                                               | $           | 368,704 |   |               | $ | 8,691,275 |        
|                                                                                            |                                                                               |             |         |   |               |  



|   |                               
|-- | ------------------------------
|9. | Stock Options and
    Warrants

Stock Option Plan


F-21



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                         |  |              
|---------------------------------------- |  | -------------
|Range of expected volatility             |  | 151% - 159%  
|Weighted average expected volatility     |  | 153%         
|Range of risk-free interest rate         |  | 2.98% - 4.33%
|Weighted average risk-free interest rate |  | 3.48%        
|Expected life in years                   |  | 6.0          
|Dividend yield                           |  | 0.0%         





|                                 |  |               |            |                  |           |                  |               |       |  |  |      | 
|-------------------------------- |  | ------------- | ---------- | ---------------- | --------- | ---------------- | ------------- | ----- |  |  | ---- | 
|                                 |  |               |            | Weighted Average |          
|                                 |  |               |            |                  |          
|                                 |  |               |            |                  |           | Contractual Life |              
|                                 |  |               |            | Exercise Price   |           |                  | Remaining, in |      
|                                 |  | Option Shares |            |                  | per Share |                  |               | Years | 
|                                 |  |               |            |                  |           |                  |               |       | 
|Outstanding at April 1, 2004     |  |               |            |                  |           |                  |               |       |  |  |      | 
|Granted                          |  |               | 845,000    |                  |           | $                | 1.02          |       |  |  | 9.39 | 
|Exercised                        |  |               |           |                  |           |                  |              |       |  |  |     | 
|Forfeited or expired             |  |               |           |                  |           |                  |              |       |  |  |     | 
|                                 |  |               |            |                  |           |                  |               |       | 
|Outstanding at March 31, 2005    |  |               | 845,000    |                  |           | $                | 1.02          |       |  |  | 9.39 | 
|Granted                          |  |               | 5,840,000  |                  |           |                  | 0.31          |       |  |  |     | 
|Exercised                        |  |               | (1,020,000 | )                |           |                  | 0.32          |       |  |  |     | 
|Forfeited or expired             |  |               | (685,000   | )                |           |                  | 0.98          |       |  |  |     | 
|                                 |  |               |            |                  |           |                  |               |       | 
|Outstanding at December 31, 2005 |  |               | 4,980,000  |                  |           | $                | 0.34          |       |  |  | 9.65 | 
|                                 |  |               |            |                  |           |                  |               |       | 
|Exercisable at December 31, 2005 |  |               | 225,833    |                  |           | $                | 1.01          |       |  |  | 8.18 | 
|                                 |  |               |            |                  |           |                  |               |       | 







F-22



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Common Stock Warrants




|                                                                         |  |                    |            |  |                |   |      | 
|------------------------------------------------------------------------ |  | ------------------ | ---------- |  | -------------- | - | ---- | 
|                                                                         |  | Number of Warrants |            |  |               
|Types of Warrants                                                        |  | Outstanding        |            |  | Exercise Price |  
|                                                                         |  |                    |            |  |                |  
|Warrant to Junior A Preferred Holders                                    |  |                    | 270,507    |  |                | $ | 3.83 | 
|Warrant to Senior A Preferred Holders                                    |  |                    | 1,220,233  |  |                | $ | 0.40 | 
|Warrants Issued to Investors in the September 2005 Private
    Placement |  |                    | 10,900,400 |  |                | $ | 0.40 | 
|Warrants Issued to Investors in the December 2005 Private
    Placement  |  |                    | 3,984,375  |  |                | $ | 0.40 | 
|Warrants Issued to Placement Agents                                      |  |                    | 2,843,924  |  |                | $ | 0.40 | 
|                                                                         |  |                    |            |  |                |  
|                                                                         |  |                    | 19,219,439 |  |                |   |      | 
|                                                                         |  |                    |            |  |                |  





|    |                               
|--- | ------------------------------
|10. | Related Party
    Transactions

Advances from Officer and Accrued
Compensation


Investments by Directors


Exercise of Stock Options by Directors




|    |                                  
|--- | ---------------------------------
|11. | Commitments and
    Contingencies

Agreement with M-Systems M-Systems


F-23



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Lease Agreement 48-month


25-month




|      |  |   |         | 
|----- |  | - | ------- | 
|2006  |  | $ | 221,194 | 
|2007  |  |   | 226,967 | 
|2008  |  |   | 214,129 | 
|2009  |  |   | 39,026  | 
|      |  |   |        
|Total |  | $ | 701,316 | 
|      |  |   |        



Litigation




F-24



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                                 
| | --------------------------------
| | Employment/ Consulting Contracts

18-month




18-month


F-25



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Guarantees








|    |                      
|--- | ---------------------
|12. | Subsequent
    Events







F-26



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                                                                                           
|--- | ------------------------------------------------------------------------------------------
|13. | SELECTED QUARTERLY FINANCIAL DATA FOR THE QUARTER ENDED
    SEPTEMBER 30, 2005 (Unaudited)





|                                     |  |                    |           |  |             |   |            |  
|------------------------------------ |  | ------------------ | --------- |  | ----------- | - | ---------- | -
|                                     |  | Balance Sheet at   |          
|                                     |  | September 30, 2005 |          
|                                     |  |                    |          
|                                     |  | As Reported        |           |  | As Adjusted |  
|                                     |  |                    |           |  |             |  
|Cash and cash equivalents            |  | $                  | 4,081,627 |  |             | $ | 355,987    |  
|Short-term investments               |  |                    | -0-       |  |             | $ | 3,725,640  |  
|Liability for warrants               |  |                    | -0-       |  |             | $ | 2,773,553  |  
|Temporary equity                     |  |                    | -0-       |  |             | $ | 4,136,149  |  
|Total stockholders equity (deficit) |  | $                  | 4,253,176 |  |             | $ | (2,656,526 | )



|                                                                             |  |                  |            |   |                  |   |            |  
|---------------------------------------------------------------------------- |  | ---------------- | ---------- | - | ---------------- | - | ---------- | -
|                                                                             |  | Income Statement |            |   | Income Statement |  
|                                                                             |  | As Reported      |            |   | As Adjusted      |  
|                                                                             |  |                  |            |   |                  |  
|Gross profit (loss)                                                          |  | $                | (219,416   | ) |                  | $ | (219,416   | )
|Total operating expenses                                                     |  |                  | 2,551,848  |   |                  |   | 2,551,848  |  
|Total non-operating expenses                                                 |  |                  | 1,152,809  |   |                  |   | 563,920    |  
|Net Loss                                                                     |  |                  | (3,924,873 | ) |                  |   | (3,335,984 | )
|Net Loss Attributable to Holders of common Shares                            |  | $                | (4,293,577 | ) |                  | $ | (3,704,688 | )
|Basic and Diluted net loss attributable to common stockholders
    per share |  | $                | (0.89      | ) |                  | $ | (0.77      | )

F-27



---



##### Table of Contents








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

S-B.


10-KSB


S-B, 10-KSB 8-K


10-KSB 10-QSB 10-KSB.


10-KSB/


20



---



##### Table of Contents








|         |                        
|-------- | -----------------------
|ITEM 8A. | CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures


13a-15(e) 15d-15(e)








| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) insufficient numbers of internal personnel possessing
    the appropriate knowledge, experience and training in applying
    US GAAP and in reporting financial information in accordance
    with the requirements of the SEC;  
|
| | (2) insufficient numbers of internal personnel having
    sufficient technical accounting expertise for certain complex
    transactions, resulting in the Companys reporting
    incorrect amounts in its financial statements; and
|
| | (3) lack of audit committee to oversee the Companys
    accounting and financial reporting processes, as well as
    approval of the Companys independent auditors.                                                                



21



---



##### Table of Contents



Changes in Internal Control Over Financial Reporting









|         |                  
|-------- | -----------------
|ITEM 8B. | OTHER INFORMATION






PART III







|        |                                                                                                                         
|------- | ------------------------------------------------------------------------------------------------------------------------
|ITEM 9. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
    PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
    ACT



|                 |  |     |    |  |                            |                                                                             |       |  |                 | 
|---------------- |  | --- | -- |  | -------------------------- | --------------------------------------------------------------------------- | ----- |  | --------------- | 
|Name             |  | Age |    |  | Positions and Offices Held |                                                                             | Since | 
|                 |  |     |    |  |                            |                                                                             |       | 
|Kent Heyman      |  |     | 50 |  |                            | Chief Executive Officer, Co-Chairman of the Board of Directors,             |       |  | September  2005 | 
|Jay Elliot       |  |     | 66 |  |                            | Chief Strategy Officer, Director, Co-Chairman of the Board of
    Directors |       |  | May 2002        | 
|Greg Osborn      |  |     | 41 |  |                            | Director                                                                    |       |  | June 2005       | 
|Alex Mashinsky   |  |     | 40 |  |                            | Director, Vice Chairman of the Board of Directors                           |       |  | September  2005 | 
|Richard Liebman  |  |     | 50 |  |                            | Chief Financial Officer                                                     |       |  | September  2005 | 
|David Wainwright |  |     | 50 |  |                            | Vice President, Sales and Marketing                                         |       |  | November 2005   | 
|Syed Aamer Azam  |  |     | 38 |  |                            | Vice President, Development                                                 |       |  | January 2005    | 



| |            
| | -----------
| | Kent Heyman





| |           
| | ----------
| | Jay Elliot



22



---



##### Table of Contents







| |               
| | --------------
| | Alex Mashinsky





| |            
| | -----------
| | Greg Osborn





| |                
| | ---------------
| | Richard Liebman





| |                 
| | ----------------
| | David Wainwright





| |                
| | ---------------
| | Syed Aamer Azam



23



---



##### Table of Contents













| |                                 
| | --------------------------------
| | Audit Committee Financial Expert

S-B,




| |                
| | ---------------
| | Audit Committee





| |                                             
| | --------------------------------------------
| | Stockholder Recommendation of Board Nominees





| |               
| | --------------
| | Code of Ethics





| |                                                            
| | -----------------------------------------------------------
| | Section 16(a) Beneficial Ownership Reporting
    Compliance





24



---



##### Table of Contents










|         |                       
|-------- | ----------------------
|ITEM 10. | EXECUTIVE COMPENSATION

CEO


Annual Compensation


|                   |                                   |      |      |        |     |   |         |         |  |        |     |                  |                  |     |            |            |        |  |              |     |  |   |         |   |  |  |           |   | 
|------------------ | --------------------------------- | ---- | ---- | ------ | --- | - | ------- | ------- |  | ------ | --- | ---------------- | ---------------- | --- | ---------- | ---------- | ------ |  | ------------ | --- |  | - | ------- | - |  |  | --------- | - | 
|                   |                                   |      |      |        |     |   |         |         |  |        |     | Award of         |                  |     |           
|                   |                                   |      |      |        |     |   |         |         |  |        |     | Restricted Stock |                  |     | Securities |           
|                   |                                   |      |      |        |     |   |         |         |  | Annual |     |                  | ($ as of Date of |     |            | Underlying |       
|                   |                                   |      |      | Salary |     |   | Bonus   |         |  | Other  |     |                  | Compensation     |     |            | Underlying |        |  | Options/SARS |    
|Name and Position  |                                   | Year |      |        | ($) |   |         | ($)     |  |        | ($) |                  |                  | ($) |            |            | Grant) |  |              | (#) | 
|                   |                                   |      |      |        |     |   |         |         |  |        |     |                  |                  |     |            |            |        |  |              |     | 
|Jay Elliot,        |                                   |      | 2005 |        |     | $ | 233,547 |         |  |        |    |                  |                  |     |           |            |        |  |             |     |  | $ | 200,000 |   |  |  | 2,700,000 |  
|                   | Chairman & CEO                    |      |      | 2004   |     |   | $       | 240,000 |  |        |     |                 |                  |     |            |           |        |  |              |    |  |   |         |  |  |  |           |  | 
|                   |                                   |      |      | 2003   |     |   | $       | 200,000 |  |        |     |                 |                  |     |            |           |        |  |              |    |  |   |         |   |  |  |           |   | 
|Gregory Duffell(1) |                                   |      | 2005 |        |     | $ | 120,000 |         |  |        |    |                  |                  |     |           |            |        |  |             |     |  |   |         |   |  |  |           |  
|                   | Director, International President |      |      | 2004   |     |   | $       | 200,000 |  |        |     |                 |                  |     |            |           |        |  |              |    |  |   |         |   |  |  |           |   | 
|Joshua Feller,(2)  |                                   |      | 2005 |        |     | $ | 75,000  |         |  |        |    |                  |                  |     |           |            |        |  |             |     |  |   |         |   |  |  |          |  
|                   | Sr. Vice President, Sales         |      |      | 2004   |     |   | $       | 175,000 |  |        |     |                 |                  |     |            |           |        |  |              |    |  |   |         |   |  |  |           |  | 
|Syed Aamer Azam,   |                                   |      | 2005 |        |     | $ | 150,000 |         |  |        |    |                  |                  |     |           |            |        |  |             |     |  |   |         |   |  |  | 100,000   |  
|                   | Vice President, Engineering       |      |      | 2004   |     |   |         |         |  |        |     |                 |                  |     |            |           |        |  |              |    |  |   |         |   |  |  |           |   | 






|    |                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Duffells employment with us was terminated in
    October 2005, and as such, the compensation for him for 2005 is
    for the period from January 1, 2005 until the date of
    termination. Salary for 2005 includes severance pay paid to this
    individual.
|   
|(2) | Mr. Fellers employment with us was terminated in June
    2005, and as such, the compensation for him for 2005 is for the
    period from January 1, 2005 until the date of termination.
    Salary for 2005 includes severance pay paid to this individual.        



| |                           
| | --------------------------
| | Option/ SAR Grants in 2005



25



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##### Table of Contents



Option/ SAR Grants in Last Fiscal Year


|                |  |                      |           |                  |              |  |      |                  |  |   |                 |  |  |  |         | 
|--------------- |  | -------------------- | --------- | ---------------- | ------------ |  | ---- | ---------------- |  | - | --------------- |  |  |  | ------- | 
|                |  |                      |           | Percent of Total |              |  |      |                  | 
|                |  | Number of Securities |           |                  | Options/SARs |  |      |                  |  |  
|                |  | Underlying           |           |                  | Granted to   |  |      |                  |  |  
|                |  | Options/SARs         |           |                  | Employees in |  |      | Exercise or Base |  |   |                
|                |  | Granted (#)          |           |                  | Fiscal Year  |  |      | Price ($/Sh)     |  |   | Expiration Date | 
|(a)             |  | (b)                  |           |                  | (c)          |  |      | (d)              |  |   | (e)             | 
|                |  |                      |           |                  |              |  |      |                  |  |   |                 | 
|Jay Elliot      |  |                      | 2,700,000 |                  |              |  | 46.2 | %                |  | $ | 0.32            |  |  |  | 9/26/15 | 
|Gregory Duffel  |  |                      |          |                  |              |  |      |                  |  |   |                 |  |  |  |         | 
|Joshua Feller   |  |                      |          |                  |              |  |      |                  |  |   |                 |  |  |  |         | 
|Syed Aamer Azam |  |                      | 100,000   |                  |              |  | 11.9 | %                |  | $ | 1.01            |  |  |  | 3/16/15 | 

Aggregated Option/ SAR Exercises in Last Fiscal Year and
FY-End Option/ SAR Values(1)


|                |  |                 |   |  |              |                        |   |                           |                      |  |                           |      |  |   |         |     
|--------------- |  | --------------- | - |  | ------------ | ---------------------- | - | ------------------------- | -------------------- |  | ------------------------- | ---- |  | - | ------- | ----
|                |  |                 |   |  |              | Number of Securities   |   |                           | Value of Unexercised | 
|                |  |                 |   |  |              | Underlying Unexercised |   |                           | In-the-Money         | 
|                |  |                 |   |  |              | Options/SARs at        |   |                           | Options/SARs at      | 
|                |  | Shares Acquired |   |  | Value        |                        |   | FY-End (#)                |                      |  | FY-End(2)                 |     
|Name            |  | on Exercise (#) |   |  | Realized ($) |                        |   | Exercisable/Unexercisable |                      |  | Exercisable/Unexercisable |     
|(a)             |  | (b)             |   |  | (c)          |                        |   | (d)                       |                      |  | (e)                       |     
|                |  |                 |   |  |              |                        |   |                           |                      |  |                           |     
|Jay Elliot      |  |                 |  |  |              |                        |  |                           |                      |  | 225,000                   | (e)/ |  | $ | 76,500  | (e)/
|                |  |                 |   |  |              |                        |   |                           |                      |  | 2,475,000                 | (u)  |  | $ | 841,500 | (u) 
|                |  |                 |  |  |              |                        |  |                           |                      |  |                          |      |  |   |        |     
|Gregory Duffell |  |                 |  |  |              |                        |  |                           |                      |  |                          |      |  |   |        |     
|Joshua Feller   |  |                 |  |  |              |                        |  |                           |                      |  |                          |      |  |   |        |     
|                |  |                 |  |  |              |                        |  |                           |                      |  |                          |      |  |   |        |     
|Syed Aamer Azam |  |                 |  |  |              |                        |  |                           |                      |  | 33,333,                   | (e)/ |  |   | 0       | /   
|                |  |                 |   |  |              |                        |   |                           |                      |  | 66,667                    | (u)  |  |   | 0       |     
|                |  |                 |  |  |              |                        |  |                           |                      |  |                          |      |  |   |        |     






|    |                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | There were no exercises of options for the fiscal year ended
    December 31, 2005 and we did not adjust or amend the
    exercise price of stock options or SARs previously awarded to
    any executive officer.
|   
|(2) | Amounts shown are based upon the closing sale price for our
    common stock on December 31, 2005, which was $0.66 per
    share.                                                                                 



| |                      
| | ---------------------
| | Director Compensation





| |                     
| | --------------------
| | Employment Contracts

18-month 18-month


26



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##### Table of Contents














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



Security Ownership of Certain Beneficial Owners


|                                          |                                          |                           |                       |             |               |  |      |   | 
|----------------------------------------- | ---------------------------------------- | ------------------------- | --------------------- | ----------- | ------------- |  | ---- | - | 
|                                          |                                          | Amount Beneficially Owned |                       |             | Percentage of | 
|Name and Address                          |                                          | and Nature of Ownership   |                       |             | Class(1)      | 
|                                          |                                          |                           |                       |             |               | 
|Alex Mashinsky(2)                         |                                          |                           | 8,503,426 direct and  |             |               |  | 14.9 | %
|                                          | 322 8th Ave., New York, N.Y. 10001       |                           |                       | indirect(2) |               |  |      |   | 
|Software Capital Partners LP(3)           |                                          |                           | 6,445,312  direct(3) |             |               |  | 11.4 | %
|                                          | 30E. 65th St., New York, N.Y. 10021      |                           |                       |             |               |  |      |   | 
|Software Seed Capital Partners IV, L.P(4) |                                          |                           | 4,717,907  direct(4) |             |               |  | 8.4  | %
|                                          | 535 Madison Ave, New York, NY. 10022     |                           |                       |             |               |  |      |   | 
|AIGH Investment Partners, LLC(5)          |                                          |                           | 4,687,500  direct(5) |             |               |  | 8.4  | %
|                                          | 6006 Berkeley Avenue Baltimore, MD 21209 |                           |                       |             |               |  |      |   | 
|LB I Group, Inc.(6)                       |                                          |                           | 4,682,069  direct(6) |             |               |  | 8.5  | %
|                                          | 745 Seventh Ave., New York, N.Y. 10019   |                           |                       |             |               |  |      |   | 






|    |                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Applicable percentage of ownership for each holder is based on
    54,390,639 shares of common stock outstanding on
    March 31, 2006, plus any common stock equivalents and
    presently exercisable stock

27



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##### Table of Contents



| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | options or warrants held by each such holder, and options or
    warrants held by each such holder which will become exercisable
    within 60 days after the date of this prospectus.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes 5,275,650 shares (including warrants to
    purchase 1,718,750 shares) owned by Governing Dynamics
    Investments, LLC, of which Mr. Mashinsky is the sole member
    and manager. Also includes warrants to
    purchase 931,603 shares of Common Stock held by
    Mr. Mashinsky which are presently exercisable. This
    information includes disclosures made in a Schedule 13D
    filed with the Securities and Exchange Commission on
    April 17, 2006, by Alex Mashinsky and Governing Dynamics
    Investments, LLC.                                                                                                                                                                                                                                
|   
|(3) | Information is based on a Schedule 13G filed with the
    Securities and Exchange Commission on April 3, 2006, by
    Software Capital Partners, L.P., Netconsult Holdings, LLC and
    Susi Belli, who share voting and dispositive power over the
    shares reported. Software Capital Partners, L.P. holds
    4,296,875 shares of common stock and warrants to purchase
    an additional 2,148,437 shares. Netconsult Holdings, LLC is
    the sole general partner of Software Capital Partners, L.P. Susi
    Belli is the sole member and manager of Netconsult Holdings, LLC.                                                                                                                                                                                   
|   
|(4) | Information is based on a Schedule 13G filed with the
    Securities and Exchange Commission on March 17, 2006, by
    Software Seed Capital Partners IV, L.P., Technology Seed Capital
    Partners, LLC and David De Leeuw, who share voting and
    dispositive power over the shares reported. Software Seed
    Capital Partners IV, L.P. holds 2,925,857 shares of common
    stock and warrants to purchase an additional
    1,792,050 shares. Technology Seed Capital Partners, LLC is
    the sole general partner of Software Seed Capital Partners IV,
    L.P. David De Leeuw is the controlling member and manager of
    Technology Seed Capital Partners, LLC.                                                                                            
|   
|(5) | Information is based on a Schedule 13G filed with the
    Securities and Exchange Commission on February 15, 2006, by
    AIGH Investment Partners, LLC. Includes warrants to
    purchase 1,562,500 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(6) | Information is based on a Schedule 13G filed with the
    Securities and Exchange Commission on February 28, 2006, by
    LB I Group, Inc., Lehman Brothers Holdings, Inc. and Lehman
    Brothers, Inc. LB I Group, Inc. holds 4,194,069 shares
    of common stock and warrants to purchase an additional
    488,000 shares, excluding warrants to purchase an
    additional 415,799 shares because the terms of the warrant
    contain a limitation on acquiring shares of common stock if the
    exercise would result in the holder beneficially owning more
    than 9.99% of the outstanding common stock. LB I Group, Inc. is
    a wholly owned subsidiary of Lehman Brothers, Inc., which is a
    wholly owned subsidiary of Lehman Brothers Holdings, Inc.



28



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##### Table of Contents





Security Ownership of Management


|                                      |  |                           |                                 |     |               |  |              | 
|------------------------------------- |  | ------------------------- | ------------------------------- | --- | ------------- |  | ------------ | 
|                                      |  | Amount Beneficially Owned |                                 |     | Percentage of | 
|Name and Address                      |  | and Nature of Ownership   |                                 |     | Class(1)      | 
|                                      |  |                           |                                 |     |               | 
|Alex Mashinsky                        |  |                           | 8,503,426  direct and indirect | (4) |               |  | 14.9%        | 
|Jay Elliot                            |  |                           | 1,375,000  direct              | (2) |               |  | 2.5%         | 
|Kent Heyman                           |  |                           | 883,333  direct                | (3) |               |  | 1.6%         | 
|Greg Osborn                           |  |                           | 1,273,738  direct and indirect | (5) |               |  | 2.3%         | 
|Syed Aamer Azam                       |  |                           | 100,000  indirect              |     |               |  | Less than 1% | 
|All officers and directors as a group |  |                           | 13,197,997                      | (6) |               |  | 22.1%        | 

FOOTNOTES




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Applicable percentage of ownership for each holder is based on
    54,390,639 shares of common stock outstanding on
    March 31, 2006, plus any common stock equivalents and
    presently exercisable stock options or warrants held by each
    such holder, and options or warrants held by each such holder
    which will become exercisable within 60 days after the date
    of this Annual Report.                                                                                                                               
|   
|(2) | Includes options to purchase 375,000 shares of Common
    Stock which are either presently exercisable or exercisable
    within 60 days after the date of this Annual Report. Also
    includes 300,000 restricted shares which vest on January 1,
    2007.                                                                                                                                                                                                                                                                             
|   
|(3) | Includes options to purchase 583,333 shares of Common
    Stock which are either presently exercisable or exercisable
    within 60 days after the date of this Annual Report. Also
    includes 300,000 restricted shares which vest on January 1,
    2007.                                                                                                                                                                                                                                                                             
|   
|(4) | Includes 5,275,650 shares (including warrants to
    purchase 1,718,750 shares) owned by Governing Dynamics
    Investments, LLC, of which Mr. Mashinsky is the sole member
    and manager. Also includes warrants to
    purchase 931,603 shares of Common Stock held by
    Mr. Mashinsky which are presently exercisable. This
    information includes disclosures made in a Schedule 13D
    filed with the Securities and Exchange Commission on
    April 17, 2006, by Alex Mashinsky and Governing Dynamics
    Investments, LLC.
|   
|(5) | Includes warrants or options to
    purchase 725,930 shares of Common Stock held by
    Mr. Osborn or InDigo Ventures of which Mr. Osborn is a
    managing partner. The warrants and options included are either
    presently exercisable or exercisable within 60 days of the
    date of this Annual Report.                                                                                                                                                                                                                          
|   
|(6) | Includes options to purchase 1,062,500 shares of
    Common Stock held by executive officers not named in the above
    table, which are either presently exercisable or exercisable
    within 60 days after the date of this Annual Report.                                                                                                                                                                                                                                                                                             






|         |                                               
|-------- | ----------------------------------------------
|ITEM 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



29



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##### Table of Contents
















|         |         
|-------- | --------
|ITEM 13. | EXHIBITS

| |   |    |  |                                                                                                                                                                                                                                                                                                                                                       
| | - | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2 | .1 |  | Agreement and Plan of Merger, dated as of May 28, 2004, by
    and among the Company, PowerHouse Acquisition, First Person,
    Christopher Neumann, David Brett Levine and Karl Jacob, acting
    solely as stockholder representative, hereby incorporated by
    reference from the Companys Current Report on
    Form 8-K filed on July 6, 2004.
| | 3 | .1 |  | Amended Articles of Incorporation, hereby incorporated by
    reference to Exhibit 3.1 of the Annual Report on
    Form 10-KSB filed with the SEC on July 14, 2004.                                                                                                                                                                                   
| | 3 | .2 |  | Bylaws, hereby incorporated by reference to Exhibit 3.2 of
    the Annual Report on Form 10-KSB filed with the SEC on
    July 14, 2004.                                                                                                                                                                                                              
| | 3 | .3 |  | Text of amended provision of the Companys Bylaws, hereby
    incorporated by reference from the Companys Current Report
    on Form 8-K filed with the Commission on September 27,
    2005.                                                                                                                                                        
| | 3 | .4 |  | Form of Certificate of Amendment to the Certificate of
    Designations, Preferences and Rights of the Series A Senior
    Convertible Preferred Stock, hereby incorporated by reference
    from the Companys Current Report on Form 8-K filed
    with the Commission on September 27, 2005.                                                       
| | 3 | .5 |  | Certificate of Amendment of Certificate of Incorporation, hereby
    incorporated by reference from the Companys Information
    Statement filed with the Commission on January 30, 2006.                                                                                                                                                            
| | 4 | .1 |  | Common Stock Purchase Warrant, dated as of April 23, 2004,
    hereby incorporated by reference from the Companys
    Registration Statement on Form SB-2 filed with the
    Commission on August 13, 2004.                                                                                                                                          
| | 4 | .2 |  | Common Stock Purchase Warrant, dated as of August 13, 2004,
    hereby incorporated by reference from the Companys
    Registration Statement on Form SB-2 filed with the
    Commission on August 13, 2004.                                                                                                                                         
| | 4 | .3 |  | Certificate of Designations, Preferences and Rights of
    Series A Junior Convertible Preferred Stock, hereby
    incorporated by reference from the Companys Quarterly
    Report on Form 10-QSB filed on September 13, 2004.                                                                                                                      
| | 4 | .4 |  | Form of Investor Warrant dated as of September 26, 2005,
    hereby incorporated by reference from the Companys
    Quarterly Report on Form 10-QSB for the quarter ended
    September 30, 2005, filed with the Commission on
    December 14, 2005.                                                                                                

30



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##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                                                                                           
| | -- | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4  | .6  |  | Form of Investor Warrant dated as of December 23, 2005,
    hereby incorporated by reference from the Companys Current
    Report on Form 8-K filed with the Commission on
    December 28, 2005.                                                                                        
| | 10 | .1  |  | Development Agreement, dated March 30, 2005, between the
    Company and M-Systems Flash Disk Pioneers Ltd, hereby
    incorporated by reference to Exhibit 10.1 of the Annual
    Report on Form 10-KSB filed with the SEC on July 28,
    2005.                                         
| | 10 | .2  |  | 2004 Omnibus Stock Incentive Plan, hereby incorporated by
    reference to Exhibit 3.1 the Quarterly Report on
    Form 10-QSB/A filed with the SEC on February 22, 2005.                                                                                                                 
| | 10 | .3  |  | Series A Senior Units Purchase Agreement, dated as of
    April 23, 2004, hereby incorporated by reference from the
    Companys Registration Statement on Form SB-2 filed
    with the Commission on August 13, 2004.                                                                   
| | 10 | .4  |  | Series A Senior Units Purchase Agreement, dated
    August 13, 2004, as of April 23, 2004, hereby
    incorporated by reference from the Companys Registration
    Statement on Form SB-2/A filed with the Commission on
    August 13, 2004.                                            
| | 10 | .5  |  | Form of Common Stock and Warrant Purchase Agreement dated as of
    September 26, 2005, hereby incorporated by reference from
    the Companys Quarterly Report on Form 10-QSB for the
    quarter ended September 30, 2005, filed with the Commission
    on December 14, 2005.         
| | 10 | .6  |  | Form of Common Stock and Warrant Purchase Agreement dated as of
    December 23, 2005, hereby incorporated by reference from
    the Companys Current Report on Form 8-K filed with
    the Commission on December 28, 2005.                                                             
| | 10 | .7  |  | Registration Rights Agreement dated as of September 21,
    2005, hereby incorporated by reference to Exhibit 10.3 of
    the Quarterly Report on Form 10-QSB filed with the
    Commission on December 14, 2005.                                                                         
| | 10 | .8  |  | Agreement dated September 26, 2005, between the Company and
    Kent Heyman, hereby incorporated by reference to
    Exhibit 10.4 of the Quarterly Report on Form 10-QSB
    filed with the Commission on December 14, 2005.                                                              
| | 10 | .9  |  | Employment Agreement dated September 26, 2005, between the
    Company and Jay Elliot, hereby incorporated by reference to
    Exhibit 10.5 of the Quarterly Report on Form 10-QSB
    filed with the Commission on December 14, 2005.                                                    
| | 10 | .10 |  | Agreement dated September 26, 2005, between the Company and
    Alex Mashinsky, hereby incorporated by reference to
    Exhibit 10.6 of the Quarterly Report on Form 10-QSB
    filed with the Commission on December 14, 2005.                                                           
| | 10 | .11 |  | Agreement dated September 26, 2005, between the Company and
    Richard Liebman, hereby incorporated by reference to
    Exhibit 10.7 of the Quarterly Report on Form 10-QSB
    filed with the Commission on December 14, 2005.                                                          
| | 10 | .12 |  | Settlement Agreement dated September 26, 2005, between the
    Company, The Wall Street Group, Inc. and Wall Street
    Consultants, Inc., hereby incorporated by reference to
    Exhibit 10.8 of the Quarterly Report on Form 10-QSB
    filed with the Commission on December 14, 2005.
| | 10 | .13 |  | Registration Rights Agreement dated as of December 23,
    2005, hereby incorporated by reference to Exhibit 99.3 of
    the Current Report on Form 8-K filed with the Commission on
    December 28, 2005.                                                                               
| | 16 |     |  | Letter regarding the change in independent accountant, hereby
    incorporated by reference from the Companys Current Report
    on Form 8-K filed with the Commission on October 26,
    2005.                                                                                          
| | 21 | .   |  | List of subsidiaries.                                                                                                                                                                                                                                                                     
| | 31 | .1. |  | Certification of Chief Executive Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                   
| | 31 | .2. |  | Certification of Chief Financial Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                   
| | 32 | .1. |  | Certification of Chief Executive Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                   
| | 32 | .2. |  | Certificate of Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                     

31



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##### Table of Contents








|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES



|                      |       |                   |         |         |                |   |        |         | 
|--------------------- | ----- | ----------------- | ------- | ------- | -------------- | - | ------ | ------- | 
|                      |       | Nine Months       |         |         | Twelve Months  |  
|                      |       | Ended             |         |         | Ended          |  
|                      |       | December 31, 2005 |         |         | March 31, 2005 |  
|                      |       |                   |         |         |                |  
|Audit fees(1)         |       | $                 | 187,942 |         |                | $ | 74,183 |        
|Audit related fees(2) |       | $                 | 10,845  |         |                | $ | 43,621 |        
|Tax fees              |       | $                 |        |         |                | $ |       |        
|All other fees        |       | $                 |        |         |                | $ |       |        
|                      |       |                   |         |         |                |  
|                      | Total |                   | $       | 198,787 |                |   | $      | 117,804 | 
|                      |       |                   |         |         |                |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents fees for professional services provided in connection
    with the audit of our annual financial statements and review of
    our quarterly financials statements and advice on accounting
    matters that arose during the audits. This amount includes
    $75,000 for professional services provided in connection with
    the reaudit of our year ended March 31, 2005 consolidated
    financial statements which was completed in December 2005.
|   
|(2) | The amount represents fees for the filing of the Companys
    registration statement.                                                                                                                                                                                                                                                                                                                                                                             



S-X,


32



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##### Table of Contents






SIGNATURES






| |                                    
| | -----------------------------------
| | POWERHOUSE TECHNOLOGIES GROUP, INC.



| |     |                
| | --- | ---------------
| | By: | /s/ Kent Heyman

| |                              
| | -----------------------------
| |                              
| | Kent Heyman                  
| | Chief Executive Officer      
| | (Principal Executive Officer)





| |     |                    
| | --- | -------------------
| | By: | /s/ Richard Liebman

| |                                             
| | --------------------------------------------
| |                                             
| | Richard Liebman                             
| | Chief Financial Officer                     
| | (Principal Financial and Accounting Officer)



33



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##### Table of Contents






POWER OF ATTORNEY


attorneys-in 10-KSB, attorneys-in attorneys-in






| |               
| | --------------
| | /s/ Jay Elliot
| |               
| | Jay Elliot    
| | Director      





| |                   
| | ------------------
| | /s/ Alex Mashinsky
| |                   
| | Alex Mashinsky    
| | Director          





| |                
| | ---------------
| | /s/ Greg Osborn
| |                
| | Greg Osborn    
| | Director       



34