<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
                                   (MARK ONE)
   [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                                     OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

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

                         COMMISSION FILE NUMBER 0-21713

                           PRISM SOFTWARE CORPORATION
                 (Name of small business issuer in its charter)

Delaware                                    95-2621719
--------------------------------            ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

15500-C Rockfield Blvd.
Irvine, California                          92618
----------------------------------------    ------------------------------------
(Address of principal executive offices)    (Zip Code)

                   Issuer's telephone number : (949) 855-3100

         Securities registered under Section 12(b) of the Exchange Act:
                                      None

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                     Common Stock, par value $.01 per share

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]


Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]


Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X ] No [ ]


Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X ]


The registrant's revenues for the year ended December 31, 2005 were $1,228,892.


The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 23, 2006 was approximately $465,000. The number of shares
outstanding of the registrant's only class of Common Stock, par value $.01 per
share, was 141,591,534 on March 23, 2006. The common shares are traded on the
OTC Bulletin Board under the symbol "PSOF".

_____________________



<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE

The Company plans to file a Definitive Information Statement for its next Annual
Meeting of Stockholders no later than 120 days after the close of the fiscal
year referenced above. Certain information required by Part III of this Form
10-KSB is incorporated herein by reference to such Definitive Information
Statement Except with respect to information specifically incorporated by
reference in this Annual Report on Form 10-KSB, the Definitive Information
Statement is not deemed to be filed as a part hereof.

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


                                       2


<PAGE>

                                      INDEX

PART I

     Item 1.    Description of Business.

     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 and Related Stockholder Matters.

     Item 6.    Management's Discussion and Analysis or Plan of Operation.

     Item 7.    Financial Statements.

     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.

     Item 12.   Certain Relationships and Related Transactions.

     Item 13.   Exhibits.

     Item 14.   Principal Accountant Fees and Services.

Signatures


                                       3


<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

COMPANY OVERVIEW

Prism Software Corporation (the "Company") was organized under the laws of
Delaware in 1992. The Company specializes in enterprise document and content
management solutions. The Company's products and expertise lie in electronic
document formation, document management, and print stream conversion solutions.
The Company's customer base includes organizations that use its solutions in
managing high-volume, large scale document printing. These customers are in a
variety of markets, such as financial services, health care, service bureau
printing, government, education and manufacturing.

The Company distributes its products primarily in North America, through direct
sales, resellers, value-added resellers ("VARs") and printer manufacturers.
Marketing, sales, training and technical support are provided from its corporate
headquarters. The Company's principal executive office is located at 15500-C
Rockfield Blvd., Irvine, California 92618, and its telephone number is (949)
855-3100. The Company's website is located at "www.prism-software.com." The
information on the Company's website is not a part of this Report.

CURRENT PRODUCTS

The following is a brief summary of the Company's primary products. More
detailed information about these products can be found on the company's website
at "www.prism-software.com." The information on the Company's website is not a
part of this Report.

     DOCFORM

     DocForm is a powerful, low-cost and easy-to-use software tool for the
     design, dynamic creation, and real-time delivery of all electronic
     documents, forms, and reports for every industry. Its primary purposes are
     to (1) reduce costs by eliminating pre-printed forms, (2) enable users to
     dynamically create complex and personalized documents and reports, and (3)
     create one-to-one personalized sales and marketing messages.

     DOCTRANSFORM

     DocTransform (1) manages corporate print and document output, (2) can
     transform various print stream formats into other formats, and (3) apply
     various modifying filters to print and data streams. Transforming print
     stream formats is of value to many organizations that want to utilize and
     redirect mainframe print streams designed for older and often outdated
     printers to newer, more modern printers.

                                       4


<PAGE>

     DOCRECORD

     DocRecord is a powerful, low-cost and easy-to-use document management and
     archival software solution. Designed to be intuitive, DocRecord helps to
     reduce complexity and costs for businesses across all major industries.
     DocRecord is modular and scalable, allowing businesses to configure the
     solution that is the best fit for their current business challenge and
     update it over time as their needs change.


DEPENDENCE ON MAJOR CUSTOMERS

In 2005 and 2004, the three largest customers in each year accounted for
approximately 59% and 42%, respectively, of the Company's sales in those years,
with one customer being among the three largest in both years. Sales through the
Company's reseller channel accounted for approximately 87% and 69%,
respectively, of the Company's sales in those years.

At December 31, 2005 and 2004, the three largest accounts receivable totaled
approximately 83% and 70%, respectively, of gross accounts receivable. At
December 31, 2005, one account represented approximately 74% of gross accounts
receivable, and a reserve had been accrued against the entire balance of that
particular account since the conditions for the full collection of the sale had
subsequently changed significantly for reasons outside the Company's control.
(The Company is actively working to satisfy such conditions.)

The Company does not have any long-term sales contracts with any of its
customers.

RESEARCH AND DEVELOPMENT

For the fiscal years ended December 31, 2005 and December 31, 2004, research and
development expenses were approximately $414,000 (about 34% of net sales) and
approximately $294,000 (about 40% of net sales), respectively. None of the
research and development expenses in either fiscal year were borne directly by
customers.

INTELLECTUAL PROPERTY

The Company currently does not hold any patents and relies on a combination of
contract, copyright, trademark and trade secret laws, licenses and
confidentiality agreements and software security measures to protect its
proprietary intellectual property. Despite these precautions, the Company
believes that existing laws provide limited protection for the Company's
technologies. However, because of the rapid pace of technological change in the
Company's industry, the legal intellectual property protection for products is a
less significant factor in its success than the knowledge, abilities and
experience of the Company's employees, the frequency of its product
enhancements, the effectiveness of its marketing activities and the timeliness
and quality of its support services. There can be no assurance that the
Company's means of protecting its proprietary rights will prevent others from
misappropriating or otherwise gaining access to valuable information, such as
software source codes, or that others will not develop technologies similar or
superior to the Company's technologies. In addition, effective intellectual
property protection may be unavailable or limited in certain foreign countries.
The Company generally enters into confidentiality or license agreements with its
employees, consultants, customers and vendors and generally controls access to
and distribution of its software, documentation and other proprietary


                                       5


<PAGE>

information. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult. There can be no
assurance that the steps taken by the Company will prevent misappropriation of
its technology. In addition, litigation may be necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets or to determine the validity and scope of the proprietary rights
of others.

The Company owns, licenses or has otherwise obtained the right to use certain
technologies incorporated in its products. While the Company believes that its
software products and proprietary rights do not infringe the rights of others,
there can be no assurance that third parties will not assert infringement claims
against the Company or that any such claims will not require the Company to
enter into royalty or license arrangements or result in costly litigation,
regardless of the merits of the claims.

EMPLOYEES

As of March 23, 2006, the Company had 14 employees. The Company's employees are
not represented by any collective bargaining organization and the Company has
never experienced a work stoppage. The Company believes that its relations with
its employees are good.

ITEM 2. DESCRIPTION OF PROPERTY.

The Company's principal administrative, development, manufacturing and shipping
facilities are located in one facility in Irvine, California. The Company
believes its facilities are adequate for its current needs and that suitable
additional or substitute space will be available as and if needed.

ITEM 3. LEGAL PROCEEDINGS.

None.

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

None.

                                       6


<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Common Stock of the Company is quoted on the National Association of
Securities Dealers, Inc. ("NASD") OTC Bulletin Board ("OTCBB") under the symbol
"PSOF." The OTCBB is a quotation service for subscribing members and is
regulated by the Securities and Exchange Commission ("SEC") and the NASD. OTCBB
securities are traded by a community of market makers that enter quotes and
trade reports through a closed computer network. Set forth below are the high
and low traded prices of the Company's Common Stock during each quarter of the
fiscal years ended December 31, 2004 and December 31, 2005, as reported by a
leading provider of real-time financial and market data.

                                                   HIGH          LOW
                                                   ----          ---
     Quarter ended March 31, 2004                 0.025          0.008
     Quarter ended June 30, 2004                  0.028          0.008
     Quarter ended September 30, 2004             0.016          0.006
     Quarter ended December 31, 2004              0.019          0.006
     Quarter ended March 31, 2005                 0.015          0.006
     Quarter ended June 30, 2005                  0.020          0.006
     Quarter ended September 30, 2005             0.0135         0.004
     Quarter ended December 31, 2005              0.009          0.004

As of March 23, 2006, there were approximately 391 stockholders of record of the
Company's Common Stock.

The Company has never paid cash dividends on its Common Stock and does not
intend to pay cash dividends in the foreseeable future.

EQUITY COMPENSATION PLAN INFORMATION

The following table gives information about the Company's Common Stock that may
be issued upon the exercise of options, warrants or rights under its existing
equity compensation plans. The information in this table is as of December 31,
2005.

<TABLE>
                    Number of securities to be    Weighted average
                     issued upon exercise of      exercise price of
                       outstanding options,      outstanding options,      Number of securities
   Plan Category       warrants and rights       warrants, and rights      remaining available
                    ------------------------   ------------------------   ----------------------
<S>                               <C>                             <C>                 <C>
Equity compensation
plans approved by
security holders                          -                          -                        -

Equity compensation
plans not approved by
security holders                  2,920,000                       0.02                1,530,000

                    ------------------------   ------------------------   ----------------------
 Total                            2,920,000                       0.02                1,530,000
                    ========================   ========================   ======================
</TABLE>


                                       7


<PAGE>

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

The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
in this Annual Report on Form 10-KSB. Except for the historical information
contained herein, the following discussion contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Annual Report on Form 10-KSB should be read as being
applicable to all related forward-looking statements wherever they appear in
this Annual Report on Form 10-KSB. The Company's actual results may differ
materially from the results discussed in the forward-looking statements.

RESULTS OF OPERATIONS

COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004

For the year ended December 31, 2005, the Company reported a loss of
approximately $1,460,000, or $0.01 per common share, compared with a loss of
approximately $1,374,000, or $0.01 per common share, for the fiscal year ended
December 31, 2004. The loss increased approximately $86,000 due primarily to the
following:

         o        Net sales increased approximately $493,000 primarily through
                  the Company's reseller channel, including one sale of over
                  $400,000.

         o        Cost of sales increased approximately $47,000 from
                  approximately $380,000, or about 52% of revenue, to
                  approximately $427,000, or about 35% of revenue. The dollar
                  amount increased due primarily to a higher cost for services,
                  but the percentage decreased due primarily to a shift in the
                  mix of products being sold.

         o        Sales, administrative and research and development expenses
                  were approximately $454,000 higher in 2004 due primarily to
                  the costs of settling two legal disputes,

         o        In 2005, the Company accrued a reserve of approximately
                  $240,000 when the conditions for the full collection of a sale
                  subsequently changed significantly for reasons outside the
                  Company's control. (The Company is actively working to satisfy
                  such conditions.)

         o        In 2004, the Company recognized gains of 1) approximately
                  $815,000 from writing off certain debt and related accrued
                  interest that was either forgiven or determined to be no
                  longer enforceable, and 2) approximately $117,000 from
                  settling certain accounts payable and from writing off certain
                  other accounts payable that were determined to be no longer
                  enforceable.

         o        Interest expense decreased approximately $168,000 due
                  primarily to lower interest rates on the Company's debt.

                                       8


<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

On December 31, 2005, the Company had cash and cash equivalents of approximately
$81,000. The principal source of liquidity in fiscal 2005 was approximately
$1,100,000 of additional borrowings.

Management anticipates that additional capital will be required to finance the
Company's operations. The Company believes that expected cash flow from
operations, borrowing, and the possible proceeds from sales of securities will
be sufficient to finance the Company's operations at currently anticipated
levels for a period of at least twelve months. However, there can be no
assurance that the Company will not encounter unforeseen difficulties that may
deplete its capital resources more rapidly than anticipated.

EFFECT OF INFLATION

The Company believes that inflation has not had a material effect on its net
sales or profitability in recent years.

FORWARD-LOOKING STATEMENTS; CAUTIONARY STATEMENT

Certain of the statements contained in this report, including those under
"Description of Business" and "Management's Discussion and Analysis or Plan of
Operation," and especially those contained under "Liquidity and Capital
Resources" may be "forward-looking statements" that involve risks and
uncertainties. All forward-looking statements included in this report are based
on information available to the Company on the date hereof and the Company
assumes no obligation to update any such forward-looking statements. The actual
future results of the Company could differ materially from those statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this Annual Report on Form 10-KSB as well as
risks associated with managing the Company's growth. While the Company believes
that these statements are accurate, the Company's business is dependent upon
general economic conditions and various conditions specific to its industry and
future trends and results cannot be predicted with certainty.


ITEM 7. FINANCIAL STATEMENTS.

The financial statements of the Company are submitted as a separate section of
this Annual Report on Form 10-KSB.

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

None.

                                       9


<PAGE>

ITEM 8A. CONTROLS AND PROCEDURES.

Under the supervision and with the participation of our Chief Executive and
Financial Officers, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-14(c) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days
of the filing date of this report. Based on this evaluation, our Chief Executive
and Financial Officers concluded that the Company's disclosure controls and
procedures are effective. Disclosure controls and procedures are designed to
ensure that information required to be disclosed in reports under the Exchange
Act are processed and reported within the time periods specified by law. The
design of any such system of controls is based in part on assumptions about the
likelihood of future events, and there can be no assurance that any such system
of controls will succeed in all circumstances.

Since the date of the evaluation described above, there have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls.

ITEM 8B. OTHER INFORMATION.

None.


                                    PART III

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

The information required by this item regarding directors and officers is
incorporated by reference to the Company's Definitive Information Statement to
be filed with the Securities and Exchange Commission in connection with its 2006
Annual Meeting of Stockholders (the "PROXY STATEMENT") under the heading
"ELECTION OF DIRECTORS." The information required by this item regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, is incorporated by reference to the information under the caption
"COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT" contained in the Information
Statement. The information required by this item regarding the Company's code of
ethics is incorporated by reference to the information under the caption "CODE
OF ETHICS" contained in the Information Statement.

ITEM 10. EXECUTIVE COMPENSATION.

The information required by this item is incorporated by reference to the
information under the caption "EXECUTIVE COMPENSATION" contained in the
Information Statement. With respect to the Company's option plans, additional
information on such plans is also included in the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual Report
on Form 10-KSB.

                                       10


<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this item is incorporated by reference to the
information under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS" contained in the Information
Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is incorporated by reference to the
information under the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
contained in the Information Statement.

ITEM 13. EXHIBITS.

3.1.     Certificate of Incorporation of Prism Software Corporation ("the
         Company") (1) (Exhibit 3.1)

3.2.     Bylaws of the Company (1) (Exhibit 3.2)

3.3.     Amendments dated February 24, 1998 and May 5, 1999 to the Company's
         Certificate of Incorporation (2) (Exhibit 3.3)

3.4.     Amendment dated September 18, 2000 to the Company's Certificate of
         Incorporation (4) (Exhibit 10.1)

4.1.     Specimen Common Stock certificate of the Company (1) (Exhibit 4.1)

4.2.     Certificate of Designation of $5.00, 10% Class A Cumulative Convertible
         Preferred Stock, as amended to date (2) (Exhibit 4.3)

10.1.    Amended and Restated 1993 Stock Option Plan ("1993 Plan") (1) (Exhibit
         10.1)

10.2.    Form of Employee Installment Incentive Stock Option and Nonstatutory
         Stock Option Agreement pertaining to the 1993 Plan (1) (Exhibit 10.2)

10.3.    2000 Nonstatutory Stock Option Plan ("2000 Plan") (3) (Exhibit 10.1)

10.4.    Form of Stock Option Agreement pertaining to the 2000 Plan (3) (Exhibit
         10.2)

10.5.    Loan Agreement dated March 13, 2003 by and between the Conrad von Bibra
         Revocable Trust, Carl von Bibra and the Company (5) (Exhibit 10.1)

10.6.    Credit Agreement dated March 15, 2003 by and between the Conrad von
         Bibra Revocable Trust and the Company (5) (Exhibit 10.3)

10.7.    Security Agreement dated March 27, 2003 by and between the Conrad von
         Bibra Revocable Trust and the Company (5) (Exhibit 10.5)

10.8.    Code of Ethics adopted July 27, 2004 (6) (Exhibit 10.2)

10.9.    Long-term Loan Agreement dated December 30, 2004 by and between the
         Conrad von Bibra Revocable Trust, Carl von Bibra and the Company (7)
         (Exhibit 10.1)

                                       11


<PAGE>

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 and Chief Financial Officer
         Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

-------------------

         (1)      Incorporated by reference to the Exhibit identified in
                  parentheses, filed as an exhibit in the Company's Registration
                  Statement on Form SB-2 (SEC File No. 333-5450-LA).
         (2)      Incorporated by reference to the Exhibit identified in
                  parentheses, filed as an exhibit in the Company's Annual
                  Report on Form 10-KSB for the fiscal year ended December 31,
                  1998.
         (3)      Incorporated by reference to the Exhibit identified in
                  parentheses, filed as an exhibit in the Company's Quarterly
                  Report on Form 10-QSB for the quarter ended June 30, 2000.
         (4)      Incorporated by reference to the Exhibit identified in
                  parentheses, filed as an exhibit in the Company's Quarterly
                  Report on Form 10-QSB for the quarter ended September 30,
                  2000.
         (5)      Incorporated by reference to the Exhibit identified in
                  parentheses, filed as an exhibit in the Company's Quarterly
                  Report on Form 10-QSB for the quarter ended March 31, 2003.
         (6)      Incorporated by reference to the Exhibit identified in
                  parentheses, filed as an exhibit in the Company's Quarterly
                  Report on Form 10-QSB for the quarter ended June 30, 2004.
         (7)      Incorporated by reference to the Exhibit identified in
                  parentheses, filed as an exhibit in the Company's Report on
                  Form 8-K for December 30, 2004.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this item is incorporated by reference to the
information under the caption "PRINCIPAL ACCOUNTANT FEES AND SERVICES" contained
in the Information Statement.


                                       12


<PAGE>

                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                          PRISM SOFTWARE CORPORATION



Dated:  March 31, 2006                    /S/ DAVID AYRES
                                          ---------------
                                          David Ayres, Director and President
                                          (Principal Executive Officer)


In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.





Dated:  March 31, 2006             /S/ DAVID AYRES
                                   ---------------
                                   David Ayres, Director and President
                                   (Principal Executive Officer)

Dated:  March 31, 2006             /S/ MICHAEL CHEEVER
                                   -------------------
                                   Michael Cheever, Treasurer
                                   (Principal Accounting and Financial Officer)

Dated:  March 31, 2006             /S/ CARL VON BIBRA
                                   ------------------
                                   Carl von Bibra, Chairman and a Director

Dated:  March 31, 2006             /S/ CONRAD VON BIBRA
                                   --------------------
                                   Conrad von Bibra, Director and Secretary


                                       13


<PAGE>












                           PRISM SOFTWARE CORPORATION

                              FINANCIAL STATEMENTS

                                DECEMBER 31, 2005








                                      F-1


<PAGE>



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
             -------------------------------------------------------



The Board of Directors and Stockholders
Prism Software Corporation


We have audited the accompanying balance sheet of Prism Software Corporation
(the "Company") as of December 31, 2005, and the related statements of
operations, stockholders' deficit and cash flows for each of the years in the
two-year period ended December 31, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2005 and the results of its operations and cash flows for each of the years in
the two-year period ended December 31, 2005 in conformity with generally
accepted accounting principles in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company's continued operating losses, limited capital
and stockholders' deficit raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to this matter are also
described in Note 13. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.


/s/ CACCIAMATTA ACCOUNTANCY CORPORATION

Irvine, California
March 22, 2006


                                      F-2


<PAGE>
<TABLE>

                                     PRISM SOFTWARE CORPORATION
                                            Balance Sheet


                                                                                    DECEMBER 31,
                                                                                       2005
                                                                                   ------------

                                               ASSETS

<S>                                                                                <C>
Current assets
  Cash                                                                             $     80,914
  Accounts receivable, net of allowance
    for doubtful accounts of $244,369                                                    79,681
  Inventory                                                                               5,908

                                                                                   ------------
    Total current assets                                                                166,503

  Equipment, net                                                                         51,453
  Other                                                                                  23,163

                                                                                   ------------
                                                                                   $    241,119
                                                                                   ============


                                LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities
  Notes payable - stockholders                                                     $     41,696
  Accrued interest - stockholders                                                        83,200
  Accrued expenses - stockholders                                                        30,203
  Accounts payable                                                                      135,396
  Accrued expenses                                                                      368,730
  Deferred revenue                                                                      138,821

                                                                                   ------------
    Total current liabilities                                                           798,046
                                                                                   ------------

Long-term liabilities
  Notes payable - stockholders                                                     $ 10,149,838
  Accrued interest - stockholders                                                     1,119,810
  Deferred revenue                                                                        5,560

                                                                                   ------------
    Total long-term liabilities                                                      11,275,208
                                                                                   ------------

Commitments and contingencies                                                                --

Stockholders' deficit
  Preferred stock - 5,000,000 shares authorized, $.01 par value;
    Series A - 78,800 shares issued and outstanding                                         788
  Common stock - 300,000,000 shares authorized, $.01 par value;
    141,591,534 shares issued and outstanding                                         1,415,915
  Additional paid-in capital                                                         11,394,263
  Accumulated deficit                                                               (24,643,101)

                                                                                   ------------
    Total stockholders' deficit                                                     (11,832,135)

                                                                                   ------------
                                                                                   $    241,119
                                                                                   ============

             The accompanying notes are an integral part of these financial statements

                                                F-3


<PAGE>

                           PRISM SOFTWARE CORPORATION
                            Statements of Operations

                                                             YEAR ENDED DECEMBER 31,
                                                      ---------------------------------
                                                           2005               2004
                                                      -------------       -------------

Net sales
  Products                                            $     868,183       $     394,100
  Services                                                  360,709             341,609

                                                      -------------       -------------
                                                          1,228,892             735,709
                                                      -------------       -------------

Cost of sales
  Products                                                   18,616              27,574
  Services                                                  407,936             352,468

                                                      -------------       -------------
                                                            426,552             380,042

                                                      -------------       -------------
    Gross profit                                            802,340             355,667
                                                      -------------       -------------

Operating expenses
  Selling and administrative                              1,143,700           1,719,279
  Research and development                                  414,394             292,538
  Provision for potentially uncollectible sales             240,000                  --

                                                      -------------       -------------
                                                          1,798,094           2,011,817

                                                      -------------       -------------
    Loss from operations                                   (995,754)         (1,656,150)

Gain - settling or writing off debt and interest                 --             814,591
Gain - settling or writing off accounts payable              17,095             117,282
Interest expense - stockholders                            (481,487)           (645,707)
Interest expense                                                 --              (3,849)

                                                      -------------       -------------
Net loss                                              $  (1,460,146)      $  (1,373,833)
                                                      =============       =============


Basic and diluted net loss per common share           $       (0.01)      $       (0.01)
                                                      =============       =============

Basic and diluted weighted average
  number of common shares outstanding                   141,592,000         141,592,000
                                                      =============       =============


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

                                           F-4


<PAGE>


                                                      Stockholders' Deficit
                                           Years Ended December 31, 2005 and 2004



                                     SERIES A
                                  PREFERRED STOCK            COMMON STOCK            ADDITIONAL                           TOTAL
                              ----------------------- ---------------------------     PAID-IN        ACCUMULATED      STOCKHOLDERS'
                               SHARES       AMOUNT      SHARES        AMOUNT          CAPITAL          DEFICIT          DEFICIT
                              -----------  ---------- -------------  ------------  --------------  ---------------  ---------------
Balance, December 31, 2003        78,800         788   141,591,534     1,415,915      11,394,263      (21,809,122)      (8,998,156)

Net loss                               -           -             -             -               -       (1,373,833)      (1,373,833)

                              -----------  ---------- -------------  ------------  --------------  ---------------  ---------------
Balance, December 31, 2004        78,800       $ 788   141,591,534    $1,415,915    $ 11,394,263    $ (23,182,955)   $ (10,371,989)
                              -----------  ---------- -------------  ------------  --------------  ---------------  ---------------

Net loss                               -           -             -             -               -       (1,460,146)      (1,460,146)

                              -----------  ---------- -------------  ------------  --------------  ---------------  ---------------
Balance, December 31, 2005        78,800       $ 788   141,591,534    $1,415,915    $ 11,394,263    $ (24,643,101)   $ (11,832,135)
                              ===========  ========== =============  ============  ==============  ===============  ===============


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

                                                          F-5


<PAGE>

                                          PRISM SOFTWARE CORPORATION
                                           Statements of Cash Flows

                                                                                     YEAR ENDED DECEMBER 31,
                                                                                 -----------------------------
                                                                                     2005               2004
                                                                                 -----------       -----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                                         $(1,460,146)      $(1,373,833)
Adjustments to reconcile net loss to net cash used by operating activities:
   Provision for doubtful accounts receivable                                        240,000                --
   Loss on disposal of assets                                                             --               873
   Depreciation                                                                       33,631            16,913
   Gain - settling or writing off debt and interest                                       --          (814,591)
   Gain - settling or writing off accounts payable                                   (17,095)         (117,282)
   (Increase) decrease in assets
     Accounts receivable                                                            (249,021)          (24,037)
     Inventory                                                                          (308)           (5,149)
     Other assets                                                                     (8,821)          (12,278)
   Increase (decrease) in liabilities
     Accounts payable                                                                (80,435)          (53,862)
     Accrued expenses                                                                333,229           772,661
     Deferred revenue                                                               (158,207)          197,331

                                                                                 -----------       -----------
      Net cash used by operating activities                                       (1,367,173)       (1,413,254)

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of equipment                                                              (41,722)          (29,425)
                                                                                 -----------       -----------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of notes payable - stockholders                           1,100,000         1,950,000
  Payments on notes - stockholders                                                        --          (129,536)

                                                                                 -----------       -----------
        Net cash provided by financing activities                                  1,100,000         1,820,464

                                                                                 -----------       -----------
Net increase (decrease) in cash                                                     (308,895)          377,785

Cash, beginning of period                                                            389,809            12,024

                                                                                 -----------       -----------
Cash, end of period                                                              $    80,914       $   389,809
                                                                                 ===========       ===========

Supplemental disclosures:
  Cash paid for interest                                                         $        --       $        --
  Cash paid for income tax                                                       $        --       $        --



                       The accompanying notes are an integral part of these financial statements.
</TABLE>
                                                         F-6


<PAGE>

                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------------

      ORGANIZATION
      ------------

      Prism Software Corporation (the "Company") was organized under the laws of
      Delaware in 1992. The Company specializes in enterprise document and
      content management solutions. The Company's products and expertise lie in
      electronic document formation, document management, and print stream
      conversion solutions. The Company's customer base includes organizations
      that use its solutions in managing high-volume, large scale document
      printing in a variety of markets.

      CONCENTRATIONS OF RISK
      ----------------------

      In 2005 and 2004, the three largest customers in each year accounted for
      approximately 59% and 42%, respectively, of the Company's sales in those
      years, with one customer being among the three largest in both years.
      Sales through the Company's reseller channel accounted for approximately
      87% and 69%, respectively, of the Company's sales in those years.

      At December 31, 2005 and 2004, the three largest accounts receivable
      totaled approximately 83% and 70%, respectively, of gross accounts
      receivable. At December 31, 2005, the largest account represented
      approximately 74% of gross accounts receivable, and was fully reserved.

      USE OF ESTIMATES
      ----------------

      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect certain reported amounts and disclosures.
      Accordingly, actual results could differ from those estimates.

      INVENTORY
      ---------

      Inventory is reported at the lower of cost (determined on the
      first-in-first-out method) or market and consists principally of licenses
      purchased for incorporation into the Company's software products.

      EQUIPMENT
      ---------

      Equipment is recorded at cost. Depreciation is provided over the estimated
      useful lives of the related assets, generally three to five years, using
      the straight-line method.

                                      F-7


<PAGE>

                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------------------------------

      SOFTWARE DEVELOPMENT COSTS
      --------------------------

      Development costs related to new software products and enhancements to
      existing software products are expensed as incurred until technological
      feasibility has been established. After technological feasibility is
      established, any additional costs are capitalized in accordance with
      Statement of Financial Accounting Standards No. 86, "Accounting for the
      Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The
      Company believes the establishment of technological feasibility occurs
      concurrently with the completion of software development. Accordingly, no
      costs have been capitalized as of December 31, 2005.

      REVENUE RECOGNITION
      -------------------

      Revenues from the licensing of computer software products are recognized
      upon delivery of the products to customers, as there are no significant
      obligations remaining after the delivery date. Revenues related to service
      agreements are deferred and recognized over the terms of the related
      agreements, generally no more than 12 months. Payments are generally due
      within 30 days. Management's review of collectibility is an ongoing
      process, and reserves are made based on the Company's historical
      experience with each customer and its knowledge of each receivable.

      INCOME TAXES
      ------------

      The Company accounts for income taxes under the asset and liability
      method. Deferred income taxes are recognized for the tax consequences of
      temporary differences by applying enacted statutory rates applicable to
      future years to the difference between the financial statement carrying
      amounts and the tax basis of existing assets and liabilities.

      STOCK-BASED COMPENSATION
      ------------------------

      The Company has elected to continue to account for stock-based
      compensation using the intrinsic value method, as described in Accounting
      Principles Board Opinion 25. Accordingly, compensation is measured as the
      excess, if any, of the quoted market price of the Company's common stock
      at the date of grant over the amount an employee is required to pay to
      acquire the stock. No such compensation costs were reported in 2005 and
      2004. Companies using APB 25 to report stock-based compensation are
      required under SFAS 123 to disclose the estimated fair value of options
      granted.

                                      F-8


<PAGE>

                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------------------------------

      STOCK-BASED COMPENSATION (CONTINUED)
      ------------------------------------

      As prescribed under SFAS 123, the Company used the Black-Scholes Option
      Pricing Model to estimate the fair value of the options granted in 2004
      using the following assumptions. No options were granted in 2005.

                                                  2004
                                                  ----
               Expected life (years)              4 years
               Risk-free interest rate            3.5%
               Volatility                         60%

      Had the Company chosen to report the stock-based compensation at its
      estimated fair value, net loss and net loss per share would have increased
      slightly.

                                                 2005               2004
                                            -------------       -----------
Net loss
  As reported                               $  (1,460,146)      $(1,373,833)
  Estimated fair value of compensation                 --            (4,800)
                                            -------------       -----------
  Pro forma                                 $  (1,460,146)      $(1,378,633)

Basic and diluted loss per share
  As reported                               $       (0.01)      $     (0.01)
  Pro forma                                 $       (0.01)      $     (0.01)


      CASH AND EQUIVALENTS
      --------------------

      The Company considers all liquid investments with a maturity of three
      months or less from the date of purchase that are readily convertible into
      cash to be cash equivalents. Balances in bank accounts may, from time to
      time, exceed federally insured limits. The Company believes that its loss
      exposure is limited.

      ADVERTISING COSTS
      -----------------

      Advertising costs are expensed as incurred. During 2005 and 2004,
      advertising costs totalled approximately $49,800 and $20,400,
      respectively.

      BASIC AND DILUTED NET LOSS PER SHARE
      ------------------------------------

      Basic net loss per share is based upon the weighted average number of
      common shares outstanding. Diluted net loss per share is based on the
      assumption that all dilutive convertible shares and stock options were
      converted or exercised. Dilution is computed by applying the treasury
      stock method. Under this method, options and warrants are assumed to be
      exercised at the beginning of the period (or at the time of issuance, if
      later), and as if funds obtained thereby were used to purchase common
      stock at the average market price during the period.


                                      F-9


<PAGE>

                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------------------------------

      FAIR VALUE OF FINANCIAL INSTRUMENTS
      -----------------------------------

      The fair value of the notes payable to stockholders and related accrued
      interest cannot be determined due to the related party nature of the
      obligations.

      RESEARCH AND DEVELOPMENT COSTS
      ------------------------------

      Research and development costs are charged to expense as incurred.

      RECENT ACCOUNTING PRONOUNCEMENTS
      --------------------------------

      In December 2004, the FASB issued SFAS No. 123 (Revised 2004), SHARE-BASED
      PAYMENTS ("SFAS 123R"). SFAS 123R requires all share-based payments to
      employees, including grants of employee stock options, to be recognized in
      the income statement based on their fair values. The Company is required
      to adopt the new standard in the first interim period beginning after
      December 15, 2005. The Company has not yet determined the impact, if any,
      of the adoption of SFAS 123R on its financial statements.

      In May 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR
      CORRECTIONS--A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3
      ("SFAS 154"). SFAS 154 changes the requirements for the accounting for and
      reporting of a change in accounting principle. The Company is required to
      adopt the new standard in the first interim period beginning after
      December 15, 2005. The Company does not expect the adoption of SFAS 154 to
      have a material effect on its financial statements.


                                      F-10


<PAGE>

                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


2.    EQUIPMENT
---------------

      Furniture and equipment                                       $ 34,883
      Computer equipment and software                                 83,371

                                                                    ---------
                                                                     118,254

      Accumulated depreciation and amortization                      (66,801)

                                                                    ---------
                                                                    $ 51,453
                                                                    =========


      Depreciation expense charged to operations in 2005 and 2004 was $33,631
      and $16,913, respectively.

3.    ACCRUED EXPENSES
----------------------

      Wages and benefits                                            $ 152,761
      Sales commissions                                                88,997
      Professional services                                            47,500
      Other                                                            79,472

                                                                    ----------
                                                                    $ 368,730
                                                                    ==========

<TABLE>

4.    NOTES PAYABLE
-------------------

      Stockholders
      ------------
<S>                                                                      <C>
      9% to 10%, past due August 1996, unsecured                         $     41,696

      5%, due March 1, 2007, secured by the Company's assets                3,050,000

      5%, convertible into common stock at $.01 per share at
      holders' option (limited to a maximum of 94,488,356 shares),
      due March 1, 2007, secured by the Company's assets                    7,099,838

                                                                         -------------
                                                                         $ 10,191,534
                                                                         =============
</TABLE>


      Annual maturities are as follows:

      2006                                $     41,696
      2007                                  10,149,838

                                          -------------
                                          $ 10,191,534
                                          =============

                                      F-11


<PAGE>

                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


4.    NOTES PAYABLE (CONTINUED)
-------------------------------

      During 2004, the holders of the secured debt described above, in exchange
      for the Company making principal payments on certain unsecured debt and
      for securing their remaining unsecured debt, 1) forgave approximately
      $30,000 of unsecured debt principal and approximately $525,000 of accrued
      interest, 2) extended the due date of their secured debt to March 1, 2007
      and 3) limited the number of shares of common stock into which their debt
      could be converted.

      During 2004, the Company recognized a gain by writing off approximately
      $127,000 of debt held by other holders which was determined to be no
      longer enforceable, and approximately $133,000 of accrued interest on such
      debt.


5.    PREFERRED STOCK
---------------------

      The Company has authorized 5,000,000 shares of $0.01 par value preferred
      stock, of which 100,000 shares have been designated as $5.00 Series A 10%
      cumulative convertible preferred stock (Series A).

      The holders of Series A are entitled to receive, when and as declared by
      the Company's Board of Directors (the Board), cumulative annual dividends
      of $0.50 per share commencing upon issuance and payable semi-annually.
      Series A has a liquidation preference of $5.00 per share plus any accrued
      but unpaid dividends. Series A is redeemable at the Company's election
      upon 30 days' notice at a price per share of $5.50 plus accrued but unpaid
      dividends thereon. The 78,800 shares of Series A outstanding at December
      31, 2005 are currently convertible at the election of the holders into
      3,419,920 shares of common stock. The conversion rate is subject to the
      adjustments set forth in the certificate of designation for Series A based
      on the current market price of the Company's common stock. The holders of
      the Series A are entitled to cast one non-cumulative vote per share of
      Series A in all matters presented to the shareholders, and the majority of
      holders of Series A, voting as a class, have certain protective rights
      relating to their dividends and preference rights. No amounts have been
      accreted in relation to the Series A redemption as the likelihood of the
      Company electing to repurchase is remote.

      At December 31, 2005, the amount of undeclared dividends in arrears on the
      Series A was $531,900 ($6.75 per share).

                                      F-12


<PAGE>

                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


6.    STOCK OPTIONS
-------------------

      1993 STOCK OPTION PLAN
      ----------------------

      The Company's 1993 Stock Option Plan provides for the issuance of options
      to employees, directors, officers, and advisors of the Company to acquire
      up to 630,000 shares of the Company's common stock. Options issued under
      this plan are generally granted at estimated market value, vest at varying
      rates and expire within ten years from the date of grant or within 90 days
      after termination of employment. As of December 31, 2005, options for
      50,000 shares of Common Stock were reserved for issuance upon exercise of
      outstanding options. Except as to options previously granted and
      outstanding under it, the 1993 Stock Option Plan terminated on February 1,
      2003.


      2000 STOCK OPTION PLAN
      ----------------------

      The Company's 2000 Stock Option Plan provides for the issuance of options
      to employees, directors, officers and advisors of the Company to acquire
      up to 3,000,000 shares of common stock. Options issued under this plan are
      generally exercisable at 85% of the market value on the date of grant,
      vest over three years and expire within ten years from the date of grant
      or within 90 days after termination of employment. As of December 31,
      2005, none of the options available for grant under the 2000 Plan had been
      exercised, 1,470,000 shares of Common Stock were reserved for issuance
      upon exercise of outstanding options and 1,530,000 shares of Common Stock
      remained available for grant thereunder. Except as to options previously
      granted and outstanding under it, the 2000 Stock Option Plan will
      terminate on May 4, 2010.


                                      F-13


<PAGE>

                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


6.    STOCK OPTIONS (CONTINUED)
-------------------------------

      E. TED DANIELS OPTIONS
      ----------------------

      In December 2004, as part of the Company's settlement with E. Ted Daniels,
      its previous President, the Company granted Mr. Daniels non-qualified
      options to purchase 1,400,000 shares of the Company's Common Stock. The
      settlement agreement also had a provision for issuing options for
      additional shares of Common Stock equal to 4% of new shares of Common
      Stock issued through December 15, 2005 (with certain limitations), but
      this time period elapsed with no additional options required to be issued
      under this provision. As of December 31, 2004, none of these options
      available for grant had been exercised, 1,400,000 shares of Common Stock
      were reserved for issuance upon exercise of such outstanding options, and
      the exercise price was $0.01 per share. These options will terminate on
      December 15, 2008.

      Stock option activity for the years ended December 31, 2005 and 2004
      follows:

<TABLE>
                                         WEIGHTED                  WEIGHTED                  WEIGHTED                  WEIGHTED
                                          AVERAGE                  AVERAGE                    AVERAGE     E. TED        AVERAGE
                           FINANCING      OPTION       1993         OPTION        2000        OPTION      DANIELS        OPTION
                            OPTIONS        PRICE       PLAN         PRICE         PLAN         PRICE      OPTIONS        PRICE
                       ---------------------------- ------------------------  ------------------------ -------------------------
<S>                          <C>              <C>       <C>            <C>      <C>              <C>       <C>             <C>
December 31, 2003            197,093          2.00      80,000         0.27     1,720,000        0.04              -          -
Granted                            -             -           -            -             -           -      1,400,000       0.01
Expired or Cancelled        (197,093)            -     (15,000)        0.65      (200,000)       0.05              -          -
Exercised                          -             -           -            -             -           -              -          -

                       ---------------------------- ------------------------  ------------------------ -------------------------
December 31, 2004                  -             -      65,000         0.18     1,520,000        0.04      1,400,000       0.01
                       ---------------------------- ------------------------  ------------------------ -------------------------
Granted                            -             -           -            -             -           -              -       0.01
Expired or Cancelled               -             -     (15,000)        0.65       (50,000)       0.03              -          -
Exercised                          -             -           -            -             -           -              -          -

                       ---------------------------- ------------------------  ------------------------ -------------------------
December 31, 2005                  -             -      50,000         0.04     1,470,000        0.04      1,400,000       0.01
                       ============================ ========================  ======================== =========================


      The following information applies to options outstanding at December 31,
2005:
                                                         Weighted
                                                         Average             Weighted                               Weighted
                                                        Remaining             Average                                Average
                                    Number           Contractual Life        Exercise             Number            Exercise
                                 Outstanding             (Years)               Price           Exercisable            Price
                               -----------------   ---------------------  ----------------   -----------------   ----------------

1993 stock option plan                   50,000             3                      $ 0.04              50,000             $ 0.04
2000 stock option plan                1,470,000             7                      $ 0.04           1,470,000             $ 0.04
E. Ted Daniels options                1,400,000             3                      $ 0.01           1,400,000             $ 0.01

                               -----------------                                             -----------------
                                      2,920,000                                                     2,920,000
                               =================                                             =================
</TABLE>

                                      F-14


<PAGE>

                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


7.    WARRANTS
--------------

      The Company issued 2,500,000 warrants in 2001 in relation to a private
      placement offering. All such warrants expired during 2004. No additional
      warrants were issued through December 31, 2005.


8.    BASIC AND DILUTED NET LOSS PER SHARE
------------------------------------------

      The following table illustrates the reconciliation of the numerators and
      denominators of the basic and diluted loss per share computations.

                                                     2005              2004
                                                 -------------    -------------

Numerator
---------
  Net loss                                       $  (1,460,146)   $  (1,373,833)
  Preferred dividends                                  (39,400)         (39,400)

                                                 -------------    -------------
  Net loss                                       $  (1,499,546)   $  (1,413,233)
                                                 =============    =============

Denominator
-----------
  Basic and diluted weighted average number of
  common shares outstanding during the period      141,592,000      141,592,000
                                                 -------------    -------------

Basic and diluted net loss per share             $       (0.01)   $       (0.01)
                                                 =============    =============

      The following incremental common shares associated with outstanding
      options, warrants and convertible debt are not included in the
      denominators above as their effect would be anti-dilutive:


                               EQUIVALENT NUMBER OF
                                  Common Shares
                                 at December 31,
                       -------------------------------------
                             2005               2004
                       -----------------  ------------------
Options                       2,920,000           2,985,000
Convertible debt             94,488,356          94,488,356


                                      F-15


<PAGE>

                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


9.    INCOME TAXES
------------------

      The Company recognizes deferred tax assets and liabilities for temporary
      differences between the financial reporting and tax bases of its assets
      and liabilities. Deferred tax assets are reduced by a valuation allowance
      when deemed appropriate.

      The Company has deferred tax assets of approximately $8,179,000 at
      December 31, 2005 relating to its net operating losses. The Company
      provided a 100% valuation allowance for these deferred tax assets.
      Accordingly, the Company recorded no benefit for income taxes during the
      periods presented. During 2005 and 2004 the Company's valuation allowance
      increased approximately $116,000 and approximately $175,000, respectively.

      At December 31, 2005, the Company has net operating loss carryforwards for
      federal tax purposes of approximately $18,175,000, which will expire
      beginning in 2006 through 2025.


10.   COMMITMENTS AND CONTINGENCIES
-----------------------------------

      LEASES
      ------

      The office lease started September 1, 2004 and expires August 31, 2007,
      with options to extend for up to two additional three-year terms. The
      initial monthly rent was $5,177, with provisions for annual escalation. In
      2005 and 2004, rent expense was $63,060 and $73,465, respectively.

      Minimum annual lease payments at December 31, 2004 are as follows:

      2006               $  65,884
      2007                  45,178

                         ----------
                         $ 111,062
                         ==========

                                      F-16


<PAGE>

                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005



11.   LEGAL PROCEEDINGS
-----------------------

      In November 2004, the Company reached a settlement to resolve in a
      mutually satisfactory and voluntary manner a payment owed under a
      terminated agreement. The other party had recently filed for arbitration
      of the matter.

      In December 2004, the Company reached a settlement to resolve in a
      mutually satisfactory and voluntary manner a dispute with its previous
      President, E. Ted Daniels, regarding his prior employment with the
      Company.

      The effects of both such settlements are reflected in the accompanying
      financial statements at December 31, 2004, and totalled approximately
      $310,000.


12.   ACCOUNTS PAYABLE
----------------------

      During 2005 and 2004, the Company recognized gains of approximately
      $17,000 and $117,000, respectively, from settling certain accounts payable
      and/or from writing off certain other accounts payable that were
      determined to be no longer enforceable.


13.   GOING CONCERN
-------------------

      The Company's continued operating losses, limited capital and
      stockholders' deficit raise substantial doubt about its ability to
      continue as a going concern. Management's plans to continue strengthening
      the Company's financial condition and operations include: restructuring
      the Company's debt and other liabilities, monitoring costs and cash flow
      activities, expanding operations through potential cooperative ventures,
      continuing to upgrade sales and marketing efforts and upgrading customer
      service and product development efforts. The Company also intends to
      continue raising capital to fund its operations, but no assurance can be
      given that such funding will be available.




                                      F-17