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

                                   FORM 10-QSB

                                   (MARK ONE)

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

                For the quarterly period ended December 31, 2004

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

                    For the transition period from ___ to ___

                       Commission file number: 333-5278-NY

                       POWERHOUSE TECHNOLOGIES GROUP, INC.

        (Exact name of small business issuer as specified in its charter)

            Delaware                                           94-3334052
-------------------------------                        -------------------------
(State or other jurisdiction of                               (IRS Employer
 incorporation or organization)                            Identification No.)

     2694 Bishop Drive, Suite 270
            San Ramon, CA                                         94583
-------------------------------                        -------------------------
       (Address of principal                                    (Zip Code)
          executive offices)

Issuer's telephone number:                                  (925) 328-1100
                                                       -------------------------

Former name, former address and former fiscal year,
  if changed since last report                                     N/A
                                                       -------------------------

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

Yes [X] No [ ]

As of February 4, 2005, there were 3,569,443 shares of the issuer's common
stock, $0.0001 par value, outstanding.

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

<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                       POWERHOUSE TECHNOLOGIES GROUP, INC.
                          (A Development Stage Company)
          CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2004
                                   (Unaudited)

<TABLE>
<CAPTION>
                                      ASSETS

CURRENT ASSETS:
<S>                                                                                     <C>
Cash                                                                                    $  1,893,280
Accounts receivable                                                                           89,404
Inventory                                                                                    189,501
Other current assets                                                                         133,406
                                                                                        ------------
Total current assets                                                                       2,305,591

PROPERTY AND EQUIPMENT:                                                                       13,842

OTHER ASSETS:
Software technology, net of accumulated amortization of $293,226                           2,529,110
Other assets                                                                                  52,025
                                                                                        ------------
Total other assets                                                                         2,581,135

TOTAL ASSETS                                                                            $  4,900,568
                                                                                        ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY


CURRENT LIABILITIES:

Accounts payable                                                                        $  1,547,366
Accrued compensation                                                                          88,290
Accrued liabilities                                                                        1,565,293
Dividends payable                                                                            434,465
                                                                                        ------------

Total current liabilities                                                                  3,635,414

TOTAL LIABILITIES                                                                          3,635,414
                                                                                        ============

Commitments and contingencies  (See Note 5)

STOCKHOLDERS' EQUITY:

Senior A Preferred stock, $.0001 par value; 10,000,000 shares authorized; 3,674,635
shares issued and outstanding; preference upon liquidation of $15,972,915                        368
Junior A Preferred stock, $.0001 par value; 5,000,000 shares authorized; 879,026
shares issued and outstanding; preference upon liquidation of $2,600,000                          88
Common stock, $.0001 par value; 200,000,000 shares authorized; 3,333,958 shares                  334
issued and outstanding
Additional paid in capital                                                                27,024,654
Deficit accumulated in development stage                                                 (25,437,040)
Treasury stock                                                                              (183,600)
Deferred consulting compensation                                                            (139,650)

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

Total stockholders' equity                                                                 1,265,154
                                                                                        ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                              $  4,900,568
                                                                                        ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       2
<PAGE>

                       POWERHOUSE TECHNOLOGIES GROUP, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                              For the period from
                                            For the three months ended           For the nine months ended        May 16, 2002
                                                     December 31,                       December 31,            (inception) to
                                               2004              2003             2004              2003       December 31, 2004
                                            (Unaudited)       (Unaudited)     (Unaudited)        (Unaudited)      (Unaudited)
                                           ------------      ------------     ------------      ------------     ------------
<S>                                        <C>               <C>              <C>               <C>              <C>
Revenues                                   $    140,120      $    238,615     $    234,643      $    238,615     $    580,228

Cost of Sales                                    93,953           166,380          162,169           166,380          376,840
                                           ------------      ------------     ------------      ------------     ------------

Gross Profit                                     46,167            72,235           72,474            72,235          203,388
                                           ------------      ------------     ------------      ------------     ------------
Operating Expenses:
Research and development                        116,027                --          254,621           104,006          574,193
Sales and marketing                             394,288           391,932        1,655,845         1,289,249        3,625,001
General and administrative                    2,038,327           626,848        4,244,712         1,280,859        7,399,060
                                           ------------      ------------     ------------      ------------     ------------
Total operating expenses                      2,548,642         1,018,780        6,155,178        2,674,114       11,598,254

Non-Operating (Income) Expense:
Other income                                     (7,151)               --          (35,734)               --          (15,370)
Loss due to theft                                    --                --               --         1,839,411        3,142,759
Equity in loss of investee                           --             2,398           24,365            97,329          205,854
Interest expense                                    277                --        2,146,966             3,118        2,214,846
                                           ------------      ------------     ------------      ------------     ------------
Total non-operating (income) expense             (6,874)            2,398        2,135,597         1,939,858        5,548,089

Loss Before Income taxes                      2,495,601           948,943        8,218,301         4,541,737       16,942,955

Provision for Income Taxes                           --                --              800                --            2,400
                                           ------------      ------------     ------------      ------------     ------------

Net Loss                                      2,495,601           948,943        8,219,101         4,541,737     $ 16,945,355
                                                                                                                 ============
Dividends on Senior A
Preferred Stock                                 883,063                --        8,491,687                --
                                           ------------      ------------     ------------      ------------
Net Loss Allocable
to Common Shareholders                     $  3,378,664      $    948,943     $ 16,710,788      $  4,541,737
                                           ============      ============     ============      ============

Basic and Diluted Loss per Share           $     (1.11)      $     (0.27)     $     (5.35)      $     (1.48)
                                           ============      ============     ============      ============

Weighted Average Shares Outstanding           3,053,458         3,548,716        3,124,716         3,059,242
                                           ============      ============     ============      ============
</TABLE>


See accompanying notes to consolidated financial statements.


                                       3
<PAGE>

                       POWERHOUSE TECHNOLOGIES GROUP, INC.
                          (A Development Stage Company)
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                DECEMBER 31, 2004

<TABLE>
<CAPTION>
                                                                                                      For the Period
                                                               For the Nine        For the Nine     from May 16, 2002
                                                               Months Ended        Months Ended       (inception) to
                                                            December 31, 2004    December 31, 2003  December 31, 2004
                                                               (unaudited)          (unaudited)         (unaudited)
                                                            -----------------    -----------------  -----------------
<S>                                                              <C>                <C>                <C>
Cash Flows from Operating Activities:
    Net loss                                                     (8,219,101)        (4,541,737)        (16,945,355)
    Adjustments to reconcile net loss to net cash
        used in operating activities:
            Common stock issued for services                        956,000            779,000           2,159,775
            Equity in loss of investee                               24,365             97,329             205,854
            Depreciation and amortization                           295,232                 --             295,232
            Accrued interest on notes payable                            --              3,118                  --
            Interest expense relating to amortization
              of debt issuance costs                                172,042                 --             193,303
            Interest expense relating to amortization
              of debt discount                                    1,883,949                 --           1,921,715
        Changes in operating assets and liabilities:
            Accounts receivable                                     (66,466)           (19,283)            (89,404)
            Inventory                                              (173,413)           (20,539)           (189,501)
            Other current assets                                   (113,406)            (9,550)           (133,406)
            License fee                                                  --           (219,033)           (118,418)
            Other assets                                            (49,976)                --             (52,025)
            Accounts payable                                        617,303            436,403           1,547,366
            Accrued compensation                                   (261,293)           309,003              70,790
            Accrued liabilities                                      86,834             50,390             465,694
            Dividends payable                                            --                 --                  --
            Due to officer                                          (21,251)           (93,667)            (21,251)
                                                                -----------        -----------         -----------
                Net cash used in operating activities
                    from continuing operations                   (4,869,181)        (3,228,566)        (10,689,631)
                                                                -----------        -----------         -----------
Cash Flows from Investing Activities:
            Acquisition of First Person Software, Inc.           (1,283,698)                --          (1,283,698)
            Purchase of equipment                                   (15,847)                --             (15,847)
            Investment in equity investee                                --                 --            (130,000)
                                                                -----------        -----------         -----------
                Net cash used in investing activities            (1,299,545)                --          (1,429,545)
                                                                -----------        -----------         -----------
Cash Flows from Financing Activities:
    Payment of finders' fee                                         (60,825)           (50,000)           (110,825)
    Payment of debt issuance costs                                       --                 --             (98,425)
    Principal payment on notes payable to equity investee                --           (180,000)           (270,000)
    Advances on common stock subscriptions                               --          3,308,632           2,233,676
    Proceeds from convertible notes                                 980,000            240,000           2,664,000
    Payments upon rescission of common stock                       (227,500)                --            (227,500)
    Proceeds from sale of common stock                                   --                 --           3,258,683
    Proceeds from sale of preferred stock                         6,562,847                 --           6,562,847
                                                                -----------        -----------         -----------
                Net cash provided by financing activities         7,254,522          3,318,632          14,012,456
                                                                -----------        -----------         -----------
Net increase in cash                                              1,085,796             90,066           1,893,280
Cash, beginning of period                                           807,484                 --                  --
                                                                -----------        -----------         -----------
Cash, end of period                                               1,893,280             90,066           1,893,280
                                                                ===========        ===========         ===========
Non-cash investing and financing activity:
    Issuance of note payable for acquisition of
      investment in equity investee                                      --            270,000             270,000

    Issuance of common stock in exchange for an
        investment in equity investee                                    --            100,000             100,000

    Issuance of common stock in connection with
        the acquisition of First Person Software, Inc.            1,196,136                 --           1,196,136

    Debt discount recognized in connection with issuance of
        convertible notes                                                --                 --             239,008

    Liabilities assumed upon combination with
</TABLE>


                                       4
<PAGE>

<TABLE>
<S>                                                               <C>                                    <C>
        Agate Technologies, Inc.                                         --                 --             280,426

    Issuance of Senior A preferred stock in
        connection with conversion of debt                        2,676,766                 --           2,676,766

    Issuance of Junior A preferred stock in
        exchange for common stock in connection                   5,410,130                 --           5,410,130
        with the rescission offer
</TABLE>

See accompanying notes to consolidated financial statements.


                                       5
<PAGE>

PowerHouse Technologies Group, Inc.
(A Development Stage Company)

Notes to Financial Statements

For the Three and Nine Month Periods Ended December 31, 2004 (Unaudited) and
December 31, 2003 (Unaudited), For the Period May 16, 2002 (inception) Through
December 31, 2004 (Unaudited)

Forward-Looking Statements

This Quarterly Report on Form 10-QSB contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 or
under rules and regulations adopted by the Securities and Exchange Commission.
These forward-looking statements are based on the Company's current expectations
or beliefs, including, but not limited to, statements concerning our operations,
economic performance, financial condition, growth and acquisition strategies,
investments and operational plans. For this purpose, any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "believe," "anticipate," "expect," "intend," "plan," "will,"
"could," "might" or "continue" or the negative or other variations thereof and
other similar expressions identify forward-looking statements. In addition, any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. These
forward-looking statements by their nature involve substantial risks and
uncertainties, including general economic and market conditions, the potential
loss or termination of existing clients and contracts and the ability of the
Company to successfully identify and thereafter consummate one or more
acquisitions, certain of which are beyond our control, and actual results may
differ materially.

You are cautioned not to place undue reliance on these forward-looking
statements, which relate only to events as of the date on which the statements
are made. We undertake no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
You should refer to and carefully review the information in future documents we
file with the Securities and Exchange Commission ("SEC").

1. Basis of Presentation

The accompanying unaudited consolidated financial statements include all
adjustments which management believes are necessary for a fair presentation of
the Company's financial position at December 31, 2004, and results of operations
for the periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been consolidated or omitted. Results of operations
for the periods presented are not necessarily indicative of the results to be
expected for the full year. The accompanying consolidated financial statements
should be read in conjunction with the Company's audited financial statements
and footnotes as of and for the year ended March 31, 2004, contained in our Form
10-KSB filed on July 14, 2004.

2. Summary of Significant Accounting Policies

Critical Accounting Policies

The Company makes estimates and assumptions in the preparation of its
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. These accounting principles
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based
upon information available to us at the time that these estimates, judgments and
assumptions are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
periods presented. To the extent there are material differences between these
estimates, judgments or assumptions and actual results, our financial statements
will be affected. The accounting policies that reflect our more significant
estimates, judgments and assumptions and which we believe are the most critical
to aid in fully understanding and evaluating our reported financial results
include the following:

            Revenue Recognition

            Reserve For Returns, Price Discounts And Rebates

            Acquired Intangible Assets


                                       6
<PAGE>

            Recoverability of Goodwill and Purchased Intangible Property

In many cases, the accounting treatment of a particular transaction is
specifically dictated by generally accepted accounting principles and does not
require management's judgment in its application. There are also areas in which
management's judgment in selecting among available alternatives would not
produce a materially different result. Our significant accounting policies are
described in Note 2 to the audited consolidated financial statements contained
in the Company's Form 10-KSB for the year ended March 31, 2004, which was filed
on July 14, 2004. The accounting policies used in preparing our interim
condensed consolidated financial statements are the same as those described in
our audited financial statements.

We account for our purchases of acquired companies in accordance with SFAS No.
141 "Business Combinations" ("SFAS 141") and account for the related acquired
intangible assets in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). In accordance with SFAS 141, we allocate the
cost of the acquired companies to the identifiable tangible and intangible
assets and liabilities acquired, with the remaining amount being classified as
goodwill. Certain intangible assets, such as "acquired technology," are
amortized to expense over time. As of December 31, 2004, we had an aggregate of
approximately $2.5 million reflected on the accompanying consolidated balance
sheet related to intangible assets. The allocation of the purchase price of the
acquired companies to intangible assets requires management to make significant
estimates and assumptions, including estimates of future cash flows expected to
be generated by the acquired assets and the appropriate discount rate for these
cash flows. If different conditions should prevail, material write-downs of
intangible assets could occur.

Our acquired software technology assets are currently amortized over a period of
five years, using the straight-line method. SFAS 142 and SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144")
requires the Company to assess for an impairment of its intangible assets using
a two-phase process. The first phase screens for impairment, while the second
phase, if necessary, measures the impairment. The Company is a single reporting
unit; accordingly, all of the Company's intangible assets are associated with
the entire company. The Company performs the required impairment analysis of
intangible assets annually, or on an interim basis if circumstances dictate. Any
reduction of the enterprise fair value below the recorded amount of
stockholders' equity could require the Company to write down the value of
intangible assets to its fair value and record an expense for the impairment
loss.

Revenue Recognition Policy

The Company derives its revenue from three sources: 1) sales to end users
through the Company website, 2) direct sales to corporate end users, and 3)
sales to distributors when the product has been sold to third party customers.
Revenue from sales through the Company's website is recognized after the 30-day
return period has lapsed. Revenue from direct sales is recognized based on the
terms of the contract. Revenue from distributors is recognized when the product
has been sold to third party customers.

Stock-Based Compensation

On December 8, 2004, the Board of Directors adopted and the stockholders
approved the 2004 Omnibus Stock Incentive Plan (the "Stock Incentive Plan") and
reserved 1,125,000 shares for grant under the Stock Incentive Plan. The Company
may issue stock options, restricted stock, or stock bonuses under the Stock
Incentive Plan to employees, directors, and consultants. Stock options granted
under the Stock Incentive Plan may be granted at prices not less than the fair
market value at the date of grant for incentive stock options. Options expire
ten years from the date of grant and generally vest over 3 years. No participant
in the Stock Incentive Plan who is a key employee may be granted more than
125,000 stock options in any calendar year.

Subsequent to December 31, 2004, the Board of Directors authorized the granting
of 840,000 stock options under the Stock Incentive Plan to several employees,
and one former employee.

The Company accounts for employee stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and in accordance with FASB Interpretation No. 44. Pursuant to these
accounting pronouncements, the Company records compensation for stock options
granted to employees over the vesting period of the options based on the
difference, if any, between the exercise price of the options and the market
price of the underlying shares at that date. The Company has no employee options
outstanding at December 31, 2004.

Beginning on January 1, 2005, the Company will adopt the accounting treatment
required by FASB Statement No. 123 (revised 2004) which will require the Company
to measure all employee stock-based compensation awards using a fair value
method and record such expense in the Company's consolidated financial
statements.


                                       7
<PAGE>

3. Stock Transactions

The Company entered into a Placement Agency Agreement, dated as of April 7,
2004, with Middlebury Capital, LLC ("Middlebury Capital") to act as the
placement agent for the sale of a minimum of $8,000,000, and up to a maximum of
$15,000,000, of the Company's Series A Senior Units (the "Senior A Units") in
the Senior A Units Offering. Each Senior A Unit is comprised of four shares of
the Company's Series A Senior Convertible Preferred Stock (the "Senior A
Preferred Stock") and a five-year warrant to purchase one share of common stock,
par value $0.0001 per share ("Common Stock") at an exercise price of $3.83 (the
"Senior A Preferred Warrants"). Pursuant to the Placement Agency Agreement, and
in conjunction with other underwriter compensation, the Company granted
Middlebury Capital five-year warrants exercisable for $2.29 per share to
purchase up to 68,559 shares of the Company's Common Stock (the "Common
Placement Agent Warrants") and five-year warrants exercisable at $3.06 per share
to purchase up to 264,775 shares of the Company's Senior A Preferred Stock (the
"Preferred Placement Agent Warrants"). As of December 31, 2004, all of the
Preferred Placement Agent Warrants had been granted.

On June 4, 2004, in connection with a rescission offer made to certain holders
of its Common Stock, the Company issued 1,082,026 shares of Series A Junior
Convertible Preferred Stock, convertible into Common Stock upon demand (the
"Junior A Preferred Stock"), in exchange for the same number of shares of the
Company's Common Stock. In addition, the Company issued, with the Junior A
Preferred Stock, five-year warrants exercisable at $3.83 per share to purchase
up to 270,507 shares of the Company's Common Stock (the "Junior A Preferred
Warrants"). During the quarter ended June 30, 2004, the Company recognized
dividends of $1,760,708 related to the beneficial conversion feature of the
Junior A Preferred Stock and Junior A Preferred Warrants. (See note 5,
"Commitments and Contingencies, Rescission Offer.")

On June 9, 2004, the Company issued 15,000 shares of restricted Common Stock in
full satisfaction for all services rendered under a professional services
agreement. The closing share price for the Company's Common Stock on this date
was $5.75 and the Company recorded consulting expense of $86,250 during the
period.

On June 14, 2004, the Company closed upon the first tranche of the Company's
Senior A Units Offering, which consisted of approximately $8,722,605 in total
consideration from the sale of approximately 784,500 Senior A Units to certain
institutional investors. The amount included approximately $2,125,000 received
under a previously closed bridge financing and approximately $539,000 principal
amount of previously issued convertible notes, following the conversion of the
convertible notes into shares of Senior A Preferred Stock in connection with the
Senior A Units Offering. In connection with the Senior A Units Offering, the
Company issued 3,137,997 shares of Senior A Preferred Stock. The Company also
issued five-year warrants exercisable at $2.29 per share to purchase 287,473
shares of the Company's Common Stock related to the convertible and bridge
financing, and Senior A Preferred Warrants to purchase 784,500 shares of the
Company's Common Stock related to the Senior A Units Offering. In connection
with the conversion of the notes into Senior A Preferred Stock, the Company
expensed debt discount and deferred loan costs totaling $2,104,271. The Company
recognized dividends of $5,021,960 related to the beneficial conversion of the
Senior A Preferred Stock to Common Stock in connection with the June 18, 2004
closing.

On June 18, 2004, the Company issued a total of 217,938 shares of Common Stock
in connection with the Company's acquisition of those shares of First Person
Software, Inc. ("First Person") that were not previously owned by the Company.
(See Note 5, "Commitments and Contingencies, Litigation.") The Company also
reserved for issuance an additional 108,991 shares of the Company's Common
Stock, the issuance of which is contingent upon the satisfaction of certain
performance milestones.

On August 13, 2004, the Company closed upon the second and final tranche of the
Company's Senior A Units Offering, which consisted of approximately $1,788,048
in total consideration from the sale of approximately 146,082 Senior A Units to
certain institutional investors. In connection with the Senior A Units Offering,
the Company issued 588,686 shares of Senior A Preferred Stock. The Company also
issued Senior A Preferred Warrants to purchase 146,082 shares of the Company's
Common Stock in connection with the Senior A Units Offering. The Company
recognized dividends of $554,221 related to the beneficial conversion of the
Senior A Preferred Stock to Common Stock in connection with the August 13, 2004
closing.

On September 7, 2004, the Company issued 10,000 shares of Common Stock to an
individual for performing product research and documentation services.
Consulting expense of $32,500 was recorded related to these shares.

In connection with the Senior A Units Offering, the Company entered into a
registration rights agreement, dated as of April 23, 2004 (the "Registration
Rights Agreement"), with certain investors, pursuant to which the Company is
obligated to register the shares of Common Stock underlying the shares of Senior
A Preferred Stock issued in connection with the Senior A Units Offering.
Pursuant to the Registration Rights Agreement, the Company is obligated to pay a
penalty to such investors if it does not cause the effectiveness of the
registration statement within certain time deadlines. The penalty begins to
accrue 90 days from the date of issuance of the Senior A Preferred


                                       8
<PAGE>

Stock with respect to investors who converted their convertible notes or bridge
notes into Senior A Preferred Stock; the date of issuance with respect to such
investors was June 14, 2004. The penalty begins to accrue 120 days from the date
of issuance with respect to investors who purchased Senior A Units; the date of
issuance with respect to investors who purchased Senior A Units in the first
tranche of the Senior A Units Offering was June 14, 2004, and the date of
issuance with respect to investors who purchased Senior A Units in the second
tranche of the Senior A Units Offering was August 13, 2004. The penalty has been
accrued at a rate of 3% per month of the original amount invested. Pursuant to
the terms of the Registration Rights Agreement, during the first 90 days in
which the penalty is earned, the penalty is payable either in cash or in shares
of Senior A Preferred Stock, at the Company's election. After that 90-day period
expires, the penalty must be paid in cash.

To comply with the terms of the Registration Rights Agreement, the Company filed
a registration statement on Form SB-2 (the "Registration Statement") with the
Securities and Exchange Commission ("SEC") on August 13, 2004. In response to
the SEC staff's comments, the Company filed Amendments to its Registration
Statement with the SEC on October 27, 2004, December 8, 2004 and December 23,
2004. On December 23, 2004, the Company received notice from the SEC that the
registration statement was effective as of that day.

On September 12, 2004, with respect to the penalty owed to the former holders of
convertible notes and bridge notes, the Company began accruing for the penalty
at a rate of $2,649 per day. With respect to the penalty owed to the purchasers
of Senior A Units in connection with the first tranche of the Senior A Units
Offering, which closed on June 14, 2004, on October 12, 2004 the Company began
to accrue an additional $6,084 penalty per day. With respect to the penalty owed
to the purchasers of Senior A Units in connection with the second tranche of the
Senior A Units Offering, which closed on August 13, 2004, on December 11, 2004
the Company began to accrue an additional $1,788 penalty per day. On December
23, 2004, the SEC declared the registration statement effective which satisfied
the requirements of the Registration Rights Agreement. Also on December 23,
2004, the Company recorded a liability for the penalty with respect to the
Registration Rights Agreement. The Company recorded a liability of $672,650 for
the period ended December 31, 2004. The total accrued dividend for the penalty
was $720,332. (See Note 5, Commitments and Contingencies, "Series A Senior
Convertible Preferred Stock Penalty".)

On September 17, 2004, the Company issued a total of 27,241 shares of Common
Stock in connection with the completion of a certain performance milestone set
forth in the Company's merger agreement, dated as of May 28, 2004, with First
Person and its stockholders (the "FPS Merger Agreement"), in connection with the
Company's acquisition of the shares of First Person that were not previously
owned by the Company on June 18, 2004. An additional 81,750 shares of Common
Stock is reserved for issuance contingent upon the completion of certain
additional performance milestones. The Company increased the value of the assets
purchased from First Person by $88,533 related to this issuance. (See Note 5,
"Commitments and Contingencies, Release of First Person Escrow Common Shares.")

On November 8, 2004, the Company issued 150,000 shares of Common Stock to an
individual in connection with prior employment matters related to the founding
and early operation of the Company. The shares were issued with transfer
restrictions based on Rule 144 under the Securities Act of 1933. The market
value for the shares at the time of the issuance was $5.50 per share. The
Company recorded an expense of $825,000 for the issuance of these shares.

On November 23, 2004, the Company issued 2,500 shares of Common Stock to a
member of the Board of Directors for services. General and Administrative
expense of $12,250 was recorded related to these shares.

On December 17, 2004, the Company issued a total of 27,241 shares of Common
Stock in connection with the completion of a certain performance milestone set
forth in the FPS Merger Agreement in connection with the Company's acquisition
of the shares of First Person that were not previously owned by the Company on
June 18, 2004. An additional 54,509 shares of Common Stock is reserved for
issuance contingent upon the completion of certain additional performance
milestones. The Company increased the value of the assets purchased from First
Person by $107,602 related to this issuance. (See Note 5, "Commitments and
Contingencies, Release of First Person Escrow Common Shares.")

During the quarter ended December 31, 2004, certain Series A Senior Preferred
and Series A Junior Preferred stockholders requested conversion of their shares
into Common Stock, pursuant to their respective agreements. For the quarter
ended December 31, 2004, there were 52,408 shares of Series A Senior Preferred
and 203,000 shares of Series A Junior Preferred surrendered for conversion, and
255,408 shares of Common Stock were issued.

4. Lease Agreements

The Company leases its office facilities under various non-cancelable operating
leases that expire at various dates through 2009.


                                       9
<PAGE>

On July 2, 2004, the Company entered into a 25-month lease agreement for a 2,335
square foot office in San Francisco, California. The agreement requires monthly
lease payments of $4,281 through June 30, 2005, and monthly lease payments of
$4,475 through July 31, 2006. Subsequent to December 31, 2004, the Company
entered into a sub-lease agreement with a third party for the San Francisco,
California space. The sub-lease will commence February 21, 2005 and the
sub-leasor will pay the Company $4,281 per month through February 28, 2006, and
$4,475 through the termination of the sublease on July 31, 2006. The Company
also received a deposit equal to two months rent of $8,562.

On December 1, 2004, the Company entered into a 48-month lease for a 10,270
square foot office in Redwood City, California. The agreement is scheduled to
commence on February 18, 2005, and requires monthly lease payments of $14,892
through July 31, 2005, monthly lease payments of $17,973 through January 31,
2006, monthly lease payments of $18,486 through January 31, 2007, monthly lease
payments of $19,000 through January 31, 2008, and monthly lease payments of
$19,513 through January 31, 2009.

On December 9, 2004 the Company entered into a 1-month lease with the landlord
of the San Ramon, California facility for the same 6,752 square feet previously
sub-leased from another tenant. The lease required a one time payment of $13,504
and terminates January 31, 2005.

Rent expense was $39,690 for the three months ended December 31, 2004 and
$93,389 for the nine months ended December 31, 2004. The following table
summarizes the Company's future minimum lease payments, net of sublease income
for operating leases as of December 31, 2004. Sublease income in the table below
amounted to $6,422 for fiscal 2005, $51,760 for fiscal 2006, and $17,900 for
fiscal 2007.

                          -----------------------------------------
                          2005                             $ 36,205
                          -----------------------------------------
                          2006                              205,537
                          -----------------------------------------
                          2007                              222,859
                          -----------------------------------------
                          2008                              229,021
                          -----------------------------------------
                          2009                              195,130
                          -----------------------------------------
                          Total                            $888,752
                          -----------------------------------------

5. Commitments and Contingencies

Rescission Offer

Contemporaneous with the commencement of the Senior A Units Offering, the
Company conducted a Rescission Offer that it made to certain of its existing
stockholders who had originally acquired their shares of Common Stock in
connection with a private placement conducted from June 2002 through July 2003
by PowerHouse Studios, Inc. ("PowerHouse Studios") (and after May 19, 2003, by
the Company). Pursuant to the Rescission Offer, these stockholders were given
the opportunity to rescind the purchase of such shares for either the cash
consideration paid for the shares, with interest, or Series A Junior Units, each
such Series A Junior Unit being comprised of four shares of Junior A Preferred
Stock, and a Junior A Preferred Warrant.

The Rescission Offer was based on certain of the matters alleged by the Company
in the Proctor Litigation. (See Note 5, "Commitments and Contingencies,
Litigation.") Stockholders who accepted the Rescission Offer were required to
give general waivers and releases with respect to certain potential claims
against the Company. The Junior A Preferred Stock has certain preferences over
the Common Stock, including an anti-dilution provision in the event the Company
is unsuccessful in the Proctor Litigation. The Junior A Preferred Warrants
contain customary anti-dilution provisions for stock dividends, stock splits and
the like.

The Rescission Offer was completed on June 4, 2004, and holders of approximately
1,082,026 shares of Common Stock accepted the Rescission Offer in exchange for
Series A Junior Units and holders of approximately 46,500 shares of Common Stock
accepted the Rescission Offer for cash consideration. Holders of approximately
119,665 shares of Common Stock retained their ownership of Common Stock as
originally purchased.


                                       10
<PAGE>

Merger with First Person Software, Inc.

On May 28, 2004, the Company entered into the FPS Merger Agreement with First
Person and its stockholders (either directly as signatories to the FPS Merger
Agreement or as parties in interest to the FPS Merger Agreement, represented by
a duly authorized representative) to acquire approximately 51% of the shares of
outstanding common stock of First Person in consideration of cash and shares of
Common Stock of the Company, at an aggregate consideration of $2,500,000 (the
"FPS Merger"). The Company issued 217,938 shares of Common Stock to the holders
of First Person shares. The consideration included a certain amount of cash that
was held in escrow by an authorized agent and was released, on August 27, 2004,
upon the satisfactory review by the Company of First Person's financial
statements, and further includes 54,509 shares of Common Stock that are
currently being held in escrow by the same agent and that will only be released
upon the satisfactory achievement by the Company of certain performance
milestones within the applicable periods specified in the FPS Merger Agreement.
(See Note 3, "Stock Transactions") Pursuant to the FPS Merger Agreement, the
number of shares issued in connection with the FPS Merger was based on the
average closing price of the Company's Common Stock for a total of 20 days
immediately prior and subsequent to the announcement of the acquisition.
Immediately prior to the FPS Merger, the Company owned approximately 49% of the
outstanding shares of First Person stock, which shares were originally purchased
by the Company in November 2002. The FPS Merger became effective on June 18,
2004. All the employees of First Person were offered, and accepted, employment
in the Company. (See Note 3, "Stock Transactions.")

The Company will give accounting recognition for the shares held in escrow
related to performance milestones noted above, if and when the performance
milestones are achieved and the shares are released from escrow. The first
evaluation period occurred approximately 90 days from the closing of the
transaction, and the second approximately 180 days from the closing of the
transaction. The allotted shares, when released from escrow due to the
attainment of the performance milestones, will result in an increase to the
value of the assets of First Person purchased by the Company.

As of June 18, 2004, the effective date of the FPS Merger, the assets and
liabilities of First Person have been allocated as follows:

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

In December 2004, the value assigned to the software technology intangible asset
increased by $107,692 as a result of the issuance of the Milestone shares, and
in September 2004 the value was increased by $88,533 also as a result of the
issuance of Milestone shares. For the period ending December 31, 2004 the
Company incurred amortization expense of $137,893 related to the software
technology intangible asset, and an adjustment of $4,261 related to the original
purchase accounting. The net book value of its software technology as of
December 31, 2004 was $2,529,110. The Company's assessment is that the useful
life of the acquired net intangible assets will be 5 years. The acquired net
intangible assets will be amortized using the straight-line method.

The following unaudited pro forma consolidated statement of operations assumes
the acquisition occurred as of the beginning of the periods presented and
presents pro forma financial information for the periods ended December 31, 2004
and 2003. There would be no pro forma impact on revenue from this acquisition.
In the Company's opinion, all adjustments necessary to present fairly such
unaudited pro forma consolidated statement of operations have been made.


                                       11
<PAGE>

From May 16,

<TABLE>
<CAPTION>
                                        For the three months ended           For the nine months ended
                                                December 31,                       December 31,

                                          2004               2003               2004              2003
                                     -------------       -----------       -------------      -------------
<S>                                  <C>                 <C>               <C>                <C>
Net loss as reported                 $  (2,495,601)      $  (948,943)      $  (8,219,101)     $  (4,541,737)
                                     -------------       -----------       -------------      -------------
Adjustment for First Person (1)                 --            (2,496)          (153,543)          (101,302)
                                     -------------       -----------       -------------      -------------
Pro forma net loss                    $ (2,495,601)      $  (951,439)      $  (8,372,644)     $  (4,643,039)
                                     -------------       -----------       -------------      -------------
Pro forma net loss allocable to
common shareholders                  $  (3,378,664)      $  (951,439)      $ (16,864,331)     $  (4,643,039)
                                     -------------       -----------       -------------      -------------
Basic and diluted loss per share
as reported                          $       (1.11)      $     (0.27)      $       (5.35)     $       (1.48)
                                     -------------       -----------       -------------      -------------
Pro forma basic and diluted loss
per share                            $       (1.11)      $     (0.27)      $       (5.40)     $       (1.52)
                                     -------------       -----------       -------------      -------------
</TABLE>

(1) Reflects additional loss related to the 51% not owned by the Company as of
April 1, 2004 and amortization of software technology.

Employment Agreement

On November 1, 2004, the Company entered into an employment agreement with
Manijeh Moghis as its Chief Operating Officer terminable at any time upon notice
by either party. The agreement calls for a salary at the rate of $225,000 per
annum and is subject to review no less than annually. The agreement calls for an
annual target bonus of 50-100% of the then current base salary, pursuant to a
bonus plan to be adopted by the Board of Directors. In addition, Ms. Moghis also
received 500,000 options for the purchase of common stock. The Board of
Directors approved the granting of these options effective as of January 20,
2005. The options have an exercise price equal to the closing market price of
the Company's Common Stock as of the date the option grant is approved by the
Board of Directors, and will vest over a period of three years, subject to
continued employment. The options shall vest subject to the following schedule:
12.5% of the total shares of Common Stock underlying the options shall vest
three months from Ms. Moghis' employment start date, which was November 1, 2004,
and thereafter, 1/36 of the total shares of Common Stock underlying the options
shall vest on the first date of each full month during which Ms. Moghis remains
employed with the Company during the 36-month vesting period so that 100% of
such options shall have vested on the third anniversary of Ms. Moghis'
employment start date, which was November 1, 2004. Ms. Moghis was also nominated
to the Company's Board of Directors, subject to approval by the Board, which was
granted November 15, 2004.

Litigation

Proctor, et. al. and Related Matters

On September 15, 2003, the Company filed a complaint in the Superior Court of
the State of California in and for the County of Los Angeles, South West
District (the "Superior Court") captioned PowerHouse Technologies Group, Inc. v.
Proctor, et. al., (case no: YC047491) (the "Proctor Litigation"). Named as
defendants therein are Joseph Ford Proctor ("Proctor"), the Chief Executive
Officer of MayFair Capital Group Limited, BrickHouse Capital Venture Limited
("BrickHouse"), Julie Holfinger, and others. The complaint alleged that the
defendants, in connection with a capital-raising effort for the Company,
diverted a significant amount of funds from the Company. The complaint asked to
recover the diverted funds and to enjoin the transfer, sale or exercise of
voting rights with respect to approximately 7,000,000 shares of Common Stock
claimed by the defendants, which would represent approximately 67% of the total
shares of Common Stock currently outstanding (the "Proctor Group Shares").

On November 10, 2004, the Superior Court issued a judgment in favor of the
Company against Proctor, Nataya Proctor, Julie Holfinger, MayFair Capital Group
Limited, BrickHouse, and the other defendants for (i) monetary damages and costs
of $12,805,264 (comprised of $3,790,759 as special damages, $9,000,000 as
punitive damages,


                                       12
<PAGE>

and $14,505 as costs), (ii) the return of all corporate books and records of
PowerHouse Studios, its predecessors, subsidiaries and affiliated companies, and
(iii) the cancellation of the stock certificates held by the Proctor Group with
respect to the Proctor Group Shares (7,250,000 shares of common stock of
PowerHouse Studios) and a declaration that the Proctor Group Shares, and all
legal and beneficial ownership interests therein, were null and void as of the
date of issuance. There can be no assurance that the Company will collect on any
of the monetary damages and costs awarded to it by the Superior Court.

The defendants' right to appeal expired on January 17, 2005, and, as of January
18, 2005, no appeal was filed by any of the defendants.

Dieterich, et. al. and Related Matters

In March 2004, the Company commenced an action in the Superior Court against
Christopher Dieterich and Dieterich & Associates ("Dieterich"), who were the
Company's counsel during the time period in which the transactions occurred that
are the subject of the Proctor Litigation. The complaint alleged that the
defendants are liable to the Company for, among other things, professional
negligence, breach of fiduciary duties, and wrongfully withholding documents
belonging to the Company.

On October 19, 2004, Christopher Dieterich filed a cross complaint with the
Superior Court alleging various claims related to unpaid invoices totaling
$22,811. The cross complaint also names Jay Elliot and Gregory Duffell, officers
of the Company, as additional defendants.

Subsequent to December 31, 2004, the Company and Christopher Dieterich and
Dieterich & Associates reached an agreement for the settlement of all claims,
related to the aforementioned actions. The agreement calls for certain monthly
payments to be paid to the Company, a mutual release of all current and future
claims and termination of the existing legal actions.

Draft, Inc. and Related Matters

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

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

On July 29, 2004 the Company settled various legal matters with Draft and its
Chief Executive Officer, Howard Draft. The settlement agreement provided for a
mutual release of all current and future claims and terminated the existing
legal actions.

The Company is not aware of any additional litigation as of February 9, 2005.

6. Subsequent Events

Subsequent to December 31, 2004, the Company received a demand for arbitration
from a former service provider, which alleges breach of contract and related
claims pursuant to an alleged contract for services, primarily services related
to raising capital. The demand claims damages of approximately $947,103, plus an
alleged option to purchase 138,948 shares of Common Stock. The Company believes
the complaint is without merit and intends to defend it vigorously and believes
that the loss, if any, resulting from the suit will not have a material effect
on the Company's financial position, results of operations, or cash flows.

Subsequent to December 31, 2004, the Company received resignations from two
employees who had been hired in connection with the FPS Merger, which was
completed on June 18, 2004. The resignations are effective as of February 11,
2005. The Company believes that no severance or separation payments are due to
these employees under the terms of their respective employment agreements.

Subsequent to December 31, 2004, the Company's' Common Stock was re-listed on
the Over the Counter Bulletin Board.


                                       13
<PAGE>

Subsequent to December 31, 2004, the Company entered into a verbal agreement
with the landlord of its San Ramon, California location to extend its occupancy
at this location through February 18, 2005. The Company made a one-time payment
of $10,128 for this extension.

ITEM 2. PLAN OF OPERATION

Company Background

PowerHouse Technologies Group, Inc. (the "Company") is in the business of
developing, acquiring and marketing computing software and infrastructure
technologies designed to improve the way mobile information is personalized,
secured, carried and accessed. The Company was founded in May 2002 as PowerHouse
Studios, Inc. ("PowerHouse Studios"). On May 19, 2003, PowerHouse Studios
completed a business combination with Agate Technologies, Inc. ("Agate"), a
publicly traded company that thereupon became the predecessor of the Company.
Following that transaction, Agate effected a 1:122 reverse stock split and
changed its name to "PowerHouse Technologies Group, Inc."

On June 18, 2004, the Company acquired the remaining 51% of First Person
Software, Inc. ("First Person") that it did not already own in consideration of
cash and shares of common stock of the Company, $0.0001 per share ("Common
Stock"). First Person is the developer of a patent pending software system
created for external memory technology and a key component of the Company's
Migo(R) product.

The Company has developed the Migo(R), a compact personal computing system that
combines the easy portability and functionality of Universal Serial Bus
memory-storage devices with advanced synchronization, personalization and data
management software. The Migo(R) is designed to improve the mobile computing
experience by allowing computer users to easily transport the personalized
desktop environment of their personal computers (complete with the same files,
Microsoft(R) Outlook(R) e-mail, Internet Explorer favorites, wallpaper,
presentations, photos, MP3 audio files and/or various other features) and then
access that same environment by displaying it on any other Windows-based
computer. In addition, the Migo(R) is designed so that once it has been
disconnected from a non-native computer through which a user's personalized
environment has been accessed, no trace of the user's computer environment or
its data will be left behind on that machine.

Principal Suppliers

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

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

Patents, Proprietary Technology and Other Intellectual Property

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


                                       14
<PAGE>

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

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

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

Employees

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

Financial Results, Liquidity and Management's Plan (Unaudited)

Three months ended December 31, 2004 and 2003

We had revenues of $140,120 for the three months ended December 31, 2004, and no
revenues for the corresponding period ended December 31, 2003. During the
quarter ended December 31, 2004, we sold our software through online downloads,
packaged through distributors and bundled with memory products. We continue to
add distributors as a method to expand the availability of our products, and are
expanding our online capabilities and advertising to promote sales. Our costs
associated with the sale of products for the period ended December 31, 2004 were
$93,953 and consisted mainly of expenses for the hardware devices sold with our
software pre-loaded, and services related to loading software, packaging and
shipping.

Our spending for the three months ended December 31, 2004 increased from the
same period in 2003 due to several factors. Reflecting a significant increase in
the number of persons employed by us, our spending for wages and related
expenses was $431,053 for the three months ended December 31, 2004, up from
$155,191 in the corresponding period in 2003. Our selling expenses increased as
we prepared for additional advertising to increase the market visibility of our
products. Costs for print advertising, trade shows and other product promotions
were $227,805 for the three months ended December 31, 2004. We also have
increased our sales efforts outside of the United States through various
consultants and representatives. General and administrative costs include a
one-time $825,000 non-cash charge for the issuance of Common Stock.

Nine months ended December 31, 2004 and 2003

We had revenues of $234,643 for the nine months ended December 31, 2004, and
revenues of $238,615 for the corresponding period ended December 31, 2003.
During the year to date we sold our software through online downloads, packaged
through distributors and bundled with memory products. Our costs associated with
the sale of products for the nine months ended December 31, 2004 and 2003 were
$162,169 and $166,380, respectively, and consisted mainly of expenses for the
hardware devices sold with our software pre-loaded, and services related to
loading software, packaging and shipping.

Our spending for the nine months ended December 31, 2004 increased from the same
period in 2003 due to several factors. Our spending for wages and related
expenses was $1,387,065 for the nine months ended December 31, 2004, up from
$571,945 in the corresponding period in 2003 (excluding a one time bonus of
$500,000 related to the


                                       15
<PAGE>

granting of shares). Our selling expenses increased related to advertising that
has increased the market visibility of our products. We also continued our
relationships with certain professional services firms to assist our development
of strategies and related materials to successfully market and sell our
products. Our general and administrative costs include a one-time $825,000
non-cash charge for the issuance of Common Stock.

For the nine months ended December 31, 2004, we incurred costs totaling $673,521
related to general legal advice on corporate and SEC related matters, the
Proctor Litigation and our litigation with Dieterich (See Part I, Financial
Information, Item 1, Financial Statements, Note 5 to the financial statements.),
and intellectual property.

During the nine months ended December 31, 2004, the Company expensed capitalized
loan costs and debt discount totaling $2,104,271 upon conversion of notes
payable to equity.

Liquidity and Capital Resources

At December 31, 2004, we had working capital of ($1,329,823) as compared to
working capital of ($2,550,515) at March 31, 2004. The increase is mainly due to
the sale of equity, and the conversion of Convertible Debt (the balance of which
was $1,492,758 at March 31, 2004) to equity, offset by the reduction of cash and
cash equivalents due to operating expenses.

Recent and Expected Losses

The Company is a development stage company and has never been profitable and has
sustained substantial net losses from operations. There can be no assurance that
we will ever generate positive cash flow from our operating activities, or that
the Company will achieve and sustain a profit during any future period,
particularly if operations remain at current levels. Failure to achieve
significant revenues, positive cash flow or profitability would materially and
adversely affect the Company's business, financial condition, and results of
operations. For the fiscal year ended March 31, 2003, the Company incurred a net
pre-tax loss of ($2,327,360) and, for the fiscal year ended March 31, 2004, the
Company incurred a net pre-tax loss of ($6,397,293). The Company's auditors,
Hein & Associates LLP, issued an opinion in connection with the Company's
financial statements for the fiscal year ended March 31, 2004, noting that
sustained recurring losses raise substantial doubt about our ability to continue
as a going concern.

The Company's results of operations were materially affected in the nine months
ended December 31, 2004, and our results of operations for the fiscal year
ending March 31, 2005 are expected to be materially affected, by the impact of
having sold and exchanged Senior A Units and Junior A Units during those periods
for consideration that was substantially below the market price of our Common
Stock as of the dates of our issuance of such Units (which are comprised of
securities that are ultimately convertible into or exercisable for shares of
Common Stock). The Company is required to reflect this "discount" from market
value, computed on an
as-if-beneficially-converted-into-Common-Stock-on-the-date-of-issuance basis, as
interest expense and dividends, the effect of which is to significantly increase
our net loss allocable to holders of our Common Stock and our basic and diluted
loss per share of Common Stock.

Substantial Doubt About Our Viability as a Going Concern

The Company's financial statements have been prepared in accordance with
generally accepted accounting principles applicable to a going concern that
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The Company had limited revenues
and minimal assets as of December 31, 2004, and has incurred losses since
inception. The Company is a development stage company. To date, the Company has
relied primarily on loans from stockholders and officers and the sale of its
equity securities, and to a lesser degree on revenues from operations, which
have not been significant, to fund operations. The Company's auditors have
therefore recognized that there is substantial doubt about the Company's ability
to continue as a going concern.

Satisfaction of Current and Future Capital Requirements

No assurance can be given that proceeds to the Company from the Senior A Units
Offering completed in August, 2004 will satisfy the Company's on-going capital
requirements. The Company cannot provide assurances that it will be able to
develop its business to the point of generating consolidated net operating
profits and positive cash flows from operations. If funds from these sources are
not sufficient to offset operating expenses, the Company would seek to institute
cost-saving measures that would not only reduce overhead, but also curtail
operations. The Company cannot assure that such measures, if implemented, will
be sufficient to offset all of our operating expenses. If any capital
subsequently raised from sales of securities is not sufficient to fund the
balance of our operating expenses after we implement cost-cutting measures, the
Company could be forced to discontinue certain operations or may be unable to
continue as a going concern.

                                       16
<PAGE>

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

ITEM 3. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our senior management,
including our Chief Executive Officer and Chief Financial and Accounting
Officer, the Company conducted an evaluation of the effectiveness of the design
and operation of its disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
("Exchange Act"), as of the end of the period covered by this Quarterly Report
(the "Evaluation Date"). Among other things, the Company evaluated its
accounting procedures and control processes related to material transactions to
ensure they are recorded timely and accurately in the financial statements.
Based on this evaluation, our principal executive officer and principal
financial officer concluded as of the Evaluation Date that the Company's
disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2004, the Company made certain changes in
its internal controls and procedures over financial reporting. After reaching
the conclusions referred to in the Company's Form 10-Q-SB/A for the quarter
ended June 30, 2004, which was filed on December 23, 2004, management took steps
it believed necessary and appropriate to correct the weaknesses in the Company's
internal accounting procedures and controls that had been found. These steps
included expanding the Company's internal accounting staff, and engaging
consultants with considerable accounting experience, and developing a set of
accounting procedures that mandate expert review promptly of all transactions in
order that they be properly recorded at the earliest possible time, expert
review immediately of the appropriate accounting principles to be applied to
each transaction, immediate closing of the Company's books of account at the end
of each quarter or other appropriate accounting period and the prompt
preparation of draft financial statements in order that the review and final
preparation process can proceed efficiently to enable the timely filing of
accurate and complete financial statements.

In this regard, the Company has hired an additional full-time accounting staff
member at the manager level and has retained Hood & Strong LLP ("Hood &
Strong"), an accounting consultancy firm that the Company believes has the
requisite skill and experience to assure that the weaknesses in its internal
controls and procedures will be cured. Hood & Strong is registered with the
PCAOB and has extensive current and prior experience providing both attest and
non-attest services to publicly listed companies. While developing the
foregoing, the Company also retained a part-time consultant to assist it with
certain specific tasks. The Company continues to retain Hood & Strong.

Specifically, Hood & Strong assists management with respect to accounting issues
related to the Company's monthly internal closings. Hood & Strong also reviews
the Company's financial statements, supporting documentation, conclusions on
treatment for complicated transactions, and the Company's Quarterly Reports on
Form 10-QSB, prior to submission to our auditors. Hood & Strong will also begin
assisting the Company with its Sarbanes-Oxley Section 404 implementation and
compliance.

The Audit Committee of the Company's Board of Directors participated in the
foregoing by reviewing developments and proposed solutions with the accounting
staff and management and has approved the procedures referred to above.


                                       17
<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 5 to the financial statements under Item 1, "Financial Statements" of
Part I, "Financial Information."

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

On December 16, 2004, the stockholders of the Company, by the majority written
consent in lieu of a meeting, duly voted upon and approved the 2004 Omnibus
Stock Incentive Plan. (See Note 2, "2. Summary of Significant Accounting
Policies, Stock-Based Compensation.")

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

a) Exhibit 3.1. 2004 Omnibus Stock Incentive Plan.

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

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

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

     Exhibit 32.2. Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.

b) The Company filed the following reports on Form 8-K during the quarter ended
December 31, 2004:

On October 18, 2004, the Company filed a Form 8-K/A, which amends and
supplements the original filing to include historical financial statements of
First Person Software, Inc. and pro forma information required by Item 9.01 of
Form 8K.

On November 11, 2004, the Company filed a Form 8-K regarding a press release
that announced the judgment of the superior Court in the Proctor Litigation.


                                       18
<PAGE>

                                   SIGNATURES

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

                       POWERHOUSE TECHNOLOGIES GROUP, INC.


Date: February 9, 2005              By:
                                        ----------------------------------------
                                        Jay Elliot
                                        Chairman of the Board and Chief
                                        Executive Officer
                                       (Principal Executive Officer)

Date: February 9, 2005              By:
                                        ----------------------------------------
                                        David R. Wells
                                        Vice President Finance Operations
                                        (Principal Financial and Accounting
                                        Officer)


                                       19
<PAGE>

EXHIBIT INDEX:
--------------

Exhibit                            Description Number
-------                            ------------------

3.1         Articles of Incorporation, as amended, hereby incorporated by
            reference from the Company's Form SB-2 filed on August 13, 2004.

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, 18 U.S.C. 1350.

32.2        Certification of Chief Financial Officer pursuant to Section 906 of
            the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.


                                       20