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 September 30, 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 November 12, 2004, there were 2,906,529 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 BALANCE SHEET AS OF SEPTEMBER 30, 2004
                                    (Unaudited)


<TABLE>
<CAPTION>
                                      ASSETS
CURRENT ASSETS:

<S>                                                                                     <C>
Cash                                                                                    $  3,432,842
Accounts receivable                                                                           47,796
Inventory                                                                                    245,780
Other current assets                                                                         129,029
                                                                                        ------------
Total current assets                                                                       3,855,447

PROPERTY AND EQUIPMENT:                                                                       11,186

OTHER ASSETS:
Software technology, net of accumulated amortization of $155,334                           2,563,662
Other assets                                                                                  21,525
                                                                                        ------------
Total other assets                                                                         2,585,187

TOTAL ASSETS                                                                            $  6,451,820
                                                                                        ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY


CURRENT LIABILITIES:

Accounts payable                                                                        $  1,322,711
Accrued compensation                                                                         244,923
Accrued liabilities                                                                          961,169
Dividends payable                                                                            224,052
                                                                                        ------------

Total current liabilities                                                                  2,752,855


TOTAL LIABILITIES                                                                          2,752,855
                                                                                        ============


Commitments and contingencies  (See Note 5)


STOCKHOLDERS' EQUITY:

Senior A Preferred stock, $.0001 par value; 10,000,000 shares authorized; 3,726,683
shares issued and outstanding; preference upon liquidation of $16,005,032                        373
Junior A Preferred stock, $.0001 par value; 5,000,000 shares authorized; 1,082,026
shares issued and outstanding; preference upon liquidation of $2,600,000                         108
Common stock, $.0001 par value; 200,000,000 shares authorized; 2,899,169 shares                  291
issued and outstanding
Additional paid in capital                                                                26,079,821
Deficit accumulated in development stage                                                 (22,058,378)
Treasury stock                                                                              (183,600)
Deferred consulting compensation                                                            (139,650)
                                                                                        ------------

Total stockholders' equity                                                                 3,698,965
                                                                                        ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                              $  6,451,820
                                                                                        ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                               For the period from
                                            For the three months ended           For the six months ended         May 16, 2002
                                                    September 30,                      September 30,             (inception) to
                                               2004              2003             2004              2003       September 30, 2004
                                           ------------      ------------     ------------      ------------     ------------
                                           (Unaudited)       (Unaudited)      (Unaudited)       (Unaudited)      (Unaudited)
<S>                                        <C>               <C>              <C>               <C>              <C>
Revenues                                   $     73,309      $         --     $     94,523      $         --     $    440,108

Cost of Sales                                    53,724                --           68,216                --          282,887
                                           ------------      ------------     ------------      ------------     ------------

Gross Profit                                     19,585                --           26,307                --          157,221
                                           ------------      ------------     ------------      ------------     ------------

Operating Expenses:
Research and development                        120,258            30,130          138,594           104,006          458,166
Sales and marketing                             482,095           330,952        1,261,557           897,317        3,230,713
General and administrative                    1,479,898           414,114        2,206,385           654,011        5,360,733
                                           ------------      ------------     ------------      ------------     ------------
Total operating expenses                      2,082,251           775,196        3,606,536         1,655,334        9,049,612

Non-Operating (Income) Expense:
Other income                                    (28,592)               --          (28,583)               --           (8,219)
Loss due to theft                                    --           162,841               --         1,839,411        3,142,759
Equity in loss of investee                           --            49,810           24,365            94,931          205,854
Interest expense                                    687               898        2,146,690             3,118        2,214,569
                                           ------------      ------------     ------------      ------------     ------------
Total non-operating (income) expense            (27,905)          213,549        2,142,472         1,937,460        5,554,963

Loss Before Income taxes                      2,034,761           988,745        5,722,701         3,592,794       14,447,354

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

Net Loss                                      2,034,761           988,745        5,723,501         3,592,794     $ 14,449,754
                                                                                                                 ============

Less: Dividends on Senior A
Preferred Stock                                 795,366                --        7,608,624                --
                                           ------------      ------------     ------------      ------------

Net Loss Allocable
to Common Shareholders                     $  2,830,127      $    988,745     $ 13,332,125      $  3,592,794
                                           ============      ============     ============      ============

Basic and Diluted                          $       0.99      $       0.29     $       4.22      $       1.68
                                           ============      ============     ============      ============
Loss per Share
Weighted Average Shares Outstanding           2,867,703         3,430,966        3,160,539         2,143,302
                                           ============      ============     ============      ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       3

<PAGE>

                       POWERHOUSE TECHNOLOGIES GROUP, INC.
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                               SEPTEMBER 30, 2004

<TABLE>
<CAPTION>
                                                                                                      For the Period
                                                                 For the Six        For the Six      from May 16, 2002
                                                                Months Ended       Months Ended       (inception) to
                                                            September 30, 2004  September 30, 2003  September 30, 2004
                                                            ------------------  ------------------  ------------------
<S>                                                         <C>                 <C>                 <C>
Cash Flows from Operating Activities:
    Net loss                                                     (5,723,501)        (3,592,794)        (14,449,754)
    Adjustments to reconcile net loss to net cash
        used in operating activities:
            Common stock issued for services                        118,750            500,000           1,322,525
            Equity in loss of investee                               24,365             94,931             205,854
            Depreciation and amortization                           156,178                 --             156,178
            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                                     (24,858)                --             (47,796)
            Inventory                                              (229,692)          (105,480)           (245,780)
            Other current assets                                   (109,028)            (2,050)           (129,028)
            License fee                                                  --           (203,000)           (118,418)
            Other assets                                            (19,476)                --             (21,525)
            Accounts payable                                        392,648            262,549           1,322,711
            Accrued compensation                                   (104,660)           241,573             227,423
            Accrued liabilities                                     155,361             85,470             534,220
            Dividends payable                                            --                 --                  --
            Due to officer                                          (21,251)           (93,667)            (21,251)
                                                                -----------        -----------         -----------
                Net cash used in operating activities
                    from continuing operations                   (3,329,173)        (2,809,350)         (9,149,623)
                                                                -----------        -----------         -----------
Cash Flows from Investing Activities:
            Acquisiton of First Person Software, Inc.            (1,287,961)                --          (1,287,961)
            Purchase of equipment                                   (12,030)                --             (12,030)
            Investment in equity investee                                --                 --            (130,000)
                                                                -----------        -----------         -----------
                Net cash used in investing activities            (1,299,991)                --          (1,429,991)
                                                                -----------        -----------         -----------
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                 --           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          3,078,632          14,012,456
                                                                -----------        -----------         -----------
Net increase in cash                                              2,625,358            269,282           3,432,842
Cash, beginning of period                                           807,484                 --                  --
Cash, end of period                                               3,432,842            269,282           3,432,842
                                                                ===========        ===========         ===========

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.            1,088,534                 --           1,088,534

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

    Liabilities assumed upon combination with
        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.

                                       4

<PAGE>

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

Notes to Financial Statements

For the Three and Six Month Periods Ended  September  30, 2004  (Unaudited)  and
September 30, 2003 (Unaudited),  For the Period May 16, 2002 (inception) Through
September 30, 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   condensed   financial   statements  include  all
adjustments  which management  believes are necessary for a fair presentation of
the  Company's  financial  position  at  September  30,  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 condensed 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  condensed
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.  Actual results could differ
significantly  from those estimates under different  assumptions and conditions.
The Company does not consider any of its accounting policies to be critical. 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.


                                       5
<PAGE>


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

The Company  accounts for employee  stock-based  compensation in accordance with
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees"  ("APB No. 25"), 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.

As of September  30, 2004,  the Company had not  formalized a stock option plan.
However,  in anticipation of the Board of Directors and stockholders  adopting a
stock option plan,  the Company has offered  certain  employees  options for the
purchase of the Company's common stock, par value $0.0001 per share (the "Common
Stock") upon the Company's  adoption of a formalized stock option plan.  Options
offered to  employees as of September  30,  2004,  contingent  upon a formalized
stock option plan, were 247,500.

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
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
September  30, 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 $1,780,708 related to this offering.  (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 $5,021,961 related to the beneficial  conversion of the
Senior A Preferred  Stock to Common Stock in  connection  with the June 18, 2004
closing.


                                       6
<PAGE>

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.

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.")

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  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
SEC on August 13,  2004.  In response to the SEC staff's  comments,  the Company
filed an Amendment  to its  Registration  Statement  with the SEC on October 27,
2004.  The  Company  has no  indication  as to  when  the  SEC  might  deem  the
Registration Statement effective.

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.  Subsequent to September 30, 2004,  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, the
Company  began to accrue an  additional  $6,084  penalty per day.  Investors who
purchased  shares of Senior A  Preferred  Stock in  connection  with the  second
tranche of the Senior A Units Offering, which closed on August 13, 2004, are not
eligible to receive a penalty  until  December 11, 2004.  On September 30, 2004,
the  Company   recorded  a  liability  for  the  penalty  with  respect  to  the
Registration  Rights Agreement.  The Company recorded a liability of $47,682 for
the period ended September 30, 2004. (See Note 5, Commitments and Contingencies,
"Series A Senior Convertible Preferred Stock Penalty".)


                                       7
<PAGE>


4.    Lease Agreements
----------------------------

The Company has operating leases for offices in San Ramon and San Francisco.  In
April 2003, the Company entered into a 20-month sub-lease agreement with a third
party for 2,186  square feet of office space  located in San Ramon,  California.
The agreement  commenced May 1, 2003, and requires monthly sub-lease payments of
$3,607  through  December  31,  2004.  The payment  includes the use of existing
furniture and equipment  located on the premises.  The agreement also provided a
right of first refusal on an  additional  1,519 square feet that was optioned to
the Company on August 15, 2003. The Company agreed to lease the additional space
for an additional  monthly payment of $2,506. The termination of this portion of
the lease is also December 31, 2004. On July 28, 2004, the Company  entered into
a second  amendment to  agreement of April 21, 2003 for office space  located in
San Ramon, California. The amendment commenced August 1, 2004, and increased the
rentable square feet by 3,047 and increased the monthly lease payments to $7,637
through December 31, 2004.

On July 2, 2004,  the Company  entered into a 25-month  lease  agreement  with a
third party for additional office space,  comprised of 2,335 square feet located
in San Francisco, California. The agreement commenced July 1, 2004, and requires
monthly lease payments of $4,281 through June 30, 2005.

Future minimum  facilities  lease rental expense as of September 30, 2004, is as
follows:


                          -----------------------------------------
                          2005                             $ 48,597
                          -----------------------------------------
                          2006                               53,118
                          -----------------------------------------
                          2007                               17,900
                          -----------------------------------------
                          Total                            $119,615
                          -----------------------------------------

For the six months ended  September 30, 2004,  the Company  incurred  $44,898 in
rent expense related to the agreements.

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 its current  litigation with the Proctor Group.  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.


                                       8
<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  108,991  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 the performance  milestones  noted above, if and when the performance
milestones  are  achieved and the shares are  released  from  escrow.  The first
evaluation  period  occurs  approximately  90  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
                                                     ===========

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 proforma condensed  statement of operations assumes the
acquisition  occurred as of the beginning of the periods  presented and presents
proforma  financial  information  for the periods  ended  September 30, 2004 and
2003. There would be no proforma impact on revenue from this acquisition. In the
Company's  opinion,  all adjustments  necessary to present fairly such unaudited
proforma condensed statement of operations have been made.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                                                                For the period
                                                                                                                 from May 16,
                                                                                                                     2002
                                                                                                                 (inception) to
                                           For the three months ended           For the six months ended          September 30,
                                              September 30,                       September 30,                       2004
                                          2004               2003               2004              2003                2004
                                     -------------       -----------       -------------      -------------      -------------
<S>                                  <C>                 <C>               <C>                <C>                <C>
Net loss as reported                 $ ( 2,034,761)      $ ( 988,745)      $  (5,723,501)     $  (3,592,794)     $ (14,449,754)
                                     -------------       -----------       -------------      -------------      -------------

Adjustment for First Person (1)                 --           (51,843)            (26,437)           (98,806)          (214,256)
                                     -------------       -----------       -------------      -------------      -------------

Proforma net loss                    $  (2,034,761)      $(1,040,588)      $  (5,749,938)     $  (3,691,600)     $ (14,664,010)
                                     -------------       -----------       -------------      -------------      -------------

Pro forma net loss allocable to
common shareholders                  $  (2,830,127)      $(1,040,588)      $ (13,358,562)     $  (3,691,600)
                                     -------------       -----------       -------------      -------------      -------------

Basic and diluted loss per share
as reported                          $       (0.99)      $     (0.29)      $       (4.22)     $       (1.68)
                                     -------------       -----------       -------------      -------------      -------------

Proforma basic and diluted loss
per share                            $       (0.99)      $     (0.30)      $       (4.23)     $       (1.72)
                                     -------------       -----------       -------------      -------------      -------------
</TABLE>

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


                                       9
<PAGE>

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  alleges that the
defendants,  in  connection  with a  capital-raising  effort  for  the  Company,
diverted a significant amount of funds from the Company.  The complaint seeks to
recover  the  diverted  funds and to enjoin the  transfer,  sale or  exercise of
voting  rights with respect to  approximately  7,000,000  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 5, 2003, the Superior Court,  without  prejudice,  declined to continue
the  temporary  restraining  order granted to the Company on September 15, 2003.
Subsequent  to  September  15,  2004,   Proctor's   lawyers   terminated   their
representation of him and certain of the other defendants in the case and no new
counsel has made an appearance  in this case to date.  Trial is set for November
10, 2004.

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

By letters dated  November 20, 2003, and December 2, 2003,  BrickHouse  demanded
payment by the Company of $5,000 for monthly  consultant  services for July 2003
and August 2003 and  $622,355  for  expenses  allegedly  advanced to, or for the
benefit of, the  Company.  The Company has  declined the request for payment and
has informed BrickHouse that such amounts that may be owed to or from BrickHouse
and its affiliates,  or the Company and its  affiliates,  are the subject of the
Proctor Litigation pending in the Superior Court.

By letters dated May 9, 2003,  and June 9, 2003,  six persons  indicated that in
2001 they invested an aggregate of approximately  $179,450,  at $1.00 per share,
in the  Company  "through  Joseph  Proctor  and Julie  Holfinger."  The  alleged
investors informed the Company that they have not received confirmation of their
investments nor any stock certificates despite sending "numerous" communications
to Mr. Proctor and Ms. Holfinger. The alleged investors advised the Company that
they will  pursue  criminal  and civil  actions  against  the  Company.  Despite
requests  made to the  alleged  investors,  the  Company  has not  received  any
documentation  evidencing the  investments.  The Company is  investigating  this
matter  and  intends to  formulate  a  response  in light of the  results of its
investigation  and  whatever  additional  documentation  may be  produced by the
parties involved.  Based upon all of the available information,  the Company has
determined that no accrual for any potential liability is required.

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  alleges  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.  The action is in its early  stages and the  outcome
cannot be predicted.


                                       10
<PAGE>

Draft, Inc. and Related Matters
-------------------------------

On December 1, 2003, the Company and its subsidiary,  Forward  Solutions,  Inc.,
were served a complaint  filed in the Superior  Court of the State of California
and for the County of Los Angeles, Central District by Draft, Inc., ("Draft"), a
Delaware  corporation  (case no.  BC306660),  alleging  breach of  contract  and
related claims pursuant to an alleged contract to develop and implement a direct
marketing  program for the  Company.  The suit claims  damages of  approximately
$445,000 plus an alleged bonus based on product sales.  The Company believes the
complaint is without merit and intends to defend it vigorously and believes that
the loss, if any, resulting from the suit will not have a material impact on the
Company's  financial  position,  results of operations,  or cash flows in future
years.

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 November 15, 2004.

6.    Subsequent Events
------------------------------

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, to be approved by the
Board of Directors  upon the  formalization  of a stock option plan. The options
will have an exercise  price equal to the closing  market price of the Company's
Common Stock on Ms. Moghis'  employment  start date, which was November 1, 2004,
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.

Proctor, et. al. and Related Matters

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,  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. The defendants' right to appeal expires 60 days
after the Notice of Entry of Judgment is filed the Superior  Court.  The Company
presented the Notice of Entry of Judgment for filing with the Superior  Court on
November 12, 2004.

Dieterich, et. al. and Related Matters

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.  The Company and the other defendants
believe the cross complaint is without merit and intend to defend it vigorously.
The Company  believes that the loss, if any,  resulting from the cross complaint
will not have material impact on the Company's  financial  position,  results of
operations, or cash flows.

                                       11
<PAGE>


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

Principal Suppliers

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

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

Patents, Proprietary Technology and Other Intellectual Property

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

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


                                       12
<PAGE>


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

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

Three months ended September 30, 2004 and 2003

We had revenues of $73,309 for the three months ended September 30, 2004, and no
revenues for the  corresponding  period  ended  September  30, 2003.  During the
second quarter of fiscal 2005, we sold our products through distributor channels
and directly through our website. 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. We had no direct or private label
sales during the quarter. Our costs associated with the sale of products for the
period ended  September  30, 2004 were $53,724 and consisted of expenses for the
Migo devices, and services related to loading software, packaging and shipping.

Our spending for the three months ended  September 30, 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 $537,704 for the three  months ended  September  30, 2004,  up from
$96,088 in the corresponding  period in 2003. Our selling expenses  increased as
we prepared for additional  advertising to increase 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.  During the quarter ended  September
30, 2004, we incurred costs totaling $479,275 related to our litigation with the
Proctor  Group  and  Dieterich  (See  Part  I,  Financial  Information,  Item 1,
Financial Statements,  Note 5 to the financial  statements.),  and general legal
advice on corporate and SEC related matters, and intellectual property.

Six months ended September 30, 2004 and 2003

We had revenues of $94,523 for the six months ended  September 30, 2004,  and no
revenues for the corresponding period ended September 30, 2003. During the first
half of fiscal  2005,  we sold our  products  through  distributor  channels and
directly through our website. We had no direct or private label sales during the
quarter. Our costs associated with the sale of products for the six months ended
September  30, 2004 were $68,216 and consisted of expenses for the Migo devices,
and services related to loading software, packaging and shipping.

Our spending for the six months ended September 30, 2004 increased from the same
period in 2003 due to  several  factors.  Our  spending  for  wages and  related
expenses  was  $940,551 for the six months  ended  September  30, 2004,  up from
$150,089  in the  corresponding  period in 2003  (excluding  a one time bonus of
$500,000 related to the granting of shares).  Our selling expenses  increased as
we prepared for additional  advertising to increase 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.  During the quarter ended  September
30, 2004, we incurred costs totaling $581,615 related to our litigation with the
Proctor  Group  and  Dieterich  (See  Part  I,  Financial  Information,  Item 1,
Financial Statements,  Note 5 to the financial  statements.),  and general legal
advice on corporate and SEC related matters, and intellectual property.


                                       13
<PAGE>

During the six months ended September 30, 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  September  30, 2004,  we had working  capital of  $1,102,592  as compared to
working  capital of  ($2,550,515) at March 31, 2004. This 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.

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 six months
ended  September  30, 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  September  30, 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  recently
completed   Senior  A  Units   Offering  will  satisfy  the  Company's   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.


                                       14
<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,
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
Chief Executive Officer and Principal Financial and Accounting Officer concluded
as of the Evaluation Date that the Company's  disclosure controls and procedures
will become effective.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2004, the Company added internal staff to
assist with the periodic closing of its financial statements.  Also, the Company
retained certain professional services firms to provide assistance and advice to
management related to the Company's financial  disclosures and processes.  Based
on this  evaluation,  our Chief  Executive  Officer and Principal  Financial and
Accounting  Officer concluded that the Company's internal control over financial
reporting will become effective.


                                       15
<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

Senior A Units Offering - Closing of Second Tranche

Pursuant to a Placement Agency Agreement,  dated as of April 7, 2004, Middlebury
Capital agreed to act as the placement agent for the offer and sale of a minimum
of $8,000,000,  and up to a maximum of  $15,000,000,  of the Company's  Senior A
Units in connection  with the Senior A Units  Offering.  The Senior A Units were
comprised of four shares of the Company's Senior A Preferred Stock and five-year
Senior A Preferred  Warrant to purchase one share of Common Stock at an exercise
price of 3.83.

The holders of the Senior A Preferred  Stock,  valued by agreement in connection
with the Senior A Units  Offering at $3.06 per share,  have the right to convert
the Senior A Preferred  Stock into Common Stock at any time, and may be required
to convert  into Common  Stock by the  Company  upon the  occurrence  of certain
events. In the event that any of the shares of Common Stock that are held by the
Proctor Group are reinstated into the Company's  capitalization (the "Triggering
Event"),   the  holders  of  the  outstanding  Senior  A  Preferred  Stock  will
automatically have the right to cast a number of votes, in the aggregate,  equal
to not less than 51% of the votes that can be cast by all outstanding securities
of the Company that are entitled to vote, on an as-converted basis.  However, in
the event of a Triggering Event, the holders of the Common Stock do not have any
additional  protective  rights and may be subject to substantial  dilution.  The
Senior  A  Preferred  Stock  accrues  a  dividend  of  8%  paid   semi-annually.
Additionally,  for each four shares of Senior A Preferred Stock, the holder will
receive  one Senior A  Preferred  Warrant,  exercisable  for one share of Common
Stock at an exercise price of $3.83 per share.  The Senior A Preferred  Warrants
contain customary anti-dilution provisions for stock dividends, stock splits and
the like.

On August 13, 2004, the Company closed on approximately $1,788,048 in funding of
Senior A Units with certain  institutional  investors.  In connection therewith,
the  Company  issued  588,686  shares of  Senior A  Preferred  Stock to  certain
institutional  investors. The shares were valued at $3.06 per share. The Company
also issued  Senior A Preferred  Warrants to purchase  146,082  shares of Common
Stock.  The closing  market price of the Common Stock August 13, 2004 was $3.55.
The Company  relied on Section 4(2) of the  Securities  Act of 1933,  as amended
(the "Securities  Act"), and Regulation D promulgated  thereunder,  as the basis
for an exemption from registering the sale of these shares of Senior A Preferred
Stock and Senior A Preferred Warrants under the Securities Act.

In connection with the Senior A Units Offering,  Middlebury  Capital was granted
five-year  warrants  exercisable  for $2.29 per share to  purchase  up to 68,559
shares of the 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
Senior A Preferred  Stock (the  "Preferred  Placement  Agent  Warrants").  As of
September  30, 2004,  all of the  Preferred  Placement  Agent  Warrants had been
granted.  The  Company  relied  on  Section  4(2)  of the  Securities  Act,  and
Regulation  D  promulgated  thereunder,  as  the  basis  for an  exemption  from
registering  the sale of the Common  Placement  Agent Warrants and the Preferred
Placement Agent Warrants under the Securities Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

On August 11, 2004, the  stockholders  of the Company,  by the majority  written
consent in lieu of a meeting,  duly voted upon and  approved an amendment to the
Company's  Certificate of Incorporation  that effected an increase in the number
of authorized shares of preferred stock to 25,000,000.

ITEM 5. OTHER INFORMATION

None.


                                       16
<PAGE>


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

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

      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 September 30, 2004.

      On July 6, 2004,  the Company filed an 8-K related to its  acquisition  of
      First Person  Software,  Inc., as described  under Item 2 "Acquisition  or
      Disposition  of  Assets"  and  Item 7  "Financial  Statements,  Pro  Forma
      Financial Information and Exhibits."

      On  September  30,  2004,  the  Company  filed a Form 8-K  related  to the
      completion of the Senior A Units  Offering,  as described  under Item 3.02
      "Sale of Unregistered Securities."


                                       17
<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: November 15, 2004             By: ________________________
                                        Jay Elliot
                                        Chairman of the Board and Chief
                                        Executive Officer
                                       (Principal Executive Officer)

Date:  November 15, 2004            By: _______________________
                                        David R. Wells
                                        Vice President Finance Operations
                                        (Principal Financial and Accounting
                                        Officer)

<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.