<PAGE>

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

                                  FORM 10-QSB


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

               For the quarterly period ended September 30, 1998

                                      OR

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


                       Commission file number 2-93477-D


                                 I-STORM, INC.
                   (FORMERLY DIGITAL POWER HOLDING COMPANY)
       (Exact name of small business issuer as specified in its charter)


             NEVADA                                       87-040127
   (State or other jurisdiction of         (I.R.S. Employer Identification No.)
   incorporation or organization)

   2440 West El Camino Real, Suite 520, Mountain View, California 94040-1400

                   (Address of principal executive offices)

                                (650) 962-5420
                          (Issuer's telephone number)

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

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.

           Class                              Outstanding at September 30, 1998
-----------------------------                 ---------------------------------
Common Stock, par value $0.01                              3,325,756

Traditional Small Business Disclosure Format (Check One):  Yes [_]  No [X]
<PAGE>

PART I. FINANCIAL INFORMATION
        Item 1. Financial Statements


                                 I-STORM, INC.
                     Formerly Digital Power Holding Company
                         (A development stage company)


                           CONSOLIDATED BALANCE SHEET
                    (in thousands, except per share amounts)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                           Post
                                                                                         Emergence       Predecessor
                                                                                         ---------       -----------
                                                                                        September 30,    December 31,
                                                                                            1998             1997
                                                                                       -------------------------------
                                                                                                (unaudited)
                                                                                       -------------------------------
<S>                                                                                    <C>
Current assets:
 Cash and cash equivalents                                                                $     26         $     --
 Accounts receivable, net of allowance for doubtful accounts of $0 and
  $31, respectively                                                                             12               85
 Factored accounts receivable, net of allowance for doubtful accounts of
  $0 as of September 30, 1998 and December 31, 1997                                            977              571
 Prepaid expenses and other current assets                                                     219              122
                                                                                       -------------------------------
     Total current assets                                                                    1,234              778
Property and equipment, net                                                                    102              974
Other assets                                                                                    --               54
Reorganization asset, net of amortization of $65 and $0, respectively                        3,138               --
                                                                                       -------------------------------
     Total assets                                                                         $  4,474         $  1,806
                                                                                       ===============================
                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
 Notes payable                                                                            $     112       $     157
 Factoring liability                                                                            952             821
 Accounts payable                                                                               526           7,151
 Accrued liabilities                                                                            721             605
 Deferred revenue                                                                               359              --
                                                                                       -------------------------------
     Total current liabilities                                                                2,670           8,734
                                                                                       -------------------------------
Long-term notes payable (Note 5)                                                                689              --
Capital lease obligation, less current portion                                                   --               2
                                                                                       -------------------------------
     Total noncurrent liabilities                                                               689               2
                                                                                       -------------------------------
Redeemable common stock, at $1.00 per share, 600,000 shares
 outstanding at September 30, 1998 and none outstanding at
 December 31, 1997 (Note 7)                                                                     600              --
                                                                                       -------------------------------
Commitments and contingencies (Note 6)

Shareholders' equity (deficit):
 Preferred stock, $0.01 par value and paid in capital
  Series A cumulative convertible preferred stock; liquidation preference
   of $4,002:
     Designated--600 shares; outstanding--0 shares
     Subscribed--600 shares at September 30, 1998 and none in 1997                                6              --
 Common stock, $0.01 par value:
  Authorized--25,000
  Outstanding--4,713 and 11,590 shares, respectively
  Subscribed 1,482 shares at September 30, 1998 and none in 1997                                 51           2,342
 Notes receivable from holders of common stock                                                   --          (2,332)
 Subscribed warrants to purchase common stock                                                   120              --
 Additional paid-in capital                                                                   1,084              --
 Accumulated deficit                                                                         (1,103)         (6,940)
                                                                                       -------------------------------
     Total shareholders' equity (deficit)                                                       515          (6,930)
                                                                                       -------------------------------
     Total liabilities and shareholders' equity (deficit)                                 $   4,474       $   1,806
                                                                                       ===============================
</TABLE>

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

                                       1
<PAGE>

                                 I-STORM, INC.
                     Formerly Digital Power Holding Company

                         (A development stage company)


                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)



<TABLE>
<CAPTION>
                                                         Post
                                                       Emergence                   Predecessor
                                                       ---------                   -----------
                                                      Period from
                                                       Inception          Period from      Three months
                                                    (July 17, 1998)      July  1, 1998         ended
                                                   to September 30,       to July 16,      September 30,
                                                         1998                1998              1997
                                                   ------------------------------------------------------
                                                                        (unaudited)
                                                   ------------------------------------------------------
<S>                                                <C>                   <C>               <C>
Revenues                                                       432                2             1,096
                                                   ------------------------------------------------------
Costs and expenses:
 Cost of revenues                                              537               78               798
 Selling, general, and administrative                          858              570               910
 Amortization of reorganization asset                           65               --                --
                                                   ------------------------------------------------------
     Total operating expenses                                1,460              648             1,708
                                                   ------------------------------------------------------
     Loss from operations                                   (1,028)            (646)             (612)

Interest expense                                               (75)              --              (145)

Other income (expense), net                                     --              (19)               --
                                                   ------------------------------------------------------
     Total other income (expense)                              (75)             (19)             (145)
                                                   ------------------------------------------------------

Net loss and comprehensive loss                             (1,103)            (665)             (757)
                                                   ======================================================
Net loss per share:
 Basic and diluted                                           (0.23)           (0.06)            (0.07)
                                                   ======================================================
Shares used in computing net loss per share:
 Basic and diluted                                           4,713           11,590            11,590
                                                   ======================================================
</TABLE>

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

                                       2
<PAGE>

                                 I-STORM, INC.
                     Formerly Digital Power Holding Company

                         (A development stage company)


                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)



<TABLE>
<CAPTION>
                                                    Post Emergence                Predecessor
                                                    --------------                -----------
                                                      Period from
                                                       Inception          Period from       Nine months
                                                    (July 17, 1998)    January 1, 1998         ended
                                                   to September 30,       to July 16,      September 30,
                                                         1998                1998              1997
                                                ----------------------------------------------------------
                                                                        (unaudited)
                                                ----------------------------------------------------------
<S>                                             <C>                    <C>                 <C>
Revenues                                                  432                2,076             5,554
                                                ----------------------------------------------------------
Costs and expenses:
 Cost of revenues                                          537               1,563             3,612
 Selling, general, and administrative                      858               2,672             3,196
 Amortization of reorganization asset                       65                  --                --
                                                ----------------------------------------------------------
     Total operating expenses                            1,460               4,235             6,808
                                                ----------------------------------------------------------
     Loss from operations                               (1,028)             (2,159)           (1,254)

Interest expense                                           (75)                 --              (252)

Other income (expense), net                                 --                (264)               --
                                                ----------------------------------------------------------
     Total other income (expense)                          (75)               (264)             (252)
                                                ----------------------------------------------------------

Net loss and comprehensive loss                         (1,103)             (2,423)           (1,506)
                                                ==========================================================
Net loss per share:
 Basic and diluted                                       (0.23)              (0.21)            (0.13)
                                                ==========================================================
Shares used in computing net loss per share:
 Basic and diluted                                       4,713              11,590            11,590
                                                ==========================================================
</TABLE>

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

                                       3
<PAGE>

                                 I-STORM, INC.
                     Formerly Digital Power Holding Company

                         (A development stage company)


            CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                                  Warrants to
                                                     Convertible                                    Purchase
                                                   Preferred Stock            Common Stock           Common       Notes
                                                -----------------------------------------------
                  Predecessor                       Shares       Amount     Shares      Amount        Stock     Receivable
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997                              --     $     --      11,590   $   2,342     $   --      $    (2,332)
 Net loss                                               --           --          --          --         --               --
 Issuance of new preferred and
  common stock and warrants in
  accordance with the POR                              600            6       3,040          30         47               --
 Application of fresh-start accounting                  --           --     (11,590)     (2,342)        --            2,332
                                                ---------------------------------------------------------------------------
Post-Emergence
--------------
Balance at inception (July 17, 1998)                   600            6       3,040          30         47               --
 Issuance of common stock for services                  --           --       2,000          20         --               --
 Issuance of common stock related to debt
  financing                                             --           --          91           1         --               --
 Issuance of warrants related to debt
  financing                                             --           --          --          --         73               --
 Net loss                                               --           --          --          --         --               --
                                                ---------------------------------------------------------------------------
Balance, September 30, 1998                            600       $    6       5,131   $      51     $  120      $        --
                                                ===========================================================================

<CAPTION>
                                                                                         Total
                                                         Additional                   Shareholders'
                                                           Paid-in       Accumulated     Equity
                  Predecessor                              Capital          Deficit     (Deficit)
------------------------------------------------------------------------------------------------------
<S>                                                      <C>             <C>           <C>
Balance, December 31, 1997                               $      --       $   (6,940)    $  (6,930)
 Net loss                                                       --           (2,423)       (2,423)
 Issuance of new preferred and common stock and
  warrants in accordance with the POR                        1,084               --         1,167
 Application of fresh-start accounting                          --            9,363         9,353
                                                     -------------------------------------------------
Post-Emergence
--------------
Balance at inception (July 17, 1998)                         1,084               --         1,167
 Issuance of common stock for services                         336               --           356
 Issuance of common stock related to debt
  financing                                                     21               --            22
 Issuance of warrants related to debt
  financing                                                     --               --            73
 Net loss                                                       --           (1,103)       (1,103)
                                                     -------------------------------------------------
Balance, September 30, 1998                              $   1,084       $   (2,760)    $    (515)
                                                     =================================================
</TABLE>

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

                                       4
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company

                         (A development stage company)


                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                (in thousands)


<TABLE>
<CAPTION>
                                                                  Post Emergence                Predecessor
                                                                  ---------------               -----------
                                                                    Period from
                                                                     Inception         Period from      Nine months
                                                                  (July 17, 1998)    January 1, 1998       ended
                                                                    to September 30,    to July 16,     September 30,
                                                                       1998                1998             1997
                                                                --------------------------------------------------------
                                                                                       (unaudited)
                                                                --------------------------------------------------------
<S>                                                             <C>                <C>                 <C>
Cash flows from operating activities:
 Net loss                                                          $      (1,103)   $      (2,423)      $         (1,506)
 Adjustments to reconcile net loss to net cash used in
  operating activities:
   Loss on disposal of fixed assets                                           --               30                     --
   Depreciation and amortization                                              86               88                    174
   Forgiveness of current obligations in exchange
    for fixed assets                                                          --              738                     --
   Valuation of common stock issued for services                             356               --                     --
   Provision for bad debts                                                    --               85                     --
   Changes in assets and liabilities:
     Accounts receivable                                                      74              (20)                 2,292
     Unbilled receivables                                                     --               --                   (121)
     Factored accounts receivable                                           (469)              (3)                  (761)
     Prepaid expenses and other assets                                       (54)              84                    (24)
     Accounts payable                                                         66               --                    390
     Deferred revenue                                                        356              655                   (674)
     Accrued liabilities                                                      67              149                   (215)
                                                                 --------------------------------------------------------
      Net cash used in operating activities                                 (621)            (617)                  (445)
                                                                 --------------------------------------------------------

Cash flows from investing activities:
 Purchase of fixed assets                                                     --               (4)                  (655)
                                                                 --------------------------------------------------------
      Net cash used in investing activities                                   --               (4)                  (655)
                                                                 -------------------------------------------------------
Cash flows from financing activities:
 Proceeds from notes payable                                                 100              528                     --
 Repayment of notes payable                                                   --              (57)                    --
 Factoring liability, net                                                    252             (121)                   623
 Payments on capital leases                                                   --              (34)                   (26)
 Proceeds from issuance of redeemable common stock                            --              600                     --
 Payment on notes receivable from shareholders                                --               --                    404
                                                                --------------------------------------------------------
      Net cash provided by financing activities                              352              916                  1,001
                                                                --------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                        (269)             295                    (99)
Cash and cash equivalents at beginning of period                             295               --                     73
                                                                --------------------------------------------------------
Cash and cash equivalents at end of period                         $          26    $         295       $            (26)
                                                                ========================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
 INVESTING AND FINANCING ACTIVITIES:
  Valuation of common stock related to debt financing              $          31    $          --       $             --
  Valuation of warrants issued in conjunction with debt            $          73    $          --       $             --
  Notes payable issued to secured creditors for pre-petition
   claims and taxes (See Note 6)                                   $         275    $          --       $             --
</TABLE>

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

                                       5
<PAGE>

                                 I-STORM, INC.
                     Formerly Digital Power Holding Company

                         (A development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 1998


1.  GENERAL:

The condensed consolidated financial statements included herein have been
prepared by I-Storm, Inc. ("I-Storm" or the "Company") without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission.  Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations; however, the
Company believes that the disclosures are adequate to make the information
presented not misleading. The condensed consolidated financial statements
included herein should be read in conjunction with the financial statements and
the notes thereto included in the Company's Report on Form 10-K as of December
31, 1998.

In the opinion of management, the accompanying interim financial statements
contain all material adjustments necessary to present fairly the consolidated
financial condition, results of operations, and changes in financial position
and stockholders' equity of the Company for interim periods.  Certain amounts in
the prior interim consolidated financial statements have been reclassified to
conform to the current period presentation.

Due to the Restructuring and implementation of Fresh Start Reporting,
Consolidated Financial Statements for the new Reorganized Company (period
starting July 17, 1998) are not comparable to those of the Predecessor Company.
For financial reporting purposes, the effective date of the bankruptcy is
considered to be the close of business on July 16, 1998.

A black line has been drawn on the accompanying Condensed Consolidated Financial
Statements to distinguish between the Reorganized Company and the Predecessor
Company.

2.  DESCRIPTION OF THE COMPANY:

Company Formation and Financial Reorganization

I-Storm was created through the merger of LVL Communications Corporation ("LVL")
and Digital Acquisition Corporation, a wholly owned subsidiary of Digital Power
Holding Company ("Digital"), a Nevada public shell corporation, on July 17,
1998, resulting in LVL becoming a wholly owned subsidiary of Digital.  Digital
has been renamed "I-Storm, Inc."  The merger was accounted for as a reverse
acquisition under the purchase method with LVL being the surviving entity.

Since December 1989, Digital has not engaged in any material business
operations.  Its only activities since that time have consisted of restoring and
maintaining its good standing in the State of Nevada.

I-Storm is an Internet advertising, marketing and communications agency, and the
developer of the "I-Storm CyberStore" concept, a joint venture program to
finance, design,

                                       6
<PAGE>

                                 I-STORM, INC.
                     Formerly Digital Power Holding Company

                         (A development stage company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                               SEPTEMBER 30, 1998

develop, and operate electronic commerce storefronts in partnership with brand-
name consumer and technology product companies as of September 30, 1998. LVL has
developed electronic and on-line commerce ("E-commerce") on behalf of
international manufacturing and technology corporations.

On March 23, 1998, LVL and its two wholly owned subsidiaries, LVL Advertising,
Inc. ("LVLA"), and LVL Interactive, Inc. ("LVLI"), filed a voluntary petition in
the United States Bankruptcy Court for the Northern District of California
("Bankruptcy Court") seeking protection under Chapter 11 of the U.S. Bankruptcy
Code.  The Chapter 11 proceedings of the Companies were jointly administered by
the Bankruptcy Court.  LVL and its subsidiaries operated their business as
debtors-in-possession, subject to Bankruptcy Court approval for certain
transactions, while they developed a reorganization plan to restructure LVL.  On
April 16, 1998, the Bankruptcy Court confirmed the First Amended Plan of
Reorganization ("POR") which became effective on July 17, 1998.  The principal
terms of the POR are as follows:

     1.   LVLA and LVLI merged into LVL.

     2.   LVL became a wholly owned subsidiary of Digital.

     3.   The outstanding shares of common stock of LVL ("Old Common Stock") and
          options to purchase Old Common Stock were canceled effective July 17,
          1998.

     4.   Certain founders and shareholders of LVL received 600,000 shares of
          common stock of the Company, subject to certain restrictions on the
          sale and disposition of these shares.

     5.   Certain secured claims are to be repaid by the Company pursuant to the
          original terms of the agreements or will be repaid over five years in
          equal quarterly installments at an annual interest rate of 10%.

     6.   An investor in LVL, Trident III, LLC ("Trident") that provided
          $600,000 in pre-confirmation bridge financing was issued 600,000
          shares of redeemable non-voting common stock and 440,000 shares of
          non-redeemable common stock.

     7.   All unsecured claims will receive a pro rata portion of 600,000 shares
          of Series A Cumulative Convertible Preferred Stock ("Series A").
          Claims of less than $5,000 may elect to receive 10% of their claim in
          cash in lieu of receiving shares of Series A ("Cash Option"). Claims
          exceeding $5,000 may elect to reduce their claim to $5,000 and receive
          $500 in lieu of receiving shares of Series A. The pool of 600,000
          shares of Series A was reduced by the percentage dollar amount of
          claims electing the Cash Option.

                                       7
<PAGE>

                                 I-STORM, INC.
                     Formerly Digital Power Holding Company

                         (A development stage company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                               SEPTEMBER 30, 1998

     8.   The Company issued warrants to purchase common stock to certain
          investors and service providers during the reorganization.

The Company also concluded the following additional transactions relating to the
restructuring of the Company:

     1.   Trident provided $228,000 in post-confirmation bridge financing and
          received 91,200 shares of non-voting common stock.

     2.   The Company has also received $100,000 in pre-confirmation bridge
          financing and $300,000 in post-confirmation bridge financing from
          other investors. The Company issued warrants to purchase 80,000 shares
          of common stock at $0.50 per share and 120,000 shares of common stock
          at $0.001 per share, respectively, in conjunction with these
          financings.

     3.   I-Storm issued warrants to purchase 290,000 shares of common stock at
          $0.25 per share in conjunction with post-confirmation bridge financing
          of $725,0000.

Significant Risks and Uncertainties

The Chapter 11 proceedings significantly affected I-Storm's capital structure,
liquidity and capital resources.  During 1997 and 1998, the Company's operations
generated substantial losses.  I-Storm expects that in the near term, it will
continue to sustain losses from operations (before giving effect to the non-cash
charges that it will incur with respect to the amortization of a $3.1 million
bankruptcy Reorganization Asset over the next ten years).

The Company is in the development stage, has yet to generate any significant
revenues and has no assurance of future revenues.  The Company is subject to the
risks and challenges associated with other companies at a similar stage of
development, including: dependence on key individuals, successful development,
marketing and sales of products and services, and competition from larger
companies with greater financial, technical, management, marketing, and sales
resources.

In order to achieve successful operations, the Company will require additional
capital to sustain and expand its business.  I-Storm has raised net proceeds of
approximately $8.2 million since September 30, 1998.  I-Storm is currently
seeking additional equity financing and is seeking to list its stock on a
nationally-recognized exchange.  There can be no assurance that I-Storm will be
able to obtain financing or that the terms of the financing will be favorable to
I-Storm.  These factors raise substantial doubt about the ability of I-Storm to
continue as a going concern and about the ability of I-Storm to realize its
Reorganization Asset.  The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

                                       8
<PAGE>

                                 I-STORM, INC.
                     Formerly Digital Power Holding Company

                         (A development stage company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                               SEPTEMBER 30, 1998

In addition to the need for additional financing, I-Storm is subject to a number
of other risk factors including, but not limited to, a limited operating history
as a reorganized entity; significant concentration of revenue from a few
customers; highly competitive markets with limited barriers to entry; and
implementation of its new E-Commence CyberStore concept.

Fresh Start Accounting

AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," prescribes the use of "fresh start
accounting" when the sum of the allowed claims plus post-petition liabilities
exceeds the value of pre-confirmation assets and the entity experiences a change
in control as pre-reorganization equity holders effectively receive less than
50% of new common stock issued pursuant to the POR.  Under these circumstances,
a new reporting entity is created and assets and liabilities should be recorded
at their fair values.  This accounting treatment is referred to as "fresh start
reporting."

Distributions in settlement of allowed claims, other transactions pursuant to
the POR and fresh start reporting adjustments have been applied to I-Storm's
pre-confirmation balance sheet resulting in the accompanying July 17, 1998
consolidated balance sheet of I-Storm.  Since fresh start accounting results in
a new reporting entity, amounts included in the accompanying consolidated
financial statements as of or subsequent to July 17, 1998 are not intended to be
comparable to financial statements as of or for any previous period.

Fresh start reporting equity value was determined in good faith by the Board of
Directors of I-Storm.  I-Storm has valued the Series A Cumulative Convertible
Preferred Stock at $1.00 per share, representing proceeds to the unsecured
creditors of approximately $0.10 per $1.00 of liabilities.  Redeemable common
stock has also been valued at $1.00 based on the redemption features of the
common stock.  Common stock has been valued at $0.25 per share based on the
value of the last transaction involving Digital's common stock.  Warrants to
purchase common stock to be issued pursuant to the POR have been valued at
approximately $0.13 based on an option-pricing model.

                                       9
<PAGE>

                                 I-STORM, INC.
                     Fomerly Digital Power Holding Company

                         (A development stage company)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              SEPTEMBER 30, 1998


The reorganization and the adoption of fresh start reporting resulted in the
following adjustments to the Company's Consolidated Balance Sheet as of July 17,
1998 (in thousands):

(UNAUDITED INFORMATION)

<TABLE>
<CAPTION>
                                              Predecessor                   Reorganization and                     Reorganized
                                                Company                  Fresh Start Adjustments                     Company
                                                                  --------------------------------------
                                                July 17,              Debit                 Credit                   July 17,
                                                 1998                                                                  1998
                                           ----------------       --------------         ---------------          -----------------
<S>                                        <C>                    <C>                    <C>                      <C>
Assets:
   Current assets                          $          1,360       $           --         $           379   (a)    $             981
 Property and equipment, net                            307                   --                     185   (b)                  122
 Reorganization asset                                    --                3,131  (c)                 --                      3,131
                                           ----------------       --------------         ---------------          -----------------
Total assets                               $          1,667       $        3,131         $           564          $           4,234
                                           ================       ==============         ===============          =================
Liabilities and equity:
 Accounts payable                          $          9,574       $        7,635  (d)    $            --          $           1,939
 Long-term notes payable                                403                   --                     125   (e)                  528
 Redeemable common stock                                 --                   --                     600   (f)                  600
 Preferred A                                             --                   --                     600   (g)                  600
 Common                                                  11                   --                      19   (h)                   30
 Warrants                                                --                   --                      47   (i)                   47
 Paid in capital                                        724                  234  (j)                 --                        490
 Accumulated deficit                                 (9,045)                  --                   9,045   (k)                   --
                                           ----------------       --------------         ---------------          -----------------
Total liabilities and equity               $          1,667       $        7,869         $        10,436          $           4,234
                                           ================       ==============         ===============          =================
</TABLE>

Explanation of the above adjustment columns are as follows:

     (a)  To adjust current assets to fair market value.
     (b)  To adjust property and equipment to fair market value.
     (c)  To establish the reorganization value in excess of identifiable assets
          as follows (in thousands):

<TABLE>
               <S>                                        <C>
               New debt                                   $        125
               New equity                                        1,266
                                                          ------------
                      Reorganization value                       1,391

               Plus:  Fair value of liabilities                  2,843
               Less:  Fair value of assets                      (1,103)
                                                          ------------
                                                          $      3,131
                                                          ============
</TABLE>

                                       10
<PAGE>

                                 I-STORM, INC.
                     Fomerly Digital Power Holding Company

                         (A development stage company)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                              SEPTEMBER 30, 1998


     (d)  To reflect the cancellation of old accounts payable and notes payable.
     (e)  To reflect the addition of bridge debt pursuant to the Reorganization
          Plan.
     (f)  To reflect the issuance of 600,000 shares of Redeemable Common
          pursuant to the Reorganization Plan.
     (g)  To reflect the issuance of 600,000 shares of Convertible Preferred A
          pursuant to the Reorganization Plan.
     (h)  To reflect the net issuance of Common shares pursuant to the
          Reorganization Plan.
     (i)  To reflect the issuance of 350,000 shares of Common Warrants pursuant
          to the Reorganization Plan.
     (j)  To reflect net adjustments to Capital pursuant to the Reorganization
          Plan.
     (k)  To reflect the elimination of stockholders' deficit of the Predecessor
          Company.

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The accompanying consolidated financial statements reflect the activities of I-
Storm and its wholly-owned subsidiary after elimination of all intercompany
accounts and transactions.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the period.  Actual results
could differ from those estimates.

Statements of Cash Flows

For purposes of the statements of cash flows, I-Storm considers all highly
liquid investments purchased with original maturities of three months or less to
be cash and cash equivalents.  Cash and cash equivalents consist of amounts on
deposit at a commercial bank.

Concentrations of Credit Risk

Financial instruments that potentially subject I-Storm to concentrations of
credit risk consist principally of accounts receivable.  I-Storm performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral.

                                       11
<PAGE>

                                 I-STORM, INC.
                     Fomerly Digital Power Holding Company

                         (A development stage company)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              SEPTEMBER 30, 1998


Property and Equipment

Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives (three to seven years) of
the assets.

Amortization of Reorganization Asset

At July 17, 1998, the reorganization value of I-Storm in excess of its net
assets was determined to be  $3,131,000.  This intangible asset was classified
as a reorganization asset ("Reorganization Asset") in the accompanying
consolidated balance sheet of I-Storm and will be amortized on a straight-line
basis over ten years.  As of September 30, 1998, the value of the Reorganization
Asset was approximately $3,138,000.  Pursuant to Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code,"
the Reorganization Asset was determined by discounting future cash flows for
I-Storm at rates reflecting the business and financial risks involved and it
approximates the amount a willing buyer would pay for the assets of the Company
immediately after the restructuring.  The carrying value of the Reorganization
Asset will be reviewed periodically for impairment, and if the facts and
circumstances suggest that it may not be recoverable, as determined based on the
undiscounted cash flows of I-Storm over the remaining amortization period, the
carrying value of the Reorganization Asset will be adjusted in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of."

                           Stock-Based Compensation

The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," in October 1995.  This accounting standard permits the use of
either a fair value based method of accounting or the method defined in
Accounting Principles Board Opinion 25 ("APB 25"), "Accounting for Stock Issued
to Employees" to account for stock-based compensation arrangements.  Companies
that elect to employ the method prescribed by APB 25 are required to disclose
the pro forma net income (loss) that would have resulted from the use of the
fair value based method.  I-Storm has elected to account for its stock-based
compensation arrangements under the provisions of APB 25.

Revenue Recognition

I-Storm's revenues consist principally of services related to development and
maintenance of web sites.  I-Storm recognizes revenue as the services are
provided.  To the extent costs incurred and anticipated costs to complete
projects in progress exceed anticipated billings, a loss is accrued for the
excess.

                                       12
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


Comprehensive Income (Loss)

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which I-Storm adopted beginning on January 1, 1998.   SFAS No. 130 establishes
standards for reporting and display of comprehensive income (loss) and its
components in a full set of general purpose financial statements.  The objective
of SFAS No. 130 is to report a measure of all changes in equity of an enterprise
that result from transactions and other economic events of the period other than
transactions with shareholders ("comprehensive income ").  Comprehensive income
(loss) is the total of net income (loss) and all other non-owner changes in
equity.  For the nine months ended September 30, 1998 and 1997, I-Storm's
comprehensive loss was equal to net loss.

Computation of Basic and Diluted Net Loss Per Share and Pro Forma Basic and
Diluted Net Loss Per Share

In accordance with SFAS No. 128, "Earnings Per Share," basic net loss per common
share has been computed using the weighted average number of shares of common
stock outstanding during the period less shares subject to repurchase.  Basic
and diluted pro forma net loss per common share, as presented in the statements
of operations, has been computed as described above and also gives effect to the
conversion of the convertible preferred stock if anti-dilutive (using the if-
converted method) from the original date of issuance.

Segment Reporting

During 1998, I-Storm adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information."  SFAS No. 131 requires a new basis of
determining reportable business segments (i.e., the management approach).  This
approach requires that business segment information used by management to assess
performance and manage company resources be the source for information
disclosure.  On this basis, I-Storm has only one business segment, the
development and implementation of the eStore concept.

During the nine months ended September 30, 1998 and 1997, I-Storm's revenue was
generated in the United States.

                        Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value.  Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for

                                       13
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998

hedging accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," which amends SFAS No. 133 to be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000 (or January 1,
2001 for I-Storm). This Statement will not have a material impact on the
financial condition or results of the operations of I-Storm.

4.  FACTORED ACCOUNTS RECEIVABLE:

I-Storm has entered into a factoring agreement with a financial institution.
Under this arrangement, I-Storm sells to the financial institution all third-
party receivables that meet certain criteria outlined in the agreement.  The
financial institution has the right to charge back any receivables that are not
paid within 90 days of the invoice date to I-Storm.  As I-Storm does not
surrender control over the factored receivables, the amounts received from the
transfer are treated as secured borrowings until either payment is received by
the financial institution or the receivable is put back to I-Storm.  The
factoring agreement expired on March 25, 1999.  Subsequent to September 30,
1998, I-Storm has completely paid off the factoring liability.

5.  NOTES PAYABLE:

As of September 30, 1998, I-Storm had a note payable agreement with Trident,
under which I-Storm was able to borrow up to $1 million at 10% per annum.  As
discussed in Note 2, Trident provided $600,000 in pre-confirmation bridge
financing and $228,000 in post-confirmation bridge financing.  In consideration
for the pre-confirmation bridge financing, I-Storm issued Trident 600,000 shares
of redeemable common stock and 440,000 shares of non-redeemable common stock.
In partial consideration for the post-confirmation bridge financing, Trident has
been issued additional 91,200 shares of non-redeemable non-voting common stock.
Subsequent to September 30, 1998, all balances outstanding on these notes have
been repaid.

Subsequent to September 30, 1998, I-Storm had notes payable agreements with
certain individuals in amounts aggregating $250,000 at 10% per annum.  The notes
are collateralized via a security interest in all of I-Storm's assets, subject
to certain other security interests.  In conjunction with the issuance of the
notes payable, I-Storm issued warrants to purchase 60,000 shares of common stock
in I-Storm exercisable at $0.50 per share.  The warrants expire on March 31,
2003. Subsequent to September 30, 1998, all balances outstanding on these notes
have been repaid.

Subsequent to September 30, 1998, I-Storm also had notes payable agreements with
certain individuals in amounts aggregating $275,000 at 10% per annum.  I-Storm
issued warrants to purchase 50,000 shares of common stock, exercisable at $0.001

                                       14
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


per share.  Subsequent to September 30, 1998, all balances outstanding on these
notes have been repaid.

Subsequent to September 30, 1998, I-Storm also had notes payable agreements with
certain individuals in amounts aggregating $300,000 at 10% per annum.  I-Storm
issued warrants to purchase 120,000 shares of common stock, exercisable at
$0.001 per share.  Subsequent to September 30, 1998, all balances outstanding on
these notes have been repaid.

All of the notes payable agreements listed above expire upon the earlier of: (i)
various dates from March 31, 1999 through October 31, 1999; (ii) the date of I-
Storm's receipt of $3 million from one or more debt or equity financings; or
(iii) upon the sale, transfer or disposition of any or all of the assets of I-
Storm.

Subsequent to September 30, 1998, I-Storm had federal and state payroll and
sales taxes due totaling $202,000.  As a result of the Chapter 11 filing, I-
Storm has five years to pay the taxes.

6.  COMMITMENTS AND CONTINGENCIES:

In March 1999, I-Storm entered into a two year operating lease for a new
facility.  The future minimum required payments under this lease are as follows
(in thousands):

<TABLE>
               <S>                                     <C>
               1999                                         253
               2000                                         348
               2001                                          29
                                                       --------
                                                            630
                                                       ========
</TABLE>

In conjunction with I-Storm's bankruptcy proceedings in 1998, I-Storm's
creditors had filed claims of approximately $621,000 as secured creditors.
Subsequent to September 30, 1998, claims for approximately $471,000 were
converted to unsecured claims and were allocated their pro rata portion of
Series A Cumulative Convertible Preferred Stock.  The remaining claims of
approximately $150,000 were repaid in August 1999.

7.  REDEEMABLE COMMON STOCK:

In conjunction with the POR, I-Storm issued 600,000 shares of redeemable common
stock to Trident in consideration for $600,000 of pre-confirmation bridge
financing.  These shares are redeemable at $1.00 per share, at Trident's option,
in the event that I-Storm raises $3 million in debt or equity financing.
Subsequent to September 30, 1998, Trident elected to convert the redeemable
common stock into non-redeemable common stock.

                                       15
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


8.  PREFERRED STOCK:

As of September 30, 1998, I-Storm was authorized to issue 2,000,000 shares of
preferred stock of which 600,000 shares are designated Series A Cumulative
Convertible Preferred Stock ("Series A").  Pursuant to the POR, these shares
will be issued on a pro rata basis to the class of unsecured creditors.  These
shares will be issued upon the identification of these claims and the
determination of shares to be issued or the Cash Option elected, and have been
reflected as subscribed shares in the accompanying balance sheet.  The shares of
Series A to be issued pursuant to the POR have been valued at $1.00 per share as
determined in good faith by the Board of Directors.  Pursuant to the POR, these
shares may not be transferred or sold until twelve months after the merger of
LVL into Digital.

The rights, restrictions, and preferences of Series A are as follows:

     .    The holders of Series A shall, upon the vote of the majority of the
          Board of Directors, be entitled to receive, out of funds legally
          available therefor, cumulative annual dividends at a rate of $0.05 per
          annum per share, respectively, prior and in preference to any payment
          of any dividend on the common stock, payable in cash or common stock
          at the option of the Board of Directors. Such dividends shall be paid
          when and as declared by the Board of Directors, and unpaid dividends
          shall accumulate for the benefit of the holders. The dividend rights
          and preferences of the Series A shall be senior to those of common
          stock. After the dividend preferences of the Series A due in a given
          year have been paid in full, all remaining dividends in such year, if
          any, shall be paid according to preference to remaining equity
          interests.

     .    In the event of any liquidation, dissolution, or winding up of I-
          Storm, or the sale, merger, or combination of I-Storm, a public
          offering in excess of $25 million, and merger or consolidation of I-
          Storm in which its shareholders do not retain a majority of the voting
          power in the surviving corporation, or a sale of substantially all of
          I-Storm's assets (singularly or collectively referred to as a
          "Liquidation Preference Event"), the holders of the Series A will be
          entitled to receive an amount equal to $6.67 per share for the Series
          A, plus an amount equal to all declared but unpaid dividends (the
          "Preference Amount"). After the Preference Amount on all outstanding
          shares of Series A has been paid, any remaining funds and assets of I-
          Storm legally available for distribution shall be paid pro rata solely
          among the holders of common stock. If I-Storm has insufficient assets
          to permit payment of the Preference Amount in full to all holders of
          Series A, then the assets of I-Storm shall be distributed ratably to
          the holders of Series A in proportion to the Preference Amount each
          such holder would have been entitled to receive.

                                       16
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


     .    The Series A shall be redeemable in part or in full at the option of
          I-Storm on thirty days advance written notice to the holders of Series
          A at a redemption price of $6.67 per share. Upon receipt of notice of
          I-Storm's intention to redeem the Series A, each holder of Series A
          shall have an option to convert to common stock as described below.
          Any partial redemption shall be made on a pro rata basis.

     .    Each holder of Series A shall have the right to convert the Series A
          into shares of common stock in part or in full at any time, including
          within thirty days after notice by I-Storm of its intention to redeem
          the Series A or of a Liquidation Preference Event. The initial
          conversion rate for the Series A shall be one-to-one. All rights
          incident to a share of Series A (including but not limited to rights
          to any declared but unpaid dividends) will terminate automatically
          upon any conversion of such share into common stock. The number of
          shares of common stock issuable upon conversion of each share of
          Series A shall be subject to adjustment from time to time upon the
          occurrence of certain events.

     .    The holders of Series A shall have the right to vote as a class on (i)
          the merger, sale, liquidation, or dissolution of I-Storm, (ii) a sale
          of all or substantially all of I-Storm's assets, (iii) any increase in
          the number of authorized shares of any class or series of equity
          securities of I-Storm, (iv) creation of any new class or series of
          equity securities in LVL, (v) any increase in the number of members of
          the Board of Directors of I-Storm and LVL, and (vi) election of one
          member of the Board of Directors of I-Storm and LVL.

9.  COMMON STOCK:

At September 30, 1998, common stock consists of 3,326,000 shares outstanding,
and an additional 1,482,000 shares subscribed.  The subscribed shares consist of
shares to be issued pursuant to the POR that had not been issued as of September
30, 1998.  The Board of Directors authorized the issuance of these shares on
July 23, 1998.  The shares of common stock to be issued pursuant to the POR have
been valued at $0.25 per share, as determined in good faith by I-Storm's Board
of Directors.  Each issued and outstanding share of common stock entitles the
holder to one vote on all matters submitted to a vote of stockholders.  Upon any
liquidation, dissolution or winding up of the affairs of I-Storm, holders of
common stock are entitled to receive pro rata all of the assets available for
distribution to shareholders, only after payment or provision for payment of all
debts and other liabilities of I-Storm, including a pro-rata distribution of
assets, first, to the holders of Series A.

Shares of common stock issued pursuant to the POR and shares issued upon the
exercise of warrants issued pursuant to the POR may not be transferred or sold
within six months of the merger of LVL and Digital for holders of common stock
that had provided financing to I-Storm.  Shares may not be transferred or sold
within eighteen

                                       17
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


months of the merger of LVL and Digital for holders of common stock that had not
provided financing to I-Storm. The Board of Directors may release all or a
portion of these restrictions at its discretion.

1998 Stock Option Plan

As provided in the POR and subject to stockholder approval, in 1998, I-Storm
established the 1998 Stock Option Plan (the "1998 Option Plan") covering
1,400,000 shares of common stock.  Options granted under the 1998 Option Plan
may be either incentive stock options or nonstatutory stock options, as
designated by the Board of Directors.  Options granted under the 1998 Option
Plan expire on the tenth anniversary of the date of grant.  The 1998 Option Plan
provides that the exercise price of each incentive stock option will be no less
than 100% of the fair market value of the common stock at the date of the grant.
The exercise price of each nonstatutory stock option will be no less than 85% of
the fair market value of the common stock at the date of the grant.  The
exercise price to an optionee who possesses more than 10% of the total combined
voting power of all classes of stock will be no less than 110% of the fair
market value of the common stock at the date of the grant and is not exercisable
after the expiration of five years from the date of grant.  Vesting provisions
of individual options under the 1998 Option Plan may vary as the Board of
Directors has the authority to set exercise dates, payment terms and other
provisions for each grant.  As of September 30, 1998, there were no shares
outstanding under the 1998 Option Plan and there were 1,402,000 options granted
to employees.  In accordance with APB No. 25, no compensation expense has been
recognized related to options granted to employees.

Subscribed warrants to purchase common stock

I-Storm has issued 350,000 warrants to purchase common stock at $0.50 per share
to creditors and to other entities and individuals as specified by the POR.  The
warrants are exercisable for a period of five years commencing from their issue
date pursuant to the POR.  The Board of Directors authorized the issuance of
these warrants on July 23, 1998.  I-Storm has valued these warrants at
approximately $0.13 per share based on an option pricing model.

Warrants to purchase common stock

I-Storm has issued warrants to purchase 290,000 shares of common stock at an
exercise price of $0.001 per share in connection with a bridge financing of
$825,000.  The warrants are exercisable for a period of five years commencing
from their issue date.  I-Storm has valued these warrants at approximately $0.25
per share based on an option pricing model.  As of September 30, 1998, none of
these warrants have been exercised.

                                       18
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


Common stock issued for services

During 1998, the Board of Directors authorized the issuance of 2,000,000 shares
of common stock valued at $0.25 per share to entities in consideration for
financial services and financing provided to I-Storm.

10.  INCOME TAXES:

I-Storm accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes."  A valuation allowance has been recorded for the total deferred
tax assets as a result of uncertainties regarding the realization of the assets
based upon the lack of profitability in recent years, the uncertainty of future
profitability, and limitations on the utilization of net operating losses due to
I-Storm's reorganization.

11.  RELATED PARTIES:

The Company entered into a twelve-month consulting agreement with Benchmark
Equity Group, Inc. ("Benchmark"), dated August 31, 1998, pursuant to which the
Company is obligated to pay a total of $175,000 in twelve monthly instalments to
Benchmark for merger and acquisitions consulting services rendered to either LVL
or the Company, commencing as of March 1, 1998.  Benchmark also entered into an
agreement in April 1998, to provide consulting services to LVL and its successor
entity in consideration of 600,000 shares of unregistered Common Stock, and the
Board of Directors approved the issuance of this Common Stock to Benchmark or
its designees on August 1, 1998, subject to a month lock-up agreement.

In September 1997, the Company engaged Mackenzie Shea, Inc. ("MSI") as a
consultant to assist the Company in structuring a reorganization and post-
organization operating entity.  MSI or its designees were issued 500,000 shares
of the Company's Common Stock in August 1998, and MSI was paid a $20,000 cash
fee in 1998 in full compensation for such services.  The shares are exempt from
registration under the federal securities laws, in accordance with Section 1145
of the Bankruptcy Code.  The shares are subject to an eighteen month lock-up
agreement, commencing August 1, 1998.  Ten percent of such shares to date have
been released from the lock-up agreement.

In September 1997, the Company engaged Thomas Schulz as a consultant to assist
the Company in structuring a reorganization and post-organization operating
entity.  Mr. Schulz or its designees were issued 500,000 shares of the Company's
Common Stock in August 1998, and Mr. Schulz also was paid a fee for such
services.  Mr. Schulz is a director of the Company.  The shares are exempt from
registration under the federal securities laws, in accordance with Section 1145
of the Bankruptcy Code.  The shares are subject to an eighteen month lock-up
agreement, commencing

                                       19
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


August 1, 1998. Ten percent of such shares to date have been released from the
lock-up agreement.

In August 1998, the Company engaged Weatherly Securities Corp. ("Weatherly") to
provide investment banking services and strategic planning for the management,
capitalization and business development of the Company for a flat fee of
1,000,000 shares of Common Stock of the Company, valued at $0.25 per share.  The
shares of Common Stock issued to Weatherly were fully vested fully as of August
1, 1998, are unregistered shares and are subject to an eighteen month lock-up
agreement.

In August 1998, the Company engaged Pound Capital Corp. ("Pound") to provide
investment banking services and strategic planning for the management,
capitalization and business development of the Company for a flat fee of 225,000
shares of Common Stock of the Company, valued at $0.25 per share.  The shares of
Common Stock issued to Pound were fully vested as of August 1, 1998, are
unregistered shares and are subject to an eighteen month lock-up agreement.

Robert Tomz entered into a consulting arrangement with the Company on December
8, 1998 whereby he was entitled to receive monthly compensation of $8,000 a
month and warrants to purchase 14,000 shares of Common Stock, exercisable at
$2.00 per share each month for a period of twelve months commencing January 11,
1999.  Mr. Tomz also served briefly as Acting Chief Financial Officer of the
Company from January 1 to March 15, 1999.  Mr. Tomz and the Company terminated
this consulting arrangement on June 15, 1999, and renegotiated the consulting
fee so that Mr. Tomz received in total $90,000 and 84,000 warrants to purchase
Common Stock of the Company exercisable at $2.00 per share.

Pursuant to the Plan of Reorganization, the Company has issued 297,642 shares of
Common Stock to each of Calbert Lai and Stephen Venuti, and 500,000 shares of
Common Stock to Thomas A. Schulz, or his designees, as set forth below.
Further, Benchmark Equity Group, Inc., an affiliate of Frank DeLape, a director,
has been issued 557,800 shares of Common Stock.  Additionally, Mr. DeLape, has
received options to purchase 50,000 shares of Common Stock at $3.50 per share
for one year's service as the Chairman of the Board of Directors of the Company
on July 23, 1999, and all other non-employee directors have received options to
purchase 25,000 shares at $3.50 per share for one year's service on the Board of
Directors of the Company, to be issued on July 23, 1999.

The Company is a party to a twelve month consulting agreement with Benchmark
Equity Group, Inc. ("Benchmark"), dated August 31, 1998, pursuant to which the
Company is obligated to pay $175,000 in twelve monthly instalments to Benchmark
for consulting services rendered to either LVL or the company, commencing as of
March 1, 1998.  As of February 1, 1999, 11 months of the Consulting Agreement
has been paid in full.  Benchmark also entered into an earlier agreement, in
April 1998, to

                                       20
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


provide consulting services to LVL and its successor entity in consideration of
600,000 shares of Common Stock, and the Board of Directors approved the issuance
of this Common Stock to Benchmark or its designees on July 23, 1998. Frank
DeLape, Chairman of the Board, is the President of Benchmark Equity Group, Inc.
The Company has a management consulting agreement with Matthew Howard, a
director, for a fee of $5,000 per month. Mr. Howard's consulting arrangement
commenced August 1, 1998.

12.  SUBSEQUENT EVENTS:

Subsequent to September 30, 1998, I-Storm raised net proceeds of $4,259,456 in
connection with the issuance of 407,900 shares of Series B Cumulative
Convertible Preferred Stock ("Series B") offered in a Regulation D private
placement at par value of $0.01 per share for an offering price of $12.25 per
share.  The Series B shares shall pay a quarterly cumulative dividend at 9% per
annum, payable in cash or common stock at the option of the Board of Directors,
and shall be convertible into common stock at a conversion price of not greater
than $3.50 per share and not less than $2.80 per share.

Subsequent to September 30, 1998, I-Storm raised net proceeds of $3,995,594 in
connection with the issuance of 371,429 shares of Series C Cumulative
Convertible Preferred Stock ("Series C") offered in a Regulation D private
placement at par value of $0.01 per share for an offering price of $12.25 per
share.  The Series C shares shall pay a quarterly cumulative dividend at 9% per
annum, payable in cash or common stock at the option of the Board of Directors,
and shall be convertible into common stock at a conversion price of not greater
than $3.50 per share and not less than $2.80 per share.

Subsequent to September 30, 1998, the Board of Directors authorized the issuance
of options to purchase 50,000 shares of common stock to the Chairman of the
Board of Directors.  Each director other than the Chairman shall be granted
options to purchase 25,000 shares of common stock.  These options will be
granted annually for each full year of service and vest one year from the date
of grant.  The exercise price of options granted for the current year of service
is $3.50 per share.  The Board of Directors also authorized the issuance of
options to purchase 50,000 and 25,000 shares of common stock to the Chairman and
members of the Advisory Board of I-Storm, respectively, under the same terms as
the options granted to the Chairman and members of the Board of Directors.
Individuals may only receive options as a member of either the Board of
Directors or the Advisory Board, but not as a member of both boards.

                                       21
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


Item 1.   Management's Discussion and Analysis of Financial Condition and
          Results of Operation

     Over the past two years, the Company has been shifting from its traditional
business of providing advertising services to developing and operating retail
web-sites in partnership with brand-name companies.  To facilitate this shift,
the Company developed and negotiated a Plan of Reorganization which was approved
by the United States Bankruptcy Court for the Northern District of California
without creditor objection on April 16, 1998.  On July 17, 1998, the Company
merged into a wholly-owned subsidiary of Digital Power Holding Company, an
inactive public Nevada corporation ("the Merger"). On July 20, 1998, the
combined entity was renamed "I-Storm, Inc." The Company's operating results for
fiscal quarter ended September 31, 1998 were strongly affected by these
transactions and, therefore, may not be a reliable predictor of future
performance. The Company believes that it must raise additional equity capital
within the next three to six months in order to continue operating. There can be
no assurance that the Company will be able to raise the necessary capital under
acceptable terms, if any, within the time available.

Results of Operations
---------------------

     On April 16, 1998, the Company's Plan of Reorganization was confirmed by
the United States Bankruptcy Court. The Plan of Reorganization resulted in the
conversion of approximately $7,151,000 in accounts payable into preferred
equity. As a result of the Reorganization, the recording of the restructuring
transaction and implementation of Fresh Start Reporting, the Company's results
of operations after April 16, 1998 (the cutoff date used for financial reporting
purposes) are not comparable to results reported in prior periods. The Company's
results of operations for the quarter ended September 30, 1998 are reflected
below for the period commencing July 17, 1998, the date of the Merger, and
ending September 30, 1998.

     The Company's net loss for the quarter ended September 30, 1998 was
approximately $1,103,000 and arose primarily as a result of operating losses and
expenses associated with the Company's reorganization, subsequent Merger, and
shift away from advertising service revenue toward E-commerce development
activities. The Company's net loss for the nine months ended September 30, 1998
was approximately $3,148,000, as compared to approximately $1,303,000 for the
nine months ended September 30, 1997. The Company's operating loss for the
quarter ended September 30, 1998 was approximately $1,028,000 as compared to
approximately $895,000 for the quarter ended September 30, 1997. The increase in
operating loss of approximately $132,883 was caused primarily by a decline in
gross profit of approximately $506,085 and a slight increase in operating
expenses of approximately $27,500. The Company's operating loss for the nine
months ended September 30, 1998 was $2,946,600 as compared to an operating loss
of approximately $3,181,700 for the nine months ended September 30, 1997. The
decrease in operating loss is due to the reduction of administrative and
marketing staff in an attempt to preserve cash.

                                      22
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


     Revenue for the quarters ended September 30, 1998 and 1997 were $431,739
and $1,198,264, respectively, a decrease of approximately $766,525 due to the
change in focus of the company from generating advertising service revenue to
seeking financing for the newly-merged corporation and developing E-commerce
partnerships. Gross profit (loss) for the quarters ended September 30, 1998 and
September 30, 1997 were $(105,371) and $400,714, or (124%) and 33% of sales,
respectively. The decrease in gross profit was primarily a result of the
Company's shift away from advertising service revenue toward E-commerce
development activities. Revenue for the nine months ended September 30, 1998 and
1997 were $2,605,580 and $5,655,886, respectively, a decrease of approximately
$3,050,306. Gross profit for the nine months ended September 30, 1998 and 1997
were $506,539 and $2,044,374 or 19% and 36% of sales, respectively.

     Operating expenses for the quarters ended September 30, 1998 and 1997 were
$922,477 and $894,967, respectively. The increase in operating expenses of
approximately $27,500 from the period one year earlier was due to reorganization
asset amortization and merger and financing activities. Operating expenses for
the nine months ended September 30, 1998 and 1997 were $3,453,114 and
$3,181,672, respectively. The increase in operating expenses of approximately
$271,442 from the period one year earlier was due to an increase in consulting
fees and a prior period expense of $65,600 resulting from the Company's
reorganization, merger and financing activities.

     Interest expense for the quarters ended September 30, 1998 and 1997 were
$75,097 and $145,000 respectively. Interest expenses for the nine months ended
September 30, 1998 and 1997 were $201,976 and $252,000, respectively. As of
September 30, 1998, the outstanding debt of the Company consisted of $628,000
long-term debt and current liabilities of $2,656,187 for total liabilities of
$3,284,187.

     For the period commencing July 1, 1998 to July 16, 1998 ("Pre-Merger
Period") the net loss of LVL Communications Corporation ("LVL") was
approximately $665,000. Operating expenses were approximately $648,000 and
operating loss was approximately $646,000. The net loss, operating loss and
operating expenses for this Pre-Merger Period were reflective of the loss and
expenses associated with the bankruptcy reorganization. The net loss, operating
loss and operating expenses for LVL in the Pre-Merger Period have not been
reflected in the above-stated Results of Operations for the Company post-merger
because they are considered to be non-recurring and to be primarily related to
the bankruptcy reorganization.

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

     At September 30, 1998, the Company had current assets of $1,234,301 and
$778,000 in September 30, 1997, while cash and cash equivalents were $26,166 at
quarter end 1998 compared to $0 at quarter end 1997.

     As of September 30, 1998, the Company owed $628,000 in long-term debt and
current notes payable totaling $100,000.  The Company also has a Factoring
Agreement in place with a lender secured by the Company's accounts receivable
and other assets. The factoring liability as of September 30, 1998 was $977,000,
up from $571,000 as of September 30, 1997.

                                       23
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998

The Company is in compliance with all material covenants of the shareholder
notes payable and Factoring Agreement as of September 30, 1998.

     Company management believes that the current cash balance, cash from
operations, and anticipated borrowing will not be sufficient to meet the
Company's liquidity needs for the next 12 months.  The Company is pursuing
additional equity investment to fund its operating expenses and working capital
needs for the coming year.  There can be no assurance that the Company will be
able to obtain sufficient capital under acceptable terms to fund its operations
and investment strategy.

PART II   OTHER INFORMATION

Item 1.   Legal Proceedings

     The Company hereby incorporates by reference the information reported in
Item 2 of the Company's August 14, 1998 Form 8-K.


Item 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

     (a)  Not applicable.

     (b)  Not applicable.

     (c)  The Company hereby incorporates by reference Item 1 of the Company's
August 14, 1998 Form 8-K.

     Trident III, L.L.C. provided $258,000 in post-confirmation bridge financing
to the Company for reorganization and working capital purposes.  In partial
consideration for this post-confirmation bridge financing, Trident has been
issued an additional 91,200 shares of non-redeemable non-voting Common Stock in
the Company which is unregistered Common Stock subject to Rule 144 restrictions.
Trident was also entitled to receive interest, at a rate of 10% per annum, on
any outstanding unpaid balance of the total of $258,000 in post-confirmation
bridge financing which it has provided to the Company in connection with the
reorganization.

     The Company has received an additional $300,000 in post-confirmation bridge
financing (the "July 1998 Bridge Financing") as follows: (i) a $150,000
Promissory Note from Four M International, repayable with accrued interest at a
rate of 10% per annum; and (ii) $75,000 in Promissory Notes from each of
Frederick Meyers and Richard David, for a

                                       24
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


total of $150,000, repayable with accrued interest at a rate of 10% per annum.
Each of the foregoing Promissory Notes will be paid from the earlier of the
First Closing of this Offering, or July 31, 1999. As part of the July 1998
Bridge Financing, the Company issued warrants to purchase Common Stock of the
Company, exercisable at $0.001 per share to each of these bridge financiers as
follows: (i) 60,000 warrants to Four M International; and (ii) 30,000 warrants,
to each of Frederick Meyers and Richard David, for a total of 60,000 warrants.
The proceeds of this bridge financing was used for reorganization costs and
working capital purposes. In January 1999, these amounts were repaid in full
from the proceeds of the Series B Preferred Stock offering.

     The Company received an additional $425,000 in post-confirmation bridge
financing (the "September 1998 Bridge Financing") as follows:  (i) a $300,000
Promissory Note from the Security Trust IRA for Robert L. Wilson, repayable with
accrued interest at a rate of 10% per annum; (ii) a $100,000 Promissory Note
from Wink Capital Management, Ltd., repayable with accrued interest at a rate of
10% per annum; and (iii) a $25,000 Promissory Note from Philip Cory Roberts,
repayable with accrued interest at a rate of 10% per annum.  As part of the
September 1998 Bridge Financing, the Company is presently issuing warrants to
purchase Common Stock of the Company, exercisable at $0.001 per share to each of
these bridge financiers as follows:  (i) 120,000 warrants to Security Trust IRA
for the benefit of Robert L. Wilson, or its designees; (ii) 40,000 warrants to
Wink Capital Management, Ltd.; and (iii) 10,000 warrants to Philip Cory Roberts.
The proceeds of this bridge financing were used for working capital purposes.
In January 1999, these amounts were repaid in full from the proceeds of the
Series B Preferred Stock offering.

Issuance of Common Stock and Options to Consultants

     In August 1998, the Board approved the issuance of shares of Common Stock
to certain consultants for strategic management and financial consultants of the
Company as follows: Benchmark Equity Group, Inc. ("Benchmark"), 557,800 shares;
Jeffrey W. Tomz, 42,200 shares; Fordham Financial Management, Inc or its
designees, 100,000 shares; Weatherly Securities Corp. 1,000,000 shares; Pound
Capital, Inc, 225,000 shares; and New Leaf, L.L.C., 75,000 shares.

     The Company believes that the transactions set forth above were exempt from
registration with the Commission pursuant to Section 4(2) of the Securities Act
as transactions by an issuer not involving any public offering.  No broker-
dealer or underwriter was involved in the foregoing transactions.  All
certificates representing such securities were appropriately legended.

                                       25
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


Issuance of Common Stock, Options and Warrants Pursuant to the Order and Plan of
Reorganization

     On July 23, 1998, the Board of Directors approved the issuance of certain
shares of Common Stock, Series A Preferred Stock and warrants in accordance with
the Order of the Bankruptcy Court confirming the Plan of Reorganization.  Such
shares of Common Stock, Series A Preferred Stock, and warrants, and the Common
Stock underlying such warrants are or will be issued pursuant to Section 1145 of
the United States Bankruptcy Code, and as such, are exempt from registration
under the federal securities laws, except with respect to an underwriter of such
securities.

     The Board approved issuances of Shares of Common Stock, Series A Preferred
Stock and warrants as follows:  Calbert Lai, 297,642 shares of Common Stock;
Stephen Venuti, 297,642 shares of Common Stock; Don Sanders, 4,016 shares of
Common Stock; Mackenzie Shea, Inc., or its designees, 500,000 shares of Common
Stock; Thomas A. Schultz, or his designees, 500,000 shares of Common Stock; and
440,000 shares of Common Stock to Trident III, L.L.C.

     The Company, pursuant to the Order and Plan of Reorganization, also issued
600,000 shares of non-voting common Stock to Trident III, L.L.C. which was
initially redeemable at $1.00 per share. In January 1999, Trident III, L.L.C.
notified the Company that it wished to waive the right to redeem this Common
Stock; accordingly, Trident III, L.L.C. presently holds 600,000 shares of non-
redeemable non-voting stock, issued pursuant to the Order and Plan of
Reorganization.

     In accordance with the Order and Plan of Reorganization, the Company also
issued 25,000 warrants to purchase Common Stock, exercisable at $0.50 per share,
to Mascia and Associates and 50,000 warrants to Pacific Business Funding, Inc.,
both creditors under the Plan.  The Company also authorized the issuance of
275,000 service warrants, exercisable at $0.50 per share, to various service
providers, all in accordance with the Plan.

     Each of the foregoing shares of Common Stock, Series A Preferred Stock, and
the common stock underlying the exercise of the warrants, except for shares of
Common Stock issued to Trident III, L.L.C., were issued subject to an eighteen-
month lock-up agreement negotiated between the Company and its placement agent
for Series B Preferred Stock, as required by the Bankruptcy Court. Pursuant to
the Bankruptcy Court's instructions, releases from the lock-up agreement were on
a pro rata basis. As of December 31, 1998, the placement agent and the Company
had agreed to release ten percent (10%) of the foregoing securities from the
lock-up. The shares of Calbert Lai and Stephen Venuti are also subject to a
further lock-up imposed by the Bankruptcy Court. Shares of Messrs. Lai and
Venuti may only

                                       26
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


be released the earlier of the time of thirty-six months after July 17, 1999, a
liquidation preference event, or the date the closing bid price reported on the
NASDAQ market system for the common stock of I-Storm has exceeded the conversion
price of the Series A Preferred Stock for the consecutive trading days.

Employee Stock Option Plan Under the Plan of Reorganization ("1998 A Stock
Option Plan")

     In August 1998, the Board approved the establishment of an employee stock
option plan ("the 1998 A Stock Option Plan") consisting of options to purchase
1.4 million shares of Common Stock, pursuant to the Plan of Reorganization, and
the options and underlying stock set aside for issuance upon exercise of such
warrants are also exempt from registration under Section 1145 of the Bankruptcy
Code.  As of December 31, 1998, options to be issued from the 1998 A Stock
Option Plan were as follows:  Calbert Lai, 600,000 options, Stephen Venuti,
300,000 options Timothy Cohrs, 75,000 options, Stuart Mangrum, 127,500 options,
David Beach, 100,000 options. The remaining 197,500 options were distributed
among various employees and consultants.

     All of the 1998 A Stock Option Plan options are exercisable at $0.50 per
share. Except for options granted to Calbert Lai and Stephen Venuti, all such
options will vest ratably over a period of three years on an annual basis. With
respect to Messrs. Venuti and Lai, one-half of these options will vest ratably
over a period of not less than three years from the date of grant, and the
remaining one half shall not vest until the Company has had sales of at least
$12 million for any 12 consecutive month period and the Company is profitable on
a quarterly basis through the same 12 month period.

Item 3.   DEFAULTS UPON SENIOR SECURITIES

     None.

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

     No matters were submitted to a vote of securities holders during this
period.

     On July 17, 1998, pursuant to the shareholder consent procedures set forth
in Section NRS 78.320 of the Nevada Revised Statutes, shareholders holding
805,000 shares of the common stock outstanding, or a majority of the common
stock of the Company, submitted written consents to the merger of LVL
Communications Corporation into a wholly-owned subsidiary of I-Storm, formerly
Digital.

                                       27
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


     On July 17, 1998, the holders of a majority of the shares of the
outstanding Common Stock of the Company took action by consent under Nevada law
to approve the filing of Fourth Amended and Restated Articles of Incorporation
to change the name of the Company to I-Storm, Inc., to authorize the
indemnification of officers and directors of the Company as allowable by Nevada
law, and to authorize the Board of Directors of the Company, from time to time,
to fix the designation of certain series of Preferred Stock; and further, to
authorize the Board of Directors to take all steps necessary to effectuate the
acquisition of LVL and to carry out the requirements of the April 16, 1998 Order
of the Bankruptcy Court for the Northern District of California Confirming a
Plan of Reorganization for LVL.

Item 5.   OTHER INFORMATION

     The Company hereby incorporates by reference the information provided in
Item 5 of the Company's August 14, 1998 Form 8-K.

     On July 23, 1998, the Board of Directors approved the filing of a
Certificate of Designation for 600,000 shares of Series A Cumulative Convertible
Stock ("Series A Preferred Stock") to be issued to certain unsecured creditors
of LVL in exchange for the cancellation of approximately $6.5 million of
unsecured debt, pursuant to the Plan of Reorganization. The Series A Preferred
Stock will have dividend and liquidation rights senior to the Company's Common
Stock and to any other class of equity securities which the Board of Directors
may designate. The holders of Series A Preferred Stock shall also have the right
to vote as a class, one vote per share, on (i) the merger, sale liquidation or
dissolution of the Company or its subsidiaries; (ii) a sale of all or
substantially all of the Company's or its subsidiaries' assets; (iii) any
increase in the number of authorized shares of any class or series of the
Company's or its subsidiaries' equity securities; (iv) the creation of any new
class or series of equity securities in the Company or its subsidiaries; (v) any
increase in the number of members of the Board of Directors of the Company or
its subsidiaries, all until such time as more than 50% of the Series A Preferred
Stock has either converted to Common Stock, or been redeemed by the Company, or
until certain liquidation or preference events occur. The Series A Preferred
Stock shall also have the right to elect one member to the Board of Directors so
long as any shares of Series A Preferred Stock are outstanding. The Series A
Preferred Stock may be converted at any time into shares of Common Stock on a
one-for-one basis. The Series A Preferred Stock will be entitled to a dividend
of $0.05 per annum. The Company filed a Certificate of Designation for the
Series A Preferred Stock with the State of Nevada on July 27, 1998.

     On July 23, 1998, the Board of Directors also approved the designation of
a Series B Cumulative Convertible Preferred Stock ("Series B Preferred Stock")
in connection with a contemplated private placement offering under Section 506
of Regulation D as promulgated

                                       28
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


under the Securities Act of 1933. The Board anticipates that such Series B
Preferred Stock be sold at $12.25 per share, and would have dividend and
liquidation preferences which are senior to the Common Stock of the Company, but
are subordinate to those of the Class A Preferred Stock. The Series B Preferred
Stock will be entitled to a quarterly cumulative dividend of $0.28 per share (9%
per annum), payable, at the option of the Company, in cash or common stock. The
Series B Preferred Stock will be convertible at the option of the holder at any
time after the final closing of the offering, into such number of shares of
Common Stock as shall equal $12.25 divided by the lower of (i) $3.50 or (ii) the
closing bid price for any five consecutive trading days during the period
commencing on the final closing of the offering and ending twelve months
thereafter, except that such conversion price shall not be reduced below $2.80.
There can be no assurance that the Company will go forward with such a private
placement offering or that such a private placement offering, if commenced, will
result in any proceeds for the benefit of the Company or its wholly-owned
subsidiary.

     The Company does not plan to make any material purchases of plant and
equipment other than the aforementioned acquisition within the next twelve
months.

     As of September 30, 1998, the Company's headquarters consisted of 15,847
square feet of leased office space and is located at 480 Cowper Street, Palo
Alto, California.  In April 1998, the Company agreed to sublet its headquarters
space to SteelCase Corporation ("SteelCase") beginning May 1, 1998, in return
for a one-time payment of $550,000 and assumption of the remainder of the
Company's original lease.  SteelCase subsequently determined that it did not
wish to occupy the building.  The Company has signed a sublet agreement with
SteelCase to occupy the building until November 1, 1998.  The Company is
currently negotiating with SteelCase to rescind its original sublet contract,
thereby permitting the Company to remain in its current location for the
remainder of the current lease (approximately 14 years).  The Company
subsequently moved its headquarters to an 11,500 square foot facility in
Mountain View, California in March 1999.


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                                       29
<PAGE>

                                 I-STORM, INC.
                    Formerly Digital Power Holding Company
                         (A Development Stage Company)

                              SEPTEMBER 30, 1998


                                   SIGNATURES

       Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.


Date:  October 18, 1999                        I-STORM, INC.



                                               By: /s/ Calbert Lai
                                                   -----------------------------
                                                   Calbert Lai, President

                                       30