##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-KSB


|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
| 
|  |  | For the fiscal year ended March 31, 2005                                                
| 
|o |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934  
| 
|  |  | For the transition period
    from           to                                         

Commission File Number 000-26698





DATAWAVE SYSTEMS INC.


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


|                                                                   |  |                                     
|------------------------------------------------------------------ |  | ------------------------------------
|Delaware                                                           |  | 98-0186455                          
|(State or other jurisdiction of incorporation or
    organization) |  | (I.R.S. Employer Identification No.)

Wayne Interchange Plaza One


145 Route 46 West, 3rd Floor


Wayne, NJ 07470


(Address of principal executive offices)


(973) 774-5000


(Issuers telephone number)


Securities registered under Section 12(b) of the
Exchange Act:


(none)


Securities registered under Section 12(g) of the
Exchange Act:


Common Shares


þ o


o






Documents Incorporated By Reference:


o þ










---










DATAWAVE SYSTEMS INC.


FORM 10-KSB


TABLE OF CONTENTS


|                              |  |                                                                                           |     |  |    |   
|----------------------------- |  | ----------------------------------------------------------------------------------------- | --- |  | -- | --
|PART I                       
|Item 1.                       |  | Business                                                                                  |     |  | 1  |   
|Item 2.                       |  | Properties                                                                                |     |  | 18 |   
|Item 3.                       |  | Legal Proceedings                                                                         |     |  | 18 |   
|Item 4.                       |  | Submission of Matters to a Vote of Security
    Holders                                   |     |  | 18 |   
|                             
|PART II                      
|Item 5.                       |  | Market for Common Equity and Related
    Shareholder Matters                              |     |  | 20 |   
|Item 6.                       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations |     |  | 20 |   
|Item 7.                       |  | Financial Statements and Supplementary
    Data                                           |     |  | 29 |   
|Item 8.                       |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure  |     |  | 29 |   
|Item 8A.                      |  | Controls and Procedures                                                                   |     |  | 29 |   
|Item 8B.                      |  | Other Information                                                                         |     |  | 29 |   
|                             
|PART III                     
|Item 9.                       |  | Directors and Executive Officers of the
    Registrant                                    |     |  | 30 | **
|Item 10.                      |  | Executive Compensation                                                                    |     |  | 30 | **
|Item 11.                      |  | Security Ownership of Certain Beneficial
    Owners and Management                        |     |  | 30 | **
|Item 12.                      |  | Certain Relationships and Related
    Transactions                                        |     |  | 30 | **
|Item 13.                      |  | Exhibits                                                                                  |     |  | 31 |   
|Item 14.                      |  | Principal Accounting Fees and Services                                                    |     |  | 31 | **
|Signatures                    |  |                                                                                           | 32  | 
|Index to Financial Statements |  |                                                                                           | F-1 | 
|EX-10.2                      
|EX-10.3                      
|EX-10.4                      
|EX-10.8                      
|EX-14.1                      
|EX-21.1                      
|EX-31.1                      
|EX-31.2                      
|EX-32.1                      
|EX-32.2                      








|   |                                                                                                                                                                                                                                                                                                   
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Items 9 through 12 and Item 14 of Part III are incorporated by
    reference from the definitive proxy statement for our 2005
    annual meeting of shareholders, which will be filed with the
    Securities and Exchange Commission within 120 days after the
    close of the 2005 fiscal year.



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NOTE REGARDING FORWARD LOOKING STATEMENTS






PART I









ITEM 1.BUSINESS


History of the Company








1



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|                                     |  |                |     |   |               |  |                   |                 |  |  |                  | 
|------------------------------------ |  | -------------- | --- | - | ------------- |  | ----------------- | --------------- |  |  | ---------------- | 
|                                     |  | Percentage (%) |     |   | Date of       |  |                   | Jurisdiction of | 
|Name of Subsidiary or Associate      |  | Interest Held  |     |   | Incorporation |  |                   | Incorporation   | 
|                                     |  |                |     |   |               |  |                   |                 | 
|DataWave Services (Canada) Inc.      |  |                | 100 | % |               |  | April 28, 1992    |                 |  |  | British Columbia | 
|DataWave Systems (U.S.) Inc.         |  |                | 100 | % |               |  | February 8, 1995  |                 |  |  | Nevada           | 
|DataWave Services (U.S.)
    Inc.(1) |  |                | 100 | % |               |  | February 8, 1995  |                 |  |  | Nevada           | 
|CXP Canada Inc.                      |  |                | 100 | % |               |  | March 10, 1995    |                 |  |  | Canada           | 
|Cardxpress Vending, Inc.             |  |                | 100 | % |               |  | November 14, 1991 |                 |  |  | Delaware         | 
|Nextwave Card Corp.                  |  |                | 50  | % |               |  | June 1, 2003      |                 |  |  | Alberta          | 






|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(1) | Wholly-owned subsidiary of DataWave Systems (U.S.) Inc., a
    first-tier wholly-owned subsidiary of the Company.

Offices




www.datawave.com www.datawave.ca.


Business Overview












| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | the ability to activate prepaid products by assigning a value to
    them at the time of purchase;
|
| |  | the ability to print a prepaid PIN number on a receipt voucher
    at the point of purchase;      
|
| |  | real-time monitoring of distribution networks;                                                    

2



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| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | detailed reporting and sales analysis  either paper
    or web-based;                                                                                                                                
|
| |  | the ability to remote download price adjustments or new products
    and services to the distribution points;                                                                                         
|
| |  | the capability to execute multiple simultaneous transactions in
    a non-stop processing environment; and                                                                                            
|
| |  | consumer convenience  payment options, multiple
    products and denominations; detailed receipts, including tax
    information, terms & conditions and other relevant
    instructions/information.







Business Strategy








| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | identifying and capitalizing on business opportunities that will
    make us the market leader in point-of-sale activated
    stored-value telephony and financial products;
|
| |  | developing profitable, high volume stored-value opportunities
    that leverage our existing technologies and relationships; and                                            
|
| |  | pursuing only those opportunities that have high volume and a
    quick time to market, with realistic capital expenditures.                                                





| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | rolling out point-of-sale activation technology to over 1,580
    locations in Canada;                                                                                 
|
| |  | introducing POSA for cellular and long distance telephone time
    to our existing national customers in Canada and gaining several
    new national accounts;         
|
| |  | negotiating agreements with national distributors in Canada to
    use our technologies and to sell our prepaid products in other
    markets in Canada;               
|
| |  | completed the roll-out of prepaid cash cards to 300 National
    Money Mart stores in Canada for Nextwave (an equity investee of
    National Money Mart and DataWave).

3



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Products and Development














Our Products










The Market




4



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##### Table of Contents











Our Suppliers








Future Products and Services








Revenues




5



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Operations






Our Network Systems






| |   |                                                               
| | - | --------------------------------------------------------------
| |  | Scalable and flexible network and point-of-sale architectures:



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | we can offer a variety of branded products and services and
    increase the number of distribution points; we can integrate
    with third party switches;

6



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| |   |                                                           
| | - | ----------------------------------------------------------
| |  | Point-of-sale activation of prepaid products and services:



| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | reduces losses and shrinkage from theft of live
    inventory; reduces inventory financing and management control
    costs;



| |   |                                
| | - | -------------------------------
| |  | Wireless and landline networks:



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | permits flexibility and mobility in site placement; facilitates
    connectivity to a variety of applications;



| |   |                          
| | - | -------------------------
| |  | 24/7 system availability;
|
| |  | Remote self-diagnostics: 



| |                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | free-standing smart machines alert us when accumulated cash
    should be picked up, when inventory levels are low, when
    malfunctions occur or when other technical service is required;
    ensures efficient maintenance scheduling and reduces down time;
    reduces operating expenses and improves cash management by
    maintaining inventory levels;



| |   |                  
| | - | -----------------
| |  | Remote downloads:



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | efficient updating of information including price and tax
    changes; accelerates introduction of new products and services;



| |   |                                                          
| | - | ---------------------------------------------------------
| |  | Real-time credit card verifications, approval and limits:



| |                      
| | ---------------------
| | reduces credit risks;



| |   |                      
| | - | ---------------------
| |  | Consumer convenience:



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | customer determined purchase denomination; cash or credit card
    acceptance; itemized customer sales receipt, including taxes;
    24/7 customer service; and



| |   |                                      
| | - | -------------------------------------
| |  | Detailed audit trail of transactions:



| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | permits timely and accurate monthly commission payments;
    complete monthly reporting  either traditional paper
    or web-based.







7



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | moving our cash card processing operations to an Allstream
    hosted facility in Vancouver, Canada that provides a more stable
    physical environment and better access to telecom resources. We
    invested in new hardware for this facility, including
    state-of-the-art Sun, Cisco and IBM systems. The facility and
    processing environment underwent a SAS Level 1 audit during the
    summer of 2003 and was determined to be compliant;
|
| |  | creating redundancy in our POSA operations by running a second
    set of systems at an Allstream hosted facility in Vancouver. We
    are now able to process POSA transactions from either facility
    (Vancouver or Richmond). Data is replicated in real-time between
    facilities (using Sybase Replication Server) and we have
    communication links with delivery and supply chains from both
    facilities;                                 
|
| |  | deploying a VOIP system to handle calls in all three of our
    offices and to handle transactions from the landline based DTM
    machines deployed in the U.S.; and                                                                                                                                                                                                                                                                                     
|
| |  | augmenting a number of leased line communication links to
    suppliers and clients with Cisco IPSEC VPN technology to reduce
    costs and/or improve resiliency.                                                                                                                                                                                                                                                                                        

The Market for Our Products and Services
















8



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Marketing Strategy




Deliver new prepaid product and service offerings:


Develop relationships with other providers of prepaid
products and services:


Maintain electronic distribution network technological
leadership:


Increase penetration of premier site locations:


Our Marketing Plan










9



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Employees




|                     |  |                |    |  |           |  |    |             |  |  |            |  |             |         |     |  |       |  |    |  |  |  |    | 
|-------------------- |  | -------------- | -- |  | --------- |  | -- | ----------- |  |  | ---------- |  | ----------- | ------- | --- |  | ----- |  | -- |  |  |  | -- | 
|                     |  | Management and |    |  | Sales and |  |    | Product     |  |  |            |  | Service and |         |     | 
|Office Location      |  | Administration |    |  | Marketing |  |    | Development |  |  | Production |  |             | Support |     |  | Total | 
|                     |  |                |    |  |           |  |    |             |  |  |            |  |             |         |     |  |       | 
|Richmond, B.C.       |  |                | 16 |  |           |  | 3  |             |  |  | 23         |  |             |         | 3   |  |       |  | 12 |  |  |  | 57 | 
|Mississauga, Ontario |  |                | 1  |  |           |  | 9  |             |  |  | 2          |  |             |         | Nil |  |       |  | 6  |  |  |  | 18 | 
|Wayne, New Jersey    |  |                | 3  |  |           |  | 7  |             |  |  | Nil        |  |             |         | Nil |  |       |  | 4  |  |  |  | 14 | 
|                     |  |                |    |  |           |  |    |             |  |  |            |  |             |         |     |  |       | 
|Totals:              |  |                | 20 |  |           |  | 19 |             |  |  | 25         |  |             |         | 3   |  |       |  | 22 |  |  |  | 89 | 
|                     |  |                |    |  |           |  |    |             |  |  |            |  |             |         |     |  |       | 



Risk Factors


The following discussion in this Annual Report on
Form 10-KSB contains forward-looking statements regarding
our business, prospects and results of operations that involve
risks and uncertainties. Our actual results could differ
materially from the results that may be anticipated by such
forward-looking statements and discussed elsewhere in this
Report. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed
below, as well as those discussed under the captions
Business and Managements Discussion and
Analysis of Financial Condition and Results of Operations
as well as those discussed elsewhere in this Report. In
evaluating our business, prospects and results of operations,
readers should carefully consider the following factors in
addition to other information presented in this Report and in
our other reports filed with the Securities and Exchange
Commission that attempt to advise interested parties of the
risks and factors that may affect our business, prospects and
results of operations. See Note Regarding Forward Looking
Statements above.


Factors Relating to Our Company and Our Business




| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the past two years we have reported earnings, but we have
    a past history of significant losses. Our history of fluctuating
    operating results raises doubt about our ability to achieve
    sustainable profitability.





| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | We have low working capital which may adversely affect our
    ability to grow or provide continuing operations.



10



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| |                                                                                     
| | ------------------------------------------------------------------------------------
| | If we are not able to obtain further financing our business
    operations may fail.





| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | The loss of any of our key customers could have a material
    adverse effect on our business, financial condition and results
    of our operations.





| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | The loss of our suppliers in Canada and the United States
    could have an adverse effect on our ability to provide
    continuing operations.











| |                                                                                    
| | -----------------------------------------------------------------------------------
| | We face currency risks associated with fluctuating foreign
    currency valuations.





| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have limited operating facilities and if we are unable to
    deliver our service in a timely manner, then we may lose
    some customers and their orders.



11



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| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | We hold no patents on some of our products and may not be
    able to protect our proprietary technology.











| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | We could experience theft of our products and credit card
    fraud which could materially affect the operations of our
    business.



12



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| |                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on experienced management and key technical
    employees and if we are unable to retain or hire such
    management and key technical employees in the future, then our
    ability to improve and implement new systems could be
    adversely affected.





| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | The loss of Josh Emanuel or other key employees would have a
    materially adverse effect on our business.





| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Some of our assets and some of our officers are outside the
    United States, with the result that it may be difficult for
    investors to enforce within the United States any judgments
    obtained against us or any of our officers.





| |                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a result of the continuation of our incorporation from the
    Yukon Territories into the State of Delaware, our company
    may be subject to Canadian income tax liabilities which may
    adversely affect our companys working capital.



13



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Certain Factors Relating to Our Industry




| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | We operate in a highly competitive industry and our failure
    to compete effectively may adversely affect our ability to
    generate revenue.





| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Rapid technological changes in our industry could render our
    products non-competitive or obsolete and consequently affect our
    ability to generate revenues.



14



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| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our revenues are seasonal which may result in our operating
    results being, from time to time, below the expectations of
    analysts and investors.





| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are affected by government regulations in the United
    States and Canada which may delay or hinder our ability to
    provide services and products.







United States.




15



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Canada.






Certain Factors Related to Our Common Stock




| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Trading of our stock may be restricted by the SECs
    penny stock regulations which may limit a
    shareholders ability to buy and sell our stock.



16



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| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The National Association of Securities Dealers, or NASD, has
    adopted sales practice requirements which may also limit a
    shareholders ability to buy and sell our stock.





| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Our common stock is illiquid and subject to price volatility
    unrelated to our operations.





| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | The price of our common stock may be volatile, and a
    shareholders investment in our common stock
    could suffer a decline in value.





| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | We do not intend to pay cash dividends, so any return on a
    shareholders investment must come from appreciation.



17



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| |                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Integrated Data Corp. owns a majority of the outstanding
    shares of our common stock and effectively controls our company,
    which could discourage or prevent a takeover, even if an
    acquisition would be beneficial to our shareholders.








|        |           
|------- | ----------
|ITEM 2. | PROPERTIES










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








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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Deloitte & Touche LLP, independent registered chartered
    accountants, was appointed as auditors of the Company to hold
    office until the close of the next annual meeting;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | The directors of the Company were authorized to fix the
    remuneration to be paid to the auditor; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | The continuance of the Company from the Yukon Territory, Canada,
    to Delaware, United States, was approved; the certificate of
    domestication and the certificate of incorporation of the
    Company (collectively, the Filing Documents), in the
    form presented to the shareholders at the Meeting, were
    approved; subject to the acceptance of the Filing Documents by
    the Secretary of State of the State of Delaware, the Filing
    Documents and form of bylaws presented at the Meeting were
    adopted in substitution for the existing organizational
    documents of the Company; and the Board of Directors was
    authorized to elect not to file the Filing Documents or
    consummate the continuance if the Board of Directors determined
    that, in the circumstances, it would not be in the best
    interests of the Company to proceed with the Continuance.

18



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|                          |                  |     |            |            |         |  |         |          |  |  |         |         | 
|------------------------- | ---------------- | --- | ---------- | ---------- | ------- |  | ------- | -------- |  |  | ------- | ------- | 
|Motions                   |                  | For |            |            | Against |  |         | Withheld | 
|                          |                  |     |            |            |         |  |         |          | 
|Election of Directors     |                  |     |            |            |         |  |         |          |  |  |         |        
|                          | Joshua Emanuel   |     |            | 28,534,368 |         |  |         |         |  |  |         | 197,500 | 
|                          | John X. Adiletta |     |            | 28,505,368 |         |  |         |         |  |  |         | 226,500 | 
|                          | Vijay Fozdar     |     |            | 28,508,668 |         |  |         |         |  |  |         | 223,200 | 
|                          | Graham Jackson   |     |            | 28,509,168 |         |  |         |         |  |  |         | 222,700 | 
|Appoint auditors          |                  |     | 28,602,268 |            |         |  | 11,400  |          |  |  | 118,200 |        
|Fix auditors remuneration |                  |     | 28,633,918 |            |         |  | 23,450  |          |  |  | 74,500  |        
|Approve the continuance   |                  |     | 24,058,284 |            |         |  | 182,500 |          |  |  | 11,500  |        

19



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PART II







|        |                                                             
|------- | ------------------------------------------------------------
|ITEM 5. | MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
    MATTERS





|                                          |  |      |      |  |     |   |      | 
|----------------------------------------- |  | ---- | ---- |  | --- | - | ---- | 
|                                          |  | High |      |  | Low |  
|                                          |  |      |      |  |     |  
|Fiscal 2005:                              |  |      |      |  |     |   |      | 
|Fourth quarter (ended March 31, 2005)     |  | $    | 0.21 |  |     | $ | 0.06 | 
|Third quarter (ended December 31, 2004)   |  |      | 0.14 |  |     |   | 0.04 | 
|Second quarter (ended September 30, 2004) |  |      | 0.09 |  |     |   | 0.05 | 
|First quarter (ended June 30, 2004)       |  |      | 0.12 |  |     |   | 0.08 | 
|Fiscal 2004:                              |  |      |      |  |     |   |      | 
|Fourth quarter (ended March 31, 2004)     |  | $    | 0.11 |  |     | $ | 0.08 | 
|Third quarter (ended December 31, 2003)   |  |      | 0.14 |  |     |   | 0.09 | 
|Second quarter (ended September 30, 2003) |  |      | 0.16 |  |     |   | 0.11 | 
|First quarter (ended June 30, 2003)       |  |      | 0.18 |  |     |   | 0.10 | 










|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in
conjunction with our consolidated financial statements and
related notes included elsewhere in this Report. Except for
historical information, the following discussion contains
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. See Note
Regarding Forward Looking Statements above.


Overview




Managements Summary




20



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Critical Accounting Policies and Estimates






Use of estimates




Revenue and cost recognition






| |   |                                                      
| | - | -----------------------------------------------------
| |  | pervasive evidence of an arrangement exists,         
|
| |  | delivery has occurred or services have been rendered,
|
| |  | the price is fixed or determinable, and              
|
| |  | collectibility is reasonably assured.                







21



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Impairment of long-lived assets




Goodwill and other intangible assets




Deferred income taxes




22



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Selected Financial Operating Data for the Fiscal Years Ended
March 31, 2005 and 2004


|                                   |                                                               |             |        |        |               |   |        |        |  |  |        |       |  |  |        |       | 
|---------------------------------- | ------------------------------------------------------------- | ----------- | ------ | ------ | ------------- | - | ------ | ------ |  |  | ------ | ----- |  |  | ------ | ----- | 
|                                   |                                                               | Years Ended |        |        | Percentage of |  
|                                   |                                                               | March 31,   |        |        | Revenue       |  
|                                   |                                                               |             |        |        |               |  
|                                   |                                                               | 2005        |        |        | 2004          |   |        | 2005   |  |  | 2004   |      
|                                   |                                                               |             |        |        |               |   |        |        |  |  |        |      
|                                   |                                                               | $000       |        |        | $000         |   |        | %      |  |  | %      |      
|Revenue                            |                                                               |             |        |        |               |   |        |        |  |  |        |       |  |  |        |      
|                                   | Sales                                                         |             | $      | 16,783 |               |   | $      | 11,145 |  |  |        | 69.0% |  |  |        | 61.8% | 
|                                   | Net agency sales                                              |             |        | 7,544  |               |   |        | 6,899  |  |  |        | 31.0% |  |  |        | 38.2% | 
|                                   |                                                               |             |        |        |               |   |        |        |  |  |        |      
|Total revenue                      |                                                               |             | 24,327 |        |               |   | 18,044 |        |  |  | 100.0% |       |  |  | 100.0% |      
|                                   | Cost of revenues (exclusive of depreciation and amortization) |             |        | 15,543 |               |   |        | 10,856 |  |  |        | 63.9% |  |  |        | 60.2% | 
|                                   |                                                               |             |        |        |               |   |        |        |  |  |        |      
|Margin                             |                                                               |             | 8,784  |        |               |   | 7,188  |        |  |  | 36.1%  |       |  |  | 39.8%  |      
|                                   |                                                               |             |        |        |               |   |        |        |  |  |        |      
|Operating costs and expenses       |                                                               |             |        |        |               |   |        |        |  |  |        |       |  |  |        |      
|                                   | General and administrative                                    |             |        | 3,279  |               |   |        | 2,813  |  |  |        | 13.5% |  |  |        | 15.6% | 
|                                   | Selling and marketing                                         |             |        | 1,906  |               |   |        | 1,562  |  |  |        | 7.8%  |  |  |        | 8.7%  | 
|                                   | Product development                                           |             |        | 1,312  |               |   |        | 1,405  |  |  |        | 5.4%  |  |  |        | 7.8%  | 
|                                   | Merger costs                                                  |             |        | 659    |               |   |        |       |  |  |        | 2.7%  |  |  |        | 0.0%  | 
|                                   | Depreciation and amortization                                 |             |        | 1,142  |               |   |        | 835    |  |  |        | 4.7%  |  |  |        | 4.5%  | 
|                                   |                                                               |             |        |        |               |   |        |        |  |  |        |      
|Total operating costs and expenses |                                                               |             | 8,298  |        |               |   | 6,615  |        |  |  | 34.1%  |       |  |  | 36.6%  |      
|Operating income                   |                                                               |             | 486    |        |               |   | 573    |        |  |  | 2.0%   |       |  |  | 3.2%   |      
|Other income                       |                                                               |             | 39     |        |               |   | 14     |        |  |  | 0.2%   |       |  |  | 0.1%   |      
|Foreign exchange gain              |                                                               |             | 34     |        |               |   | 51     |        |  |  | 0.1%   |       |  |  | 0.3%   |      
|Income before income taxes         |                                                               |             | 559    |        |               |   | 638    |        |  |  | 2.3%   |       |  |  | 3.5%   |      
|Income taxes                       |                                                               |             |       |        |               |   | (79    | )      |  |  | 0.0%   |       |  |  | (0.4)% |      
|Equity gain (loss) from investee   |                                                               |             | 104    |        |               |   | (64    | )      |  |  | 0.4%   |       |  |  | (0.4)% |      
|                                   |                                                               |             |        |        |               |   |        |        |  |  |        |      
|Net income                         |                                                               | $           | 663    |        |               | $ | 494    |        |  |  | 2.7%   |       |  |  | 2.7%   |      
|                                   |                                                               |             |        |        |               |   |        |        |  |  |        |      

Revenues






23



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##### Table of Contents





|                                          |  |             |       |  |      |  |       | 
|----------------------------------------- |  | ----------- | ----- |  | ---- |  | ----- | 
|                                          |  | Years Ended |      
|                                          |  | March 31,   |      
|                                          |  |             |      
|                                          |  | 2005        |       |  | 2004 | 
|                                          |  |             |       |  |      | 
|Canada                                    |  |             |       |  |      |  |       | 
|POSA terminals (owned)                    |  |             | 3,885 |  |      |  | 2,304 | 
|POSA terminals (serviced or host to host) |  |             | 501   |  |      |  | 537   | 
|United States                             |  |             |       |  |      |  |       | 
|DTMs                                      |  |             | 913   |  |      |  | 1,044 | 
|Traditional machine units                 |  |             | 7     |  |      |  | 11    | 
|Over-the counter units (terminals)        |  |             |      |  |      |  | 250   | 
|POSA terminals (serviced or host to host) |  |             | 159   |  |      |  | 106   | 
|Mexico                                    |  |             |       |  |      |  |       | 
|POSA terminals (serviced or host to host) |  |             | 200   |  |      |  | 200   | 
|                                          |  |             |       |  |      | 
|Total                                     |  |             | 5,665 |  |      |  | 4,452 | 
|                                          |  |             |       |  |      | 











Cost of Revenue (exclusive of depreciation and
amortization)






24



---



##### Table of Contents









General and Administrative Expenses






| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | legal costs decreased by $80,000;                                                                                            
|
| |  | bank charges and processing fees decreased by $33,000;                                                                       
|
| |  | rent and occupancy costs increased by $30,000 due to a full year
    in new offices in Richmond B.C., Canada;                
|
| |  | travel expenses increased by $38,000 due to increased travel in
    the United States;                                       
|
| |  | salaries increased by $488,000 as a result of hiring additional
    staff in operations and finance, including legal counsel;
|
| |  | various other expenses increased by $23,000.                                                                                 

Selling and Marketing Expense




Product Development






25



---



##### Table of Contents



Merger Costs




Depreciation and Amortization






Provision for Income Taxes




Liquidity and Capital Resources










| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | accounts payable and accrued liabilities increased by
    $7,982,000, including an increase of $4,760,000 for wireless
    products (PINs and cellular airtime) which is mainly due to
    increased inventory and the increased sales, and an increase of
    $2,409,000 for prepaid long distance products. All accounts
    payable balances outstanding at March 31, 2005 were paid by
    the end of April 2005. The increase is offset by;
|
| |  | accounts receivable increased by $3,788,000, including an
    increase of $2,102,000 for sales of point-of-sale dispensed
    products, mainly due to the growth in sales of prepaid cellular,
    and an increase of $1,445,000 for prepaid long distance products
    primarily due to an increase in promotional business in the
    U.S.; and                                                                                               
|
| |  | inventories increased by $2,075,000, primarily for prepaid
    cellular PINs products. In addition;                                                                                                                                                                                                                                                                                                                                             
|
| |  | depreciation and amortization expense for the year was
    $1,142,000;                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | deferred revenue expense was $818,000, mainly due to an increase
    in non-activated PINs; and                                                                                                                                                                                                                                                                                                                                                 
|
| |  | net income for the year was $663,000 and other operating
    activities provided cash of $271,000.                                                                                                                                                                                                                                                                                                                                              

26



---



##### Table of Contents













|                              |  |                        |           |           |          |   |         |           |       |   |           |  |  |         |         |  |  |   |         | 
|----------------------------- |  | ---------------------- | --------- | --------- | -------- | - | ------- | --------- | ----- | - | --------- |  |  | ------- | ------- |  |  | - | ------- | 
|                              |  | Payments Due by Period |          
|                              |  |                        |          
|                              |  |                        |           | Less Than |          |   |         |           | After |  
|Contractual Obligations       |  | Total                  |           |           | One Year |   |         | 1-3 Years |       |   | 4-5 Years |  |  | 5 Years |        
|                              |  |                        |           |           |          |   |         |           |       |   |           |  |  |         |        
|Capital Lease Obligations     |  | $                      | 150,541   |           |          | $ | 87,213  |           |       | $ | 63,328    |  |  | $       |        |  |  | $ |        | 
|Operating Leases              |  |                        | 2,691,525 |           |          |   | 431,898 |           |       |   | 681,224   |  |  |         | 683,334 |  |  |   | 895,069 | 
|                              |  |                        |           |           |          |   |         |           |       |   |           |  |  |         |        
|Total Contractual Obligations |  | $                      | 2,842,066 |           |          | $ | 519,111 |           |       | $ | 744,552   |  |  | $       | 683,334 |  |  | $ | 895,069 | 
|                              |  |                        |           |           |          |   |         |           |       |   |           |  |  |         |        

Future Capital Needs and Resources








27



---



##### Table of Contents











Effect of Inflation




Trend Information










Related Party Transactions








28



---



##### Table of Contents



Off-Balance Sheet Arrangements









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








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








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










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



29



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##### Table of Contents



PART III







|        |                                                   
|------- | --------------------------------------------------
|ITEM 9. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT










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








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



Securities authorized for issuance under equity compensations
plans








|                                                           |  |                      |           |  |                      |   |      |                      |  |  |           | 
|---------------------------------------------------------- |  | -------------------- | --------- |  | -------------------- | - | ---- | -------------------- |  |  | --------- | 
|                                                           |  | Number of securities |           |  |                      |   |     
|                                                           |  | to be issued upon    |           |  | Weighted average     |   |      |                     
|                                                           |  | exercise of          |           |  | exercise price of    |   |      | Number of securities | 
|                                                           |  | outstanding options, |           |  | outstanding options, |   |      | remaining available  | 
|Plan category                                              |  | warrants and rights  |           |  | warrants and rights  |   |      | for future issuance  | 
|                                                           |  |                      |           |  |                      |   |      |                      | 
|                                                           |  | (a)                  |           |  | (b)                  |   |      | (c)                  | 
|Equity compensation plans approved by security holders     |  |                      | 3,322,500 |  |                      | $ | 0.12 |                      |  |  | 2,516,720 | 
|Equity compensation plans not approved by security holders |  |                      | Nil       |  |                      |   | Nil  |                      |  |  | Nil       | 
|                                                           |  |                      |           |  |                      |   |      |                      | 
|Total                                                      |  |                      | 3,322,500 |  |                      | $ | 0.12 |                      |  |  | 2,516,720 | 
|                                                           |  |                      |           |  |                      |   |      |                      | 






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



30



---



##### Table of Contents








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

|        |    |       |             |                                                                                                                                               
|------- | -- | ----- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |            
|Number  |    |       | Description
|        |    |       |            
|        | 3  | .1(1) |             | State of Delaware Certificate of Domestication of DataWave
    Systems Inc.                                                                   
|        | 3  | .2(1) |             | State of Delaware Certificate of Incorporation of DataWave
    Systems Inc.                                                                   
|        | 3  | .3(1) |             | Bylaws of DataWave Systems Inc.                                                                                                               
|        | 10 | .1(2) |             | 1998 Stock Option Plan                                                                                                                        
|        | 10 | .2**  |             | 2000 Stock Option Plan                                                                                                                        
|        | 10 | .3**  |             | Form of Option Agreement                                                                                                                      
|        | 10 | .4**  |             | Form of Indemnity Agreement                                                                                                                   
|        | 10 | .5(3) |             | Agreement and Plan of Merger between Integrated Data Corp. and
    DataWave Systems Inc.                                                      
|        | 10 | .6(4) |             | Merger Break-up and Mutual Release Agreement with Integrated
    Data Corp.                                                                   
|        | 10 | .7(5) |             | License Termination Agreement between Integrated Data Corp. and
    DataWave Systems Inc.                                                     
|        | 10 | .8**  |             | Employment Agreement with Joshua Emanuel                                                                                                      
|        | 14 | .1**  |             | Code of Business Ethics                                                                                                                       
|        | 21 | .1**  |             | Subsidiaries of DataWave Systems Inc.                                                                                                         
|        | 31 | .1**  |             | Certification pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002 of Josh Emanuel                                                   
|        | 31 | .2**  |             | Certification pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002 of John Gunn                                                      
|        | 32 | .1**  |             | Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 Of The Sarbanes-Oxley Act
    Of 2002 of Josh Emanuel
|        | 32 | .2**  |             | Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 Of The Sarbanes-Oxley Act
    Of 2002 of John Gunn   






|   |               
|-- | --------------
|** | Filed herewith



|    |                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Previously filed as an exhibit to, and incorporated herein by
    reference from, the Companys 8K report filed on
    March 1, 2004.                                           
|   
|(2) | Previously filed as an exhibit to, and incorporated herein by
    reference from, the Companys Form 20F for the fiscal
    year ended March 31, 1998, filed on October 1, 1998.
|   
|(3) | Previously filed as an exhibit to, and incorporated herein by
    reference from, the Companys 8K report filed on
    June 4, 2004.                                            
|   
|(4) | Previously filed as an exhibit to, and incorporated herein by
    reference from, the Companys 8K report filed on
    March 9, 2005.                                           
|   
|(5) | Previously filed as an exhibit to, and incorporated herein by
    reference from, the Companys 8K report filed on
    January 27, 2005                                         






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



31



---



##### Table of Contents






SIGNATURES






| |                      
| | ---------------------
| | DataWave Systems Inc.
| | (Registrant)         



| |     |              
| | --- | -------------
| | By: | /s/ John Gunn

| |                                         
| | ----------------------------------------
| |                                         
| | John Gunn                               
| | General Manager, Chief Financial Officer





|                                         |  |                                                                                                                   |  |               |  | 
|---------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | ------------- |  | 
|Signature                                |  | Capacities                                                                                                        |  | Date         
|                                         |  |                                                                                                                   |  |              
|                                        
|/s/ Joshua EmanuelJoshua
    Emanuel     |  | Chief Executive Officer and Chairman(Principal Executive Officer)                                                 |  | June 29, 2005
|                                        
|/s/ John GunnJohn
    Gunn               |  | General Manager and
    Chief Financial Officer(Principal Financial Officer and
    Principal Accounting Officer) |  | June 29, 2005
|                                        
|/s/ John X. AdilettaJohn
    X. Adiletta |  | Director                                                                                                          |  | June 29, 2005
|                                        
|/s/ Vijay FozdarVijay
    Fozdar         |  | Director                                                                                                          |  | June 29, 2005

32



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##### Table of Contents



DATAWAVE SYSTEMS INC.


Form 10-KSB Annual Report





Index to Financial Statements


|                                                           |                                                                                                     |      |     |     | 
|---------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ---- | --- | --- | 
|                                                           |                                                                                                     | Page |    
|                                                           |                                                                                                     |      |    
|Report of Independent Registered Chartered
    Accountants |                                                                                                     |      | F-2 |    
|Consolidated Financial Statements:                         |                                                                                                     |      |     |    
|                                                           | Consolidated balance sheets as of
    March 31, 2005 and 2004                                       |      |     | F-3 | 
|                                                           | Consolidated statements of operations for
    the years ended March 31, 2005 and 2004               |      |     | F-4 | 
|                                                           | Consolidated statements of
    shareholders equity for the years ended March 31,
    2005 and 2004 |      |     | F-5 | 
|                                                           | Consolidated statements of cash flows for
    the years ended March 31, 2005 and 2004               |      |     | F-6 | 
|Notes to consolidated financial
    statements             |                                                                                                     |      | F-7 |    

F-1



---



##### Table of Contents






REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS




DataWave
Systems Inc.










/s/ Deloitte & Touche
LLP








F-2



---



##### Table of Contents



DATAWAVE SYSTEMS INC.





CONSOLIDATED BALANCE SHEETS


Years ended March 31, 2005 and 2004


(Expressed in United States dollars, except share amounts)





|                                           |                                                                  |                                                                                                                        |             |            |        |   |             |           |            | 
|------------------------------------------ | ---------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ----------- | ---------- | ------ | - | ----------- | --------- | ---------- | 
|                                           |                                                                  | 2005                                                                                                                   |             |            | 2004   |  
|                                           |                                                                  |                                                                                                                        |             |            |        |  
|ASSETS                                    
|Current                                    |                                                                  |                                                                                                                        |             |            |        |   |             |          
|                                           | Cash and cash equivalents                                        |                                                                                                                        | $           | 4,526,512  |        |   | $           | 852,406   |           
|                                           | Restricted cash (Note 3(c))                                      |                                                                                                                        |             | 34,000     |        |   |             |          |           
|                                           | Accounts receivable and other (Note 3(a))                        |                                                                                                                        |             | 7,366,712  |        |   |             | 3,779,638 |           
|                                           | Inventories (Note 3(b))                                          |                                                                                                                        |             | 4,155,614  |        |   |             | 2,234,443 |           
|                                           | Prepaid expenses and deposits                                    |                                                                                                                        |             | 336,800    |        |   |             | 451,377   |           
|                                           |                                                                  |                                                                                                                        |             |            |        |  
|Total current assets                       |                                                                  |                                                                                                                        | 16,419,638  |            |        |   | 7,317,864   |          
|Restricted cash                            |                                                                  |                                                                                                                        |            |            |        |   | 54,000      |          
|Machinery and equipment, net (Note 3(d))   |                                                                  |                                                                                                                        | 2,453,571   |            |        |   | 2,332,997   |          
|Equity investment (Note 10)                |                                                                  |                                                                                                                        | 39,387      |            |        |   |            |          
|Deferred development costs (Note 3(e))     |                                                                  |                                                                                                                        | 101,567     |            |        |   | 49,335      |          
|Other long term receivables (Note 7)       |                                                                  |                                                                                                                        | 124,008     |            |        |   | 110,865     |          
|Goodwill (Note 3(f))                       |                                                                  |                                                                                                                        | 1,857,985   |            |        |   | 1,845,619   |          
|Intangible assets, net (Note 3(f))         |                                                                  |                                                                                                                        | 1,079,843   |            |        |   | 378,529     |          
|                                           |                                                                  |                                                                                                                        |             |            |        |  
|Total assets                               |                                                                  | $                                                                                                                      | 22,075,999  |            |        | $ | 12,089,209  |          
|                                           |                                                                  |                                                                                                                        |             |            |        |  
|LIABILITIES                               
|Current                                    |                                                                  |                                                                                                                        |             |            |        |   |             |          
|                                           | Accounts payable and accrued liabilities
    (Notes 3(g) and 10) |                                                                                                                        | $           | 14,547,422 |        |   | $           | 7,080,615 |           
|                                           | Deferred revenue                                                 |                                                                                                                        |             | 839,303    |        |   |             | 61,572    |           
|                                           | Current portion of capital lease obligations (Note 8)            |                                                                                                                        |             | 78,344     |        |   |             | 64,641    |           
|                                           | Current portion of deferred inducement (Note 7)                  |                                                                                                                        |             | 31,002     |        |   |             | 27,716    |           
|                                           |                                                                  |                                                                                                                        |             |            |        |  
|Total current liabilities                  |                                                                  |                                                                                                                        | 15,496,071  |            |        |   | 7,234,544   |          
|Capital lease obligations (Note 8)         |                                                                  |                                                                                                                        | 61,668      |            |        |   | 125,026     |          
|Deferred income taxes (Note 6)             |                                                                  |                                                                                                                        | 309,509     |            |        |   | 267,766     |          
|Deferred inducement (Note 7)               |                                                                  |                                                                                                                        | 342,184     |            |        |   | 280,835     |          
|Convertible promissory note (Note 3(h))    |                                                                  |                                                                                                                        | 600,000     |            |        |   |            |          
|                                           |                                                                  |                                                                                                                        |             |            |        |  
|Total liabilities                          |                                                                  |                                                                                                                        | 16,809,432  |            |        |   | 7,908,171   |          
|                                           |                                                                  |                                                                                                                        |             |            |        |  
|Commitments (Note 9)                       |                                                                  |                                                                                                                        |             |            |        |   |             |          
|SHAREHOLDERS EQUITY                      
|Common shares                              |                                                                  |                                                                                                                        |             |            |        |   |             |          
|                                           | Authorized, 100,000,000 common shares, $0.001 par value          |                                                                                                                        |             |            |        |   |             |           |           
|                                           |                                                                  | Issued, 46,826,834 and 43,889,334 shares issued and outstanding
    at March 31, 2005 and March 31, 2004, respectively |             |            | 46,827 |   |             |           | 15,006,743 | 
|Additional paid-in capital                 |                                                                  |                                                                                                                        | 17,920,408  |            |        |   | 2,725,492   |          
|Accumulated other comprehensive income     |                                                                  |                                                                                                                        | 465,048     |            |        |   | 277,966     |          
|Accumulated deficit                        |                                                                  |                                                                                                                        | (13,165,716 | )          |        |   | (13,829,163 | )        
|                                           |                                                                  |                                                                                                                        |             |            |        |  
|Total shareholders equity                 |                                                                  |                                                                                                                        | 5,266,567   |            |        |   | 4,181,038   |          
|                                           |                                                                  |                                                                                                                        |             |            |        |  
|Total liabilities and shareholders equity |                                                                  | $                                                                                                                      | 22,075,999  |            |        | $ | 12,089,209  |          
|                                           |                                                                  |                                                                                                                        |             |            |        |  

|                                   |  |                                   
|---------------------------------- |  | ----------------------------------
|APPROVED BY                       
|                                  
|Josh EmanuelJosh Emanuel, Director |  | Vijay FozdarVijay Fozdar, Director



F-3



---



##### Table of Contents



DATAWAVE SYSTEMS INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


Years ended March 31, 2005 and 2004


(Expressed in United States dollars, except share amounts)





|                                                     |                                                              |      |            |            |      |   |            |            | 
|---------------------------------------------------- | ------------------------------------------------------------ | ---- | ---------- | ---------- | ---- | - | ---------- | ---------- | 
|                                                     |                                                              | 2005 |            |            | 2004 |  
|                                                     |                                                              |      |            |            |      |  
|Revenue                                              |                                                              |      |            |            |      |   |            |           
|                                                     | Sales                                                        |      | $          | 16,783,031 |      |   | $          | 11,144,952 | 
|                                                     | Net agency sales (Note 5)                                    |      |            | 7,543,982  |      |   |            | 6,898,727  | 
|                                                     |                                                              |      |            |            |      |  
|Total revenue                                        |                                                              |      | 24,327,013 |            |      |   | 18,043,679 |           
|                                                     | Cost of revenue (exclusive of depreciation and amortization) |      |            | 15,543,066 |      |   |            | 10,855,665 | 
|                                                     |                                                              |      |            |            |      |  
|                                                     |                                                              |      | 8,783,947  |            |      |   | 7,188,014  |           
|                                                     |                                                              |      |            |            |      |  
|Operating costs and expenses                         |                                                              |      |            |            |      |   |            |           
|                                                     | General and administrative                                   |      |            | 3,278,871  |      |   |            | 2,812,821  | 
|                                                     | Selling and marketing                                        |      |            | 1,905,988  |      |   |            | 1,562,150  | 
|                                                     | Product development                                          |      |            | 1,312,263  |      |   |            | 1,405,248  | 
|                                                     | Merger costs (Notes 4(b) and 11)                             |      |            | 658,652    |      |   |            |           | 
|                                                     | Depreciation and amortization                                |      |            | 1,142,474  |      |   |            | 835,035    | 
|                                                     |                                                              |      |            |            |      |  
|Total operating costs and expenses                   |                                                              |      | 8,298,248  |            |      |   | 6,615,254  |           
|                                                     |                                                              |      |            |            |      |  
|Operating income                                     |                                                              |      | 485,699    |            |      |   | 572,760    |           
|Other income                                         |                                                              |      | 39,265     |            |      |   | 13,888     |           
|Gain on foreign exchange                             |                                                              |      | 34,605     |            |      |   | 51,279     |           
|                                                     |                                                              |      |            |            |      |  
|Income before income taxes                           |                                                              |      | 559,569    |            |      |   | 637,927    |           
|Income taxes (Note 6)                                |                                                              |      |           |            |      |   | (79,000    | )         
|Equity income (loss) from investee                   |                                                              |      | 103,878    |            |      |   | (64,491    | )         
|                                                     |                                                              |      |            |            |      |  
|Net income                                           |                                                              | $    | 663,447    |            |      | $ | 494,436    |           
|                                                     |                                                              |      |            |            |      |  
|Net income per share (Note 4(d))                     |                                                              |      |            |            |      |   |            |           
|                                                     |  basic                                                      |      | $          | 0.02       |      |   | $          | 0.01       | 
|                                                     |                                                              |      |            |            |      |  
|                                                     |  diluted                                                    |      | $          | 0.01       |      |   | $          | 0.01       | 
|                                                     |                                                              |      |            |            |      |  
|Weighted-average number of common shares (Note 4(d)) |                                                              |      |            |            |      |   |            |           
|                                                     |  basic                                                      |      |            | 44,066,389 |      |   |            | 43,889,334 | 
|                                                     |                                                              |      |            |            |      |  
|                                                     |  diluted                                                    |      |            | 47,426,389 |      |   |            | 43,889,334 | 
|                                                     |                                                              |      |            |            |      |  



F-4



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##### Table of Contents



DATAWAVE SYSTEMS INC.





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


Years ended March 31, 2005 and 2004


(Expressed in United States dollars, except share amounts)





|                                                             |  |           |            |  |        |   |             |             |  |       |               |  |  |             |         |  |               |   |             |   |  |   |           | 
|------------------------------------------------------------ |  | --------- | ---------- |  | ------ | - | ----------- | ----------- |  | ----- | ------------- |  |  | ----------- | ------- |  | ------------- | - | ----------- | - |  | - | --------- | 
|                                                             |  |           |            |  |        |   |             | Accumulated |  |       |               |  | 
|                                                             |  | Number of |            |  |        |   | Additional  |             |  | Other |               |  |  |             | Total   | 
|                                                             |  | Common    |            |  | Common |   |             | Paid-in     |  |       | Comprehensive |  |  | Accumulated |         |  | Shareholders |  
|                                                             |  | Shares    |            |  | Shares |   |             | Capital     |  |       | Income        |  |  | Deficit     |         |  | Equity        |  
|                                                             |  |           |            |  |        |   |             |             |  |       |               |  |  |             |         |  |               |  
|Balance, April 1, 2003                                       |  |           | 43,889,334 |  |        | $ | 15,006,743  |             |  | $     | 2,725,492     |  |  | $           | 45,845  |  |               | $ | (14,323,599 | ) |  | $ | 3,454,481 | 
|Net income                                                   |  |           |            |  |        |   |            |             |  |       |              |  |  |             |        |  |               |   | 494,436     |   |  |   | 494,436   | 
|Foreign currency translation adjustment                      |  |           |            |  |        |   |            |             |  |       |              |  |  |             | 232,121 |  |               |   |            |   |  |   | 232,121   | 
|                                                             |  |           |            |  |        |   |             |             |  |       |               |  |  |             |         |  |               |  
|Comprehensive income                                         |  |           |            |  |        |   |             |             |  |       |               |  |  |             |         |  |               |   |             |   |  |   | 726,557   | 
|                                                             |  |           |            |  |        |   |             |             |  |       |               |  |  |             |         |  |               |  
|Balance, March 31, 2004                                      |  |           | 43,889,334 |  |        |   | 15,006,743  |             |  |       | 2,725,492     |  |  |             | 277,966 |  |               |   | (13,829,163 | ) |  |   | 4,181,038 | 
|Issuance of shares (Note 4(b))                               |  |           | 2,937,500  |  |        |   | 235,000     |             |  |       |              |  |  |             |        |  |               |   |            |   |  |   | 235,000   | 
|Reclassification to additional paid-in capital on emigration |  |           |            |  |        |   | (15,194,916 | )           |  |       | 15,194,916    |  |  |             |        |  |               |   |            |   |  |   |          | 
|Net income                                                   |  |           |            |  |        |   |            |             |  |       |              |  |  |             |        |  |               |   | 663,447     |   |  |   | 663,447   | 
|Foreign currency translation adjustment                      |  |           |            |  |        |   |            |             |  |       |              |  |  |             | 187,082 |  |               |   |            |   |  |   | 187,082   | 
|                                                             |  |           |            |  |        |   |             |             |  |       |               |  |  |             |         |  |               |  
|Comprehensive income                                         |  |           |            |  |        |   |             |             |  |       |               |  |  |             |         |  |               |   |             |   |  |   | 850,529   | 
|                                                             |  |           |            |  |        |   |             |             |  |       |               |  |  |             |         |  |               |  
|Balance, March 31, 2005                                      |  |           | 46,826,834 |  |        | $ | 46,827      |             |  | $     | 17,920,408    |  |  | $           | 465,048 |  |               | $ | (13,165,716 | ) |  | $ | 5,266,567 | 
|                                                             |  |           |            |  |        |   |             |             |  |       |               |  |  |             |         |  |               |  



F-5



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##### Table of Contents



DATAWAVE SYSTEMS INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


Years ended March 31, 2005 and 2004


(Expressed in United States dollars, except share amounts)





|                                                                                                |                                                       |      |           |            |      |   |            |            |  
|----------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ---- | --------- | ---------- | ---- | - | ---------- | ---------- | -
|                                                                                                |                                                       | 2005 |           |            | 2004 |  
|                                                                                                |                                                       |      |           |            |      |  
|Operating activities                                                                            |                                                       |      |           |            |      |   |            |           
|                                                                                                | Net income                                            |      | $         | 663,447    |      |   | $          | 494,436    |  
|Adjustments to reconcile net income to net cash provided by
    (used in) operating activities: |                                                       |      |           |            |      |   |            |           
|                                                                                                | Depreciation and amortization                         |      |           | 1,142,474  |      |   |            | 835,035    |  
|                                                                                                | Equity (income) loss from investments                 |      |           | (103,878   | )    |   |            | 64,491     |  
|                                                                                                | Deferred income taxes                                 |      |           |           |      |   |            | 79,000     |  
|                                                                                                | Merger costs                                          |      |           | 235,000    |      |   |            |           |  
|                                                                                                | Amortization of lease inducement                      |      |           | 25,547     |      |   |            |           |  
|Net change in non-cash operating assets and liabilities                                         |                                                       |      |           |            |      |   |            |           
|                                                                                                | Accounts receivable and other                         |      |           | (3,787,862 | )    |   |            | (2,305,139 | )
|                                                                                                | Inventories                                           |      |           | (2,074,656 | )    |   |            | (1,009,052 | )
|                                                                                                | Prepaid expenses and deposits                         |      |           | 113,603    |      |   |            | 31,172     |  
|                                                                                                | Accounts payable and accrued liabilities              |      |           | 7,981,805  |      |   |            | 1,812,949  |  
|                                                                                                | Deferred revenue                                      |      |           | 817,858    |      |   |            | (84,848    | )
|                                                                                                |                                                       |      |           |            |      |  
|Net cash provided by (used in) operating activities                                             |                                                       |      | 5,013,338 |            |      |   | (81,956    | )         
|                                                                                                |                                                       |      |           |            |      |  
|Investing activities                                                                            |                                                       |      |           |            |      |   |            |           
|                                                                                                | Restricted cash                                       |      |           | 20,000     |      |   |            |           |  
|                                                                                                | Deferred development costs                            |      |           | (94,786    | )    |   |            | (49,335    | )
|                                                                                                | Deferred inducements, net of related receivables      |      |           |           |      |   |            | 197,686    |  
|                                                                                                | Purchase of machinery and equipment                   |      |           | (912,044   | )    |   |            | (1,170,118 | )
|                                                                                                | Purchase of intangible                                |      |           | (265,000   | )    |   |            |           |  
|                                                                                                |                                                       |      |           |            |      |  
|                                                                                                | Net cash used in investing activities                 |      |           | (1,251,830 | )    |   |            | (1,021,767 | )
|                                                                                                |                                                       |      |           |            |      |  
|Financing activity                                                                              |                                                       |      |           |            |      |   |            |           
|                                                                                                | Repayment of capital lease obligations                |      |           | (87,402    | )    |   |            | (182,934   | )
|                                                                                                |                                                       |      |           |            |      |  
|                                                                                                | Net cash used in financing activity                   |      |           | (87,402    | )    |   |            | (182,934   | )
|                                                                                                |                                                       |      |           |            |      |  
|Increase (decrease) in cash                                                                     |                                                       |      | 3,674,106 |            |      |   | (1,286,657 | )         
|Cash and cash equivalents, beginning of year                                                    |                                                       |      | 852,406   |            |      |   | 2,139,063  |           
|                                                                                                |                                                       |      |           |            |      |  
|Cash and cash equivalents, end of year                                                          |                                                       | $    | 4,526,512 |            |      | $ | 852,406    |           
|                                                                                                |                                                       |      |           |            |      |  
|Supplemental disclosure of cash flow information:                                               |                                                       |      |           |            |      |   |            |           
|                                                                                                | Income taxes paid                                     |      | $         |           |      |   | $          |           |  
|                                                                                                |                                                       |      |           |            |      |  
|Supplemental disclosure of non-cash financing and investing items                               |                                                       |      |           |            |      |   |            |           
|                                                                                                | Issue of promissory note on acquisition of intangible |      | $         | 600,000    |      |   | $          |           |  
|                                                                                                | Equipment acquired under capital lease obligations    |      | $         |           |      |   | $          | 349,155    |  
|                                                                                                | Tenant inducements for leased premises                |      | $         |           |      |   | $          | 540,466    |  



F-6



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##### Table of Contents



DATAWAVE SYSTEMS INC.





NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







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





|   |                                
|-- | -------------------------------
|2. | SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation






|    |                            
|--- | ---------------------------
|(a) | Principles of consolidation





|    |                  
|--- | -----------------
|(b) | Equity investment







|    |                 
|--- | ----------------
|(c) | Use of estimates





|    |                             
|--- | ----------------------------
|(d) | Foreign currency translation

Foreign Currency Translation,


F-7



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##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                                            
|-- | -------------------------------------------
|2. | SIGNIFICANT ACCOUNTING POLICIES (continued)



|    |                                         
|--- | ----------------------------------------
|(d) | Foreign currency translation (continued)







|    |                          
|--- | -------------------------
|(e) | Cash and cash equivalents





|    |                
|--- | ---------------
|(f) | Restricted cash





|    |            
|--- | -----------
|(g) | Inventories







|    |                    
|--- | -------------------
|(h) | Revenue recognition





| |   |                                                     
| | - | ----------------------------------------------------
| |  | pervasive evidence of an arrangement exists         
|
| |  | delivery has occurred or services have been rendered
|
| |  | the price is fixed or determinable, and             
|
| |  | collectibility is reasonably assured.               





F-8



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##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                                            
|-- | -------------------------------------------
|2. | SIGNIFICANT ACCOUNTING POLICIES (continued)



|    |                                
|--- | -------------------------------
|(h) | Revenue recognition (continued)









|    |                          
|--- | -------------------------
|(i) | Product development costs







|    |                                        
|--- | ---------------------------------------
|(j) | Capitalized internal use software costs

Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use






|    |                                       
|--- | --------------------------------------
|(k) | Advertising costs and sales incentives



F-9



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##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                                            
|-- | -------------------------------------------
|2. | SIGNIFICANT ACCOUNTING POLICIES (continued)



|    |                                                   
|--- | --------------------------------------------------
|(k) | Advertising costs and sales incentives (continued)







|    |                        
|--- | -----------------------
|(l) | Machinery and equipment



|                                |  |                                             
|------------------------------- |  | --------------------------------------------
|Computer equipment and software |  | 30% declining balance                       
|Office equipment                |  | 20% declining balance                       
|Other machinery and equipment   |  | 30% declining balance                       
|Vending, DTM and OTC equipment  |  | 3 years straight-line                       
|Leasehold improvements          |  | 10 years straight-line or shorter lease term





|    |                                
|--- | -------------------------------
|(m) | Impairment of long-lived assets





|    |                                     
|--- | ------------------------------------
|(n) | Goodwill and other intangible assets

Goodwill and Other
Intangible Assets,


F-10



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##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                                            
|-- | -------------------------------------------
|2. | SIGNIFICANT ACCOUNTING POLICIES (continued)



|    |                      
|--- | ---------------------
|(o) | Financial instruments



|    |           
|--- | ----------
|(i) | Fair value





|     |            
|---- | -----------
|(ii) | Credit risk















| |                  
| | -----------------
| | (p)  Income taxes

Accounting for Income Taxes


F-11



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##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                                            
|-- | -------------------------------------------
|2. | SIGNIFICANT ACCOUNTING POLICIES (continued)



| |                        
| | -----------------------
| | (q)  Earnings per share





| |                              
| | -----------------------------
| | (r)  Stock-based compensation

Accounting for Stock Issued
to Employees


Accounting for
Stock-Based Compensation  Transition and Disclosure Accounting for Stock Based
Compensation






|                        |  |      |     |   |      |  |     |  
|----------------------- |  | ---- | --- | - | ---- |  | --- | -
|                        |  | 2005 |     |   | 2004 | 
|                        |  |      |     |   |      | 
|Expected life (years)   |  |      | 5.0 |   |      |  | 3.6 |  
|Expected volatility     |  |      | 179 | % |      |  | 95  | %
|Risk-free interest rate |  |      | 3.9 | % |      |  | 3.8 | %



F-12



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##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                                            
|-- | -------------------------------------------
|2. | SIGNIFICANT ACCOUNTING POLICIES (continued)



(r)  Stock-based compensation (continued)




|                                                                                                                    |                   |      |          |      |      |   |         |      | 
|------------------------------------------------------------------------------------------------------------------- | ----------------- | ---- | -------- | ---- | ---- | - | ------- | ---- | 
|                                                                                                                    |                   | 2005 |          |      | 2004 |  
|                                                                                                                    |                   |      |          |      |      |  
|Net income  as reported                                                                                            |                   | $    | 663,447  |      |      | $ | 494,436 |     
|Add: Stock-based employee compensation expense
    (recovery) included in reported net income                       |                   |      |         |      |      |   |        |     
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards |                   |      | (238,801 | )    |      |   | (56,810 | )   
|                                                                                                                    |                   |      |          |      |      |  
|Pro-forma net income                                                                                                |                   | $    | 424,646  |      |      | $ | 437,626 |     
|                                                                                                                    |                   |      |          |      |      |  
|Net income per share  as reported                                                                                  |                   |      |          |      |      |   |         |     
|                                                                                                                    | Basic             |      | $        | 0.02 |      |   | $       | 0.01 | 
|                                                                                                                    |                   |      |          |      |      |  
|                                                                                                                    | Diluted           |      | $        | 0.01 |      |   | $       | 0.01 | 
|                                                                                                                    |                   |      |          |      |      |  
|Net income per share  pro-forma                                                                                    |                   |      |          |      |      |   |         |     
|                                                                                                                    | Basic and diluted |      | $        | 0.01 |      |   | $       | 0.01 | 
|                                                                                                                    |                   |      |          |      |      |  



|    |                    
|--- | -------------------
|(s) | Comparative figures





|    |                                          
|--- | -----------------------------------------
|(t) | Recently issued accounting pronouncements

Revenue Recognition


Consolidation of Variable Interest Entities, Consolidated Financial Statements


F-13



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##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                                            
|-- | -------------------------------------------
|2. | SIGNIFICANT ACCOUNTING POLICIES (continued)



|    |                                                      
|--- | -----------------------------------------------------
|(t) | Recently issued accounting pronouncements (continued)

The Effect of Contingently Convertible Debt
on Diluted Earnings per Share


Inventory Costs  An amendment of ARB No. 43,
Chapter 4 Inventory Pricing,


Exchanges of Nonmonetary Assets  an amendment of APB
Opinion No. 29


Share Based Payment




F-14



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##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                                            
|-- | -------------------------------------------
|2. | SIGNIFICANT ACCOUNTING POLICIES (continued)



|    |                                                      
|--- | -----------------------------------------------------
|(t) | Recently issued accounting pronouncements (continued)



Accounting Changes and Error Corrections,


3.   BALANCE SHEET DETAILS


(a)  Accounts receivable and other


|                                                  |  |      |           |   |      |   |           |  
|------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                                  |  | 2005 |           |   | 2004 |  
|                                                  |  |      |           |   |      |  
|Trade accounts receivable  POSA                  |  | $    | 4,499,592 |   |      | $ | 2,397,403 |  
|Trade accounts receivable  prepaid long distance |  |      | 2,638,597 |   |      |   | 1,193,320 |  
|Less allowance for doubtful accounts              |  |      | (96,360   | ) |      |   | (12,947   | )
|Tenant inducements                                |  |      |          |   |      |   | 166,297   |  
|Other receivables                                 |  |      | 324,883   |   |      |   | 35,565    |  
|                                                  |  |      |           |   |      |  
|                                                  |  | $    | 7,366,712 |   |      | $ | 3,779,638 |  
|                                                  |  |      |           |   |      |  

(b)  Inventories


|                                           |  |      |           |  |      |   |           | 
|------------------------------------------ |  | ---- | --------- |  | ---- | - | --------- | 
|                                           |  | 2005 |           |  | 2004 |  
|                                           |  |      |           |  |      |  
|PINs and cellular time                     |  | $    | 3,274,233 |  |      | $ | 1,777,259 | 
|Cards and prepaid long distance phone time |  |      | 646,139   |  |      |   | 318,087   | 
|Part and supplies                          |  |      | 235,242   |  |      |   | 139,097   | 
|                                           |  |      |           |  |      |  
|                                           |  | $    | 4,155,614 |  |      | $ | 2,234,443 | 
|                                           |  |      |           |  |      |  

(c)  Restricted cash






F-15



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##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                                  
|-- | ---------------------------------
|3. | BALANCE SHEET DETAILS (continued)

(d)  Machinery and equipment




|                                |  |      |           |             |              |   |           |       |  |   |           | 
|------------------------------- |  | ---- | --------- | ----------- | ------------ | - | --------- | ----- |  | - | --------- | 
|                                |  | 2005 |          
|                                |  |      |          
|                                |  |      |           | Accumulated |              |   | Net Book  |      
|                                |  | Cost |           |             | Depreciation |   |           | Value | 
|                                |  |      |           |             |              |   |           |       | 
|Computer equipment and software |  | $    | 1,921,569 |             |              | $ | 1,102,811 |       |  | $ | 818,758   | 
|Office equipment                |  |      | 162,449   |             |              |   | 68,611    |       |  |   | 93,838    | 
|Other machinery and equipment   |  |      | 29,120    |             |              |   | 23,827    |       |  |   | 5,293     | 
|Parts, supplies, and components |  |      | 331,690   |             |              |   |          |       |  |   | 331,690   | 
|Vending machines in assembly    |  |      | 10,873    |             |              |   |          |       |  |   | 10,873    | 
|Vending equipment               |  |      | 3,454,320 |             |              |   | 3,336,090 |       |  |   | 118,230   | 
|POSA equipment                  |  |      | 1,969,809 |             |              |   | 1,207,702 |       |  |   | 762,107   | 
|Leasehold improvements          |  |      | 362,318   |             |              |   | 49,536    |       |  |   | 312,782   | 
|                                |  |      |           |             |              |   |           |       | 
|                                |  | $    | 8,242,148 |             |              | $ | 5,788,577 |       |  | $ | 2,453,571 | 
|                                |  |      |           |             |              |   |           |       | 

|                                |  |      |           |             |              |   |           |       |  |   |           | 
|------------------------------- |  | ---- | --------- | ----------- | ------------ | - | --------- | ----- |  | - | --------- | 
|                                |  | 2004 |          
|                                |  |      |          
|                                |  |      |           | Accumulated |              |   | Net Book  |      
|                                |  | Cost |           |             | Depreciation |   |           | Value | 
|                                |  |      |           |             |              |   |           |       | 
|Computer equipment and software |  | $    | 1,455,721 |             |              | $ | 672,496   |       |  | $ | 783,225   | 
|Office equipment                |  |      | 124,285   |             |              |   | 46,344    |       |  |   | 77,941    | 
|Other machinery and equipment   |  |      | 30,705    |             |              |   | 22,819    |       |  |   | 7,886     | 
|Parts, supplies, and components |  |      | 332,078   |             |              |   |          |       |  |   | 332,078   | 
|Vending machines in assembly    |  |      | 28,764    |             |              |   |          |       |  |   | 28,764    | 
|Vending equipment               |  |      | 3,320,775 |             |              |   | 3,246,951 |       |  |   | 73,824    | 
|POSA equipment                  |  |      | 1,001,559 |             |              |   | 286,612   |       |  |   | 714,947   | 
|Leasehold improvements          |  |      | 324,699   |             |              |   | 10,367    |       |  |   | 314,332   | 
|                                |  |      |           |             |              |   |           |       | 
|                                |  | $    | 6,618,586 |             |              | $ | 4,285,589 |       |  | $ | 2,332,997 | 
|                                |  |      |           |             |              |   |           |       | 









|    |                           
|--- | --------------------------
|(e) | Deferred development costs



F-16



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##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)





3.                        BALANCE
SHEET DETAILS (continued)




|    |                                       
|--- | --------------------------------------
|(e) | Deferred development costs (continued)

complete the projects have been deferred and will be
amortized over the life of the agreements. Net deferred
development costs at March 31, 2005 were $101,567
(2004  $49,335).




|    |                               
|--- | ------------------------------
|(f) | Goodwill and intangible assets



|                                                                 |  |      |           |  |      |   |           | 
|---------------------------------------------------------------- |  | ---- | --------- |  | ---- | - | --------- | 
|                                                                 |  | 2005 |           |  | 2004 |  
|                                                                 |  |      |           |  |      |  
|Goodwill                                                         |  | $    | 1,857,985 |  |      | $ | 1,845,619 | 
|                                                                
|Intangible assets  customer lists and international
    license |  | $    | 1,577,175 |  |      | $ | 657,342   | 
|Less accumulated amortization                                    |  |      | 497,332   |  |      |   | 278,813   | 
|                                                                 |  |      |           |  |      |  
|Net intangible assets                                            |  | $    | 1,079,843 |  |      | $ | 378,529   | 
|                                                                 |  |      |           |  |      |  
|Goodwill and intangible assets, net                              |  | $    | 2,937,828 |  |      | $ | 2,224,148 | 
|                                                                 |  |      |           |  |      |  





|    |                                         
|--- | ----------------------------------------
|(g) | Accounts payable and accrued liabilities

|                                                |  |      |            |  |      |   |           | 
|----------------------------------------------- |  | ---- | ---------- |  | ---- | - | --------- | 
|                                                |  | 2005 |            |  | 2004 |  
|                                                |  |      |            |  |      |  
|Trade accounts payable  PINs and cellular time |  | $    | 8,663,602  |  |      | $ | 3,903,421 | 
|Trade accounts payable  prepaid long distance  |  |      | 3,209,064  |  |      |   | 799,699   | 
|Trade accounts payable  other                  |  |      | 500,659    |  |      |   | 675,938   | 
|Accrued compensation and benefits               |  |      | 56,620     |  |      |   | 83,965    | 
|Co-op and rebate accruals                       |  |      | 312,993    |  |      |   | 256,140   | 
|Long-distance time accruals                     |  |      | 599,098    |  |      |   | 700,551   | 
|Other accrued liabilities                       |  |      | 1,089,165  |  |      |   | 495,055   | 
|State, local, GST (net) and other taxes payable |  |      | 116,221    |  |      |   | 165,846   | 
|                                                |  |      |            |  |      |  
|                                                |  | $    | 14,547,422 |  |      | $ | 7,080,615 | 
|                                                |  |      |            |  |      |  



F-17



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##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                                  
|-- | ---------------------------------
|3. | BALANCE SHEET DETAILS (continued)



|    |                            
|--- | ---------------------------
|(h) | Convertible promissory note







|   |              
|-- | -------------
|4. | COMMON SHARES



|    |           
|--- | ----------
|(a) | Authorized





|    |         
|--- | --------
|(b) | Issuance





|    |                       
|--- | ----------------------
|(c) | Share purchase options





F-18



---



##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                          
|-- | -------------------------
|4. | COMMON SHARES (continued)



|    |                                   
|--- | ----------------------------------
|(c) | Share purchase options (continued)



|                                    |                            |           |           |            |                |   |      |      | 
|----------------------------------- | -------------------------- | --------- | --------- | ---------- | -------------- | - | ---- | ---- | 
|                                    |                            |           |           | Weighted   |               
|                                    |                            | Number of |           |            | Average        |  
|                                    |                            | Shares    |           |            | Exercise Price |  
|                                    |                            |           |           |            |                |  
|Balance outstanding, April 1, 2003  |                            |           | 4,971,484 |            |                | $ | 0.22 |     
|                                    | Options granted            |           |           | 450,000    |                |   |      | 0.21 | 
|                                    | Options cancelled/ Expired |           |           | (972,582   | )              |   |      | 0.19 | 
|                                    |                            |           |           |            |                |  
|Balance outstanding, March 31, 2004 |                            |           | 4,448,902 |            |                | $ | 0.22 |     
|                                    | Options granted            |           |           | 2,750,000  |                |   |      | 0.10 | 
|                                    | Options cancelled/ Expired |           |           | (3,876,402 | )              |   |      | 0.25 | 
|                                    |                            |           |           |            |                |  
|Balance outstanding, March 31, 2005 |                            |           | 3,322,500 |            |                | $ | 0.12 |     
|                                    |                            |           |           |            |                |  



|               |             |  |           |                  |           |                  |           |  |             |  |  |              |           |  |  |  |                                | 
|-------------- | ----------- |  | --------- | ---------------- | --------- | ---------------- | --------- |  | ----------- |  |  | ------------ | --------- |  |  |  | ------------------------------ | 
|               |             |  |           | Weighted Average |           |                  | Number of |  |             | 
|Exercise Price |             |  | Number of |                  |           | Remaining        |           |  | Exercisable |  |  |             
|Range          |             |  | Options   |                  |           | Contractual Life |           |  | Options     |  |  | Expiry Dates |          
|               |             |  |           |                  |           |                  |           |  |             |  |  |              |          
|$              | 0.16 - 0.23 |  |           |                  | 572,500   |                  |           |  | 1.57        |  |  |              | 514,167   |  |  |  | July 18, 2005 to July 31, 2007 | 
|$              | 0.10        |  |           |                  | 2,400,000 |                  |           |  | 4.8         |  |  |              | 2,200,000 |  |  |  | January 31, 2010               | 
|$              | 0.135       |  |           |                  | 350,000   |                  |           |  | 4.8         |  |  |              | 350,000   |  |  |  | January 31, 2010               | 
|               |             |  |           |                  |           |                  |           |  |             |  |  |              |          
|               |             |  |           |                  | 3,322,500 |                  |           |  |             |  |  |              | 3,064,167 |  |  |  |                                | 
|               |             |  |           |                  |           |                  |           |  |             |  |  |              |          



|    |                   
|--- | ------------------
|(d) | Earnings per share



F-19



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##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                          
|-- | -------------------------
|4. | COMMON SHARES (continued)



|    |                               
|--- | ------------------------------
|(d) | Earnings per share (continued)



|                                                   |                             |      |            |           |      |   |            |   | 
|-------------------------------------------------- | --------------------------- | ---- | ---------- | --------- | ---- | - | ---------- | - | 
|                                                   |                             | 2005 |            |           | 2004 |  
|                                                   |                             |      |            |           |      |  
|Numerator:                                         |                             |      |            |           |      |   |            |  
|Net Income                                         |                             | $    | 663,447    |           |      | $ | 494,436    |  
|                                                   |                             |      |            |           |      |  
|Denominator:                                       |                             |      |            |           |      |   |            |  
|Weighted average common shares outstanding         |                             |      | 44,134,126 |           |      |   | 43,889,334 |  
|Effect of dilutive securities                      |                             |      |            |           |      |   |            |  
|                                                   | Stock Options               |      |            | 1,485,000 |      |   |            |  | 
|                                                   | Convertible promissory note |      |            | 1,875,000 |      |   |            |  | 
|                                                   |                             |      |            |           |      |  
|Diluted weighted average common shares outstanding |                             |      | 47,494,126 |           |      |   | 43,889,334 |  
|                                                  
|Basic net income per share                         |                             | $    | 0.02       |           |      | $ | 0.01       |  
|                                                   |                             |      |            |           |      |  
|Diluted net income per share                       |                             | $    | 0.01       |           |      | $ | 0.01       |  
|                                                   |                             |      |            |           |      |  



|   |                             
|-- | ----------------------------
|5. | BUSINESS SEGMENT INFORMATION



|    |                      
|--- | ---------------------
|(a) | Segmented information



F-20



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##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                                         
|-- | ----------------------------------------
|5. | BUSINESS SEGMENT INFORMATION (continued)



|    |                                  
|--- | ---------------------------------
|(a) | Segmented information (continued)



|                                        |        |          |            |            |          |   |             |            |  |   |          |         |  |       |           |           |       |   |         |         |  |   |             |            | 
|--------------------------------------- | ------ | -------- | ---------- | ---------- | -------- | - | ----------- | ---------- |  | - | -------- | ------- |  | ----- | --------- | --------- | ----- | - | ------- | ------- |  | - | ----------- | ---------- | 
|                                        |        | Prepaid  |            |            |          |   | Prepaid     |            |  |   |          |         |  |      
|                                        |        | Long     |            |            | Prepaid  |   |             | Internet   |  |   | Fees and |         |  |       |           |          
|                                        |        | Distance |            |            | Cellular |   |             | Products   |  |   | Service  |         |  | Other |           |           | Total |  
|                                        |        |          |            |            |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|Year ended March 31, 2005               |        |          |            |            |          |   |             |            |  |   |          |         |  |       |           |           |       |   |         |         |  |   |             |           
|                                        | Canada |          | $          | 10,289,118 |          |   | $           |           |  |   | $        | 4,229   |  |       | $         | 2,106,435 |       |   | $       |        |  |   | $           | 12,399,782 | 
|                                        | U.S.   |          |            | 4,095,141  |          |   |             |           |  |   |          |        |  |       |           | 99,826    |       |   |         | 133,719 |  |   |             | 4,328,686  | 
|                                        | Mexico |          |            |           |          |   |             |           |  |   |          |        |  |       |           |          |       |   |         | 54,563  |  |   |             | 54,563     | 
|                                        |        |          |            |            |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|Sales                                   |        |          | 14,384,259 |            |          |   |            |            |  |   | 4,229    |         |  |       | 2,206,261 |           |       |   | 188,282 |         |  |   | 16,783,031  |           
|                                        |        |          |            |            |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|                                        | Canada |          |            |           |          |   |             | 92,862,525 |  |   |          | 322,333 |  |       |           |          |       |   |         |        |  |   |             | 93,184,858 | 
|                                        | U.S.   |          |            | 7,797,714  |          |   |             |           |  |   |          |        |  |       |           |          |       |   |         |        |  |   |             | 7,797,714  | 
|                                        | Mexico |          |            |           |          |   |             |           |  |   |          |        |  |       |           |          |       |   |         |        |  |   |             |           | 
|                                        |        |          |            |            |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|Gross proceeds received on agency sales |        |          | 7,797,714  |            |          |   | 92,862,525  |            |  |   | 322,333  |         |  |       |          |           |       |   |        |         |  |   | 100,982,572 |           
|Less payments to suppliers              |        |          | (2,187,597 | )          |          |   | (90,943,578 | )          |  |   | (307,415 | )       |  |       |          |           |       |   |        |         |  |   | (93,438,590 | )         
|                                        |        |          |            |            |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|Net agency sales                        |        |          | 5,610,117  |            |          |   | 1,918,947   |            |  |   | 14,918   |         |  |       |          |           |       |   |        |         |  |   | 7,543,982   |           
|                                        |        |          |            |            |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|                                        | Canada |          |            | 10,289,118 |          |   |             | 1,918,947  |  |   |          | 19,147  |  |       |           | 2,106,435 |       |   |         |        |  |   |             | 14,333,647 | 
|                                        | U.S.   |          |            | 9,705,258  |          |   |             |           |  |   |          |        |  |       |           | 99,826    |       |   |         | 133,719 |  |   |             | 9,938,803  | 
|                                        | Mexico |          |            |           |          |   |             |           |  |   |          |        |  |       |           |          |       |   |         | 54,563  |  |   |             | 54,563     | 
|                                        |        |          |            |            |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|Total revenue                           |        |          | 19,994,376 |            |          |   | 1,918,947   |            |  |   | 19,147   |         |  |       | 2,206,261 |           |       |   | 188,282 |         |  |   | 24,327,013  |           
|Cost of revenues                        |        |          | 15,188,903 |            |          |   |            |            |  |   | 3,486    |         |  |       | 350,677   |           |       |   |        |         |  |   | 15,543,066  |           
|                                        |        |          |            |            |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|Margin                                  |        | $        | 4,805,473  |            |          | $ | 1,918,947   |            |  | $ | 15,661   |         |  | $     | 1,855,584 |           |       | $ | 188,282 |         |  | $ | 8,783,947   |           
|                                        |        |          |            |            |          |   |             |            |  |   |          |         |  |       |           |           |       |  

F-21



---



##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                                         
|-- | ----------------------------------------
|5. | BUSINESS SEGMENT INFORMATION (continued)



|    |                                  
|--- | ---------------------------------
|(a) | Segmented information (continued)

|                                        |        |          |            |           |          |   |             |            |  |   |          |         |  |       |           |           |       |   |         |         |  |   |             |            | 
|--------------------------------------- | ------ | -------- | ---------- | --------- | -------- | - | ----------- | ---------- |  | - | -------- | ------- |  | ----- | --------- | --------- | ----- | - | ------- | ------- |  | - | ----------- | ---------- | 
|                                        |        | Prepaid  |            |           |          |   | Prepaid     |            |  |   |          |         |  |      
|                                        |        | Long     |            |           | Prepaid  |   |             | Internet   |  |   | Fees and |         |  |       |           |          
|                                        |        | Distance |            |           | Cellular |   |             | Products   |  |   | Service  |         |  | Other |           |           | Total |  
|                                        |        |          |            |           |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|Year ended March 31, 2004               |        |          |            |           |          |   |             |            |  |   |          |         |  |       |           |           |       |   |         |         |  |   |             |           
|                                        | Canada |          | $          | 7,668,077 |          |   | $           |           |  |   | $        |        |  |       | $         | 1,434,809 |       |   | $       |        |  |   | $           | 9,102,886  | 
|                                        | U.S.   |          |            | 1,618,561 |          |   |             |           |  |   |          |        |  |       |           |          |       |   |         | 325,537 |  |   |             | 1,944,098  | 
|                                        | Mexico |          |            |          |          |   |             |           |  |   |          |        |  |       |           |          |       |   |         | 97,968  |  |   |             | 97,968     | 
|                                        |        |          |            |           |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|Sales                                   |        |          | 9,286,638  |           |          |   |            |            |  |   |         |         |  |       | 1,434,809 |           |       |   | 423,505 |         |  |   | 11,144,952  |           
|                                        |        |          |            |           |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|                                        | Canada |          |            |          |          |   |             | 57,633,025 |  |   |          | 192,032 |  |       |           |          |       |   |         |        |  |   |             | 57,825,057 | 
|                                        | U.S.   |          |            | 6,076,834 |          |   |             |           |  |   |          |        |  |       |           |          |       |   |         |        |  |   |             | 6,076,834  | 
|                                        | Mexico |          |            |          |          |   |             |           |  |   |          |        |  |       |           |          |       |   |         |        |  |   |             |           | 
|                                        |        |          |            |           |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|Gross proceeds received on agency sales |        |          | 6,076,834  |           |          |   | 57,633,025  |            |  |   | 192,032  |         |  |       |          |           |       |   |        |         |  |   | 63,901,891  |           
|Less payments to suppliers              |        |          | (848,063   | )         |          |   | (55,977,676 | )          |  |   | (177,425 | )       |  |       |          |           |       |   |        |         |  |   | (57,003,164 | )         
|                                        |        |          |            |           |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|Net agency sales                        |        |          | 5,228,771  |           |          |   | 1,655,349   |            |  |   | 14,607   |         |  |       |          |           |       |   |        |         |  |   | 6,898,727   |           
|                                        |        |          |            |           |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|                                        | Canada |          |            | 7,668,077 |          |   |             | 1,655,349  |  |   |          | 14,607  |  |       |           | 1,434,809 |       |   |         |        |  |   |             | 10,772,842 | 
|                                        | U.S.   |          |            | 6,847,332 |          |   |             |           |  |   |          |        |  |       |           |          |       |   |         | 325,537 |  |   |             | 7,172,869  | 
|                                        | Mexico |          |            |          |          |   |             |           |  |   |          |        |  |       |           |          |       |   |         | 97,968  |  |   |             | 97,968     | 
|                                        |        |          |            |           |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|Total revenue                           |        |          | 14,515,409 |           |          |   | 1,655,349   |            |  |   | 14,607   |         |  |       | 1,434,809 |           |       |   | 423,505 |         |  |   | 18,043,679  |           
|Cost of revenues                        |        |          | 10,525,635 |           |          |   |            |            |  |   |         |         |  |       | 250,353   |           |       |   | 79,677  |         |  |   | 10,855,665  |           
|                                        |        |          |            |           |          |   |             |            |  |   |          |         |  |       |           |           |       |  
|Margin                                  |        | $        | 3,989,774  |           |          | $ | 1,655,349   |            |  | $ | 14,607   |         |  | $     | 1,184,456 |           |       | $ | 343,828 |         |  | $ | 7,188,014   |           
|                                        |        |          |            |           |          |   |             |            |  |   |          |         |  |       |           |           |       |  



|    |                       
|--- | ----------------------
|(b) | Geographic information



|              |  |                                       |            |  |                   |   |            |      |  |   |           |  |  |   |           | 
|------------- |  | ------------------------------------- | ---------- |  | ----------------- | - | ---------- | ---- |  | - | --------- |  |  | - | --------- | 
|              |  | For the year ended and as at March 31 |           
|              |  |                                       |           
|              |  | Revenue                               |            |  | Long-Lived Assets |  
|              |  |                                       |            |  |                   |  
|              |  | 2005                                  |            |  | 2004              |   |            | 2005 |  |   | 2004      | 
|              |  |                                       |            |  |                   |   |            |      |  |   |           | 
|Canada        |  | $                                     | 14,333,647 |  |                   | $ | 10,772,842 |      |  | $ | 4,570,509 |  |  | $ | 4,592,806 | 
|United States |  |                                       | 9,938,803  |  |                   |   | 7,172,869  |      |  |   | 1,085,852 |  |  |   | 124,539   | 
|Mexico        |  |                                       | 54,563     |  |                   |   | 97,968     |      |  |   |          |  |  |   |          | 
|              |  |                                       |            |  |                   |   |            |      |  |   |           | 
|              |  | $                                     | 24,327,013 |  |                   | $ | 18,043,679 |      |  | $ | 5,656,361 |  |  | $ | 4,717,345 | 
|              |  |                                       |            |  |                   |   |            |      |  |   |           | 



F-22



---



##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                                         
|-- | ----------------------------------------
|5. | BUSINESS SEGMENT INFORMATION (continued)



|    |                                                  
|--- | -------------------------------------------------
|(c) | Concentration of revenues and economic dependence







|    |                                                   
|--- | --------------------------------------------------
|(d) | Concentration of suppliers and economic dependence







|   |             
|-- | ------------
|6. | INCOME TAXES



|         |  |           |          |   |           |   |           |  
|-------- |  | --------- | -------- | - | --------- | - | --------- | -
|         |  | March 31, |          |   | March 31, |  
|         |  | 2005      |          |   | 2004      |  
|         |  |           |          |   |           |  
|U.S.     |  | $         | 755,240  |   |           | $ | (372,052  | )
|Canadian |  |           | (195,671 | ) |           |   | 1,009,979 |  
|         |  |           |          |   |           |  
|         |  | $         | 559,569  |   |           | $ | 637,927   |  
|         |  |           |          |   |           |  



|                                                     |                                                           |           |         |          |           |   |         |          |  
|---------------------------------------------------- | --------------------------------------------------------- | --------- | ------- | -------- | --------- | - | ------- | -------- | -
|                                                     |                                                           | March 31, |         |          | March 31, |  
|                                                     |                                                           | 2005      |         |          | 2004      |  
|                                                     |                                                           |           |         |          |           |  
|Income taxes based on above                          |                                                           | $         | 223,492 |          |           | $ | 229,016 |         
|Increase (reduction) in income taxes resulting from: |                                                           |           |         |          |           |   |         |         
|                                                     | Effect of foreign tax rates different from statutory rate |           |         | 10,364   |           |   |         |         |  
|                                                     | Tax benefit not recognized on current year losses         |           |         | 333,773  |           |   |         | 40,560   |  
|                                                     | Other permanent differences                               |           |         | 11,292   |           |   |         | 4,917    |  
|                                                     | Benefit on application of loss carry forwards             |           |         | (611,228 | )         |   |         | (277,180 | )
|                                                     | Assets depreciation                                       |           |         | (15,109  | )         |   |         | 72,845   |  
|                                                     | Deferred revenue                                          |           |         | 47,416   |           |   |         | 8,842    |  
|                                                     |                                                           |           |         |          |           |  
|Income tax expense                                   |                                                           | $         |        |          |           | $ | 79,000  |         
|                                                     |                                                           |           |         |          |           |  

F-23



---



##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |                         
|-- | ------------------------
|6. | INCOME TAXES (continued)



|                          |                                  |           |          |         |           |   |          |         | 
|------------------------- | -------------------------------- | --------- | -------- | ------- | --------- | - | -------- | ------- | 
|                          |                                  | March 31, |          |         | March 31, |  
|                          |                                  | 2005      |          |         | 2004      |  
|                          |                                  |           |          |         |           |  
|U.S.                      |                                  |           |          |         |           |   |          |        
|Deferred tax assets:      |                                  |           |          |         |           |   |          |        
|                          | Operating losses carried forward |           | $        | 280,387 |           |   | $        | 674,290 | 
|                          | Machinery and equipment          |           |          | 74,057  |           |   |          | 36,141  | 
|                          | Intangible assets                |           |          |        |           |   |          |        | 
|                          |                                  |           |          |         |           |  
|                          |                                  |           | 354,444  |         |           |   | 710,431  |        
|Valuation allowance       |                                  |           | (354,444 | )       |           |   | (710,431 | )      
|                          |                                  |           |          |         |           |  
|Net deferred tax assets   |                                  | $         |         |         |           | $ |         |        
|                          |                                  |           |          |         |           |  
|                         
|Deferred tax liabilities: |                                  | $         |         |         |           | $ |         |        
|                          |                                  |           |          |         |           |  

|                                 |  |           |          |   |           |   |            |  
|-------------------------------- |  | --------- | -------- | - | --------- | - | ---------- | -
|                                 |  | March 31, |          |   | March 31, |  
|                                 |  | 2005      |          |   | 2004      |  
|                                 |  |           |          |   |           |  
|Canada                           |  |           |          |   |           |   |            |  
|Deferred tax assets:             |  |           |          |   |           |   |            |  
|Operating losses carried forward |  | $         |         |   |           | $ | 852,714    |  
|Deferred revenue                 |  |           | 56,258   |   |           |   |           |  
|Machinery and equipment          |  |           | 188,416  |   |           |   | 159,366    |  
|Intangible assets                |  |           | 34,413   |   |           |   | 41,746     |  
|                                 |  |           |          |   |           |  
|                                 |  |           | 279,087  |   |           |   | 1,053,826  |  
|Valuation allowance              |  |           | (279,087 | ) |           |   | (1,053,826 | )
|                                 |  |           |          |   |           |  
|Net deferred tax assets          |  | $         |         |   |           | $ |           |  
|                                 |  |           |          |   |           |  
|                                
|Deferred tax liabilities:        |  | $         | 309,509  |   |           | $ | 267,766    |  
|                                 |  |           |          |   |           |  





F-24



---



##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)





6.                        INCOME
TAXES (continued)


Company does not believe it meets the criteria to recognize
the deferred tax asset, and has accordingly provided a full
valuation allowance.






|     |  |   |         | 
|---- |  | - | ------- | 
|2014 |  | $ | 326,000 | 
|2017 |  |   | 158,000 | 
|2019 |  |   | 177,000 | 
|2020 |  |   | 48,000  | 
|     |  |   |        
|     |  | $ | 709,000 | 
|     |  |   |        



|   |                    
|-- | -------------------
|7. | DEFERRED INDUCEMENT





|   |                         
|-- | ------------------------
|8. | CAPITAL LEASE OBLIGATION



|                                           |  |   |         | 
|------------------------------------------ |  | - | ------- | 
|2006                                       |  | $ | 87,213  | 
|2007                                       |  |   | 63,328  | 
|                                           |  |   |        
|Total minimum lease payments               |  |   | 150,541 | 
|Less: amount representing interest at 8.5% |  |   | 10,529  | 
|                                           |  |   |        
|                                           |  |   | 140,012 | 
|Less: current portion                      |  |   | 78,344  | 
|                                           |  |   |        
|Balance of obligation                      |  | $ | 61,668  | 
|                                           |  |   |        

F-25



---



##### Table of Contents



DATAWAVE SYSTEMS INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Years ended March 31, 2005 and 2004


(Expressed in United States Dollars)







|   |            
|-- | -----------
|9. | COMMITMENTS



|           |  |   |           | 
|---------- |  | - | --------- | 
|2005       |  | $ | 431,898   | 
|2006       |  |   | 376,375   | 
|2007       |  |   | 304,849   | 
|2008       |  |   | 318,026   | 
|2009       |  |   | 365,308   | 
|Thereafter |  |   | 895,069   | 
|           |  |   |          
|           |  | $ | 2,691,525 | 
|           |  |   |          





|    |                  
|--- | -----------------
|10. | EQUITY INVESTMENT







|    |                           
|--- | --------------------------
|11. | RELATED PARTY TRANSACTIONS







F-26