<PAGE>

                    U. S. SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                   FORM 10-QSB

            Quarterly Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934


                 For Quarter Ended:           DECEMBER 31, 2004


                 Commission File Number:              001-04026


                           LIFESTYLE INNOVATIONS, INC.
                           ---------------------------
        (Exact name of small business issuer as specified in its charter)


             NEVADA                                          82-6008727
             ------                                          ----------
    (State of Incorporation)                            (IRS Employer ID No)


                    4700 LAKESHORE CT, COLLEYVILLE, TX 76034
                    ----------------------------------------
                     (Address of principal executive office)

                                  817-307-6591
                                  ------------
                           (Issuer's telephone number)


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


The number of shares outstanding of registrant's common stock, par value $.001
per share, as of January 31, 2004 was 27,892,093 shares.

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


<PAGE>


<TABLE>
<S>     <C>
                                LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES


                                                   INDEX

                                                                                                      Page
                                                                                                       No.
                                                                                                      -----
Part I.       Financial Information (unaudited)

      Item 1. Condensed Consolidated Balance Sheet - December 31, 2004                                  3

              Condensed Consolidated Statements of Operations -                                         4
              Three Months Ended December 31, 2004 and 2003

              Condensed Consolidated Statements of Operations -                                         5
              Six Months Ended December 31, 2004 and 2003

              Condensed Consolidated Statement of Stockholders' Deficit -                               6
              Six Months Ended December 31, 2004 and 2003

              Condensed Consolidated Statements of Cash Flows -                                         7
              Six Months Ended December 31, 2004 and 2003

              Notes to Condensed Consolidated Financial Statements                                    8-22

      Item 2. Management's Discussion and Analysis or Plan of Operation                               23-26

      Item 3. Controls and Procedures                                                                  27

Part II.      Other Information                                                                       28-30


                                                     2
</TABLE>
<PAGE>

<TABLE>
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
(UNAUDITED)

                                               ASSETS
<S>                                                                                     <C>
CURRENT ASSETS
 Cash and cash equivalents                                                              $      9,802
 Accounts receivable, net                                                                     83,969
 Marketable equity securities                                                                  9,000
 Inventory                                                                                    59,526
 Loans and advances                                                                           62,000
                                                                                        -------------
    Total current assets                                                                     224,297
Property and equipment, net                                                                   11,655
Goodwill, net                                                                                253,049
Other assets                                                                                  44,773
                                                                                        -------------
     Total assets                                                                       $    533,774
                                                                                        =============

                                LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
 Notes payable and current installments of long-term debt                               $    923,024
 Notes payable - related parties                                                           1,124,267
 Accounts payable                                                                            240,798
 Accrued expenses                                                                            788,360
 Due to affiliates                                                                         1,138,999
 Current liabilities of discontinued operations                                            1,147,158
                                                                                        -------------
     Total current liabilities                                                             5,362,606
Long-term debt less current installments                                                     159,143
                                                                                        -------------
     Total liabilities                                                                     5,521,749
                                                                                        -------------

Commitments and contingencies

STOCKHOLDERS' DEFICIT
 Series A convertible preferred stock: $.10 par value; 1,000,000 shares authorized;
  577,389 shares issued and outstanding; liquidation preference $1,587,820;
  convertible into 1,270,256 shares of common stock                                           57,739
 Common stock: $.001 par value; authorized 250,000,000 shares; issued and
  outstanding - 26,885,134 shares                                                             26,885
 Additional paid in capital                                                               13,796,915
 Common stock warrants                                                                       206,295
 Stock subscription receivable                                                                (4,000)
 Accumulated deficit                                                                     (19,071,809)
                                                                                        -------------
     Total stockholders' deficit                                                          (4,987,975)
                                                                                        -------------
     Total liabilities and stockholders' deficit                                        $    533,774
                                                                                        =============

See accompanying notes to condensed consolidated financial statements.


                                                  3
</TABLE>
<PAGE>

<TABLE>
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)

                                                             2004             2003
                                                        -------------     -------------
<S>                                                     <C>               <C>
SALES AND REVENUES
  Products                                              $    261,272      $         --

                                                        -------------     -------------
                                                             261,272                --
COST OF SALES                                                134,410                --
                                                        -------------     -------------
  GROSS PROFIT                                               126,862                --

OPERATING EXPENSES:
  Selling, general and administrative expense                 98,663           144,880
  Stock option and warrant compensation                           --          (243,748)
  Management fee - parent                                         --            10,000
                                                        -------------     -------------
    Total operating expenses                                  98,663           (88,868)
                                                        -------------     -------------
EARNINGS (LOSS) FROM OPERATIONS                               28,199            88,868
OTHER INCOME (EXPENSE):
  Other income                                                    89                --
  Unrealized gain from marketable equity securities            9,000                --
  Interest expense                                           (45,992)          (26,578)
  Interest expense - related parties                         (32,541)          (21,961)
                                                        -------------     -------------
                                                             (69,444)          (48,539)
                                                        -------------     -------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS                   (41,245)           40,329
Discontinued operations:
 Loss from discontinued operations                            (6,270)       (5,722,000)
 Income tax benefit                                               --                --
                                                        -------------     -------------
                                                              (6,270)       (5,722,000)
                                                        -------------     -------------
NET LOSS                                                $    (47,515)     $ (5,681,671)
                                                        =============     =============

NET EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED:
  CONTINUING OPERATIONS                                 $      (0.00)     $       0.00
  DISCONTINUED OPERATIONS                                      (0.00)            (0.27)
                                                        -------------     -------------
    NET LOSS PER SHARE, BASIC AND DILUTED               $      (0.00)     $      (0.27)
                                                        =============     =============

WEIGHTED AVERAGE SHARES OUTSTANDING                       24,974,541        20,819,053
                                                        =============     =============

See accompanying notes to condensed consolidated financial statements.


                                           4
</TABLE>
<PAGE>

<TABLE>
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)

                                                            2004              2003
                                                        -------------     -------------
<S>                                                     <C>               <C>
SALES AND REVENUES
  Products                                              $    447,165      $         --

                                                        -------------     -------------
                                                             447,165                --
COST OF SALES                                                229,779                --
                                                        -------------     -------------
  GROSS PROFIT                                               217,386                --

OPERATING EXPENSES:
  Selling, general and administrative expense                240,311           198,419
  Stock option and warrant compensation                           --          (135,414)
  Management fee - parent                                         --            25,000
                                                        -------------     -------------
    Total operating expenses                                 240,311            88,005
                                                        -------------     -------------
EARNINGS (LOSS) FROM OPERATIONS                              (22,925)          (88,005)
OTHER INCOME (EXPENSE):
  Other income                                                    89                --
  Unrealized gain from marketable equity securities            9,000                --
  Interest expense                                           (82,943)          (69,330)
  Interest expense - related parties                         (57,582)          (39,139)
                                                        -------------     -------------
                                                            (131,436)         (108,469)
                                                        -------------     -------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS                  (154,361)         (196,474)
Discontinued operations:
 Loss from discontinued operations                            (4,582)       (6,498,376)
 Income tax benefit                                               --                --
                                                        -------------     -------------
                                                              (4,582)       (6,498,376)
                                                        -------------     -------------
NET LOSS                                                $   (158,943)     $ (6,694,850)
                                                        =============     =============

NET EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED:
  CONTINUING OPERATIONS                                 $      (0.01)     $      (0.01)
  DISCONTINUED OPERATIONS                                      (0.00)            (0.31)
                                                        -------------     -------------
    NET LOSS PER SHARE, BASIC AND DILUTED               $      (0.01)     $      (0.32)
                                                        =============     =============

WEIGHTED AVERAGE SHARES OUTSTANDING                       24,963,577        20,763,129
                                                        =============     =============

See accompanying notes to condensed consolidated financial statements.


                                           5
</TABLE>
<PAGE>


<TABLE>
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
SIX MONTHS ENDED DECEMBER 31, 2004
(UNAUDITED)

                                                                                                        Additional
                                       Preferred Stock                      Common Stock                  Paid-in
                                   Shares          Par Value           Shares          Par Value          Capital
                               -------------     -------------     -------------     -------------     -------------
<S>                                 <C>          <C>                 <C>             <C>               <C>
Balance, June 30, 2004              781,752      $     78,175        26,053,625      $     26,054      $ 13,827,582
 Preferred stock converted
  to common stock                  (204,363)          (20,436)          449,598               449            19,987
Debentures converted to
  common stock                           --                --           381,911               382           (50,654)
 Net loss                                --                --                --                --                --

                               -------------     -------------     -------------     -------------     -------------
Balance, December 31, 2004          577,389      $     57,739        26,885,134      $     26,885      $ 13,796,915
                               =============     =============     =============     =============     =============



                                  Common            Stock
                                   Stock         Subscription       Accumulated       Treasury
                                  Warrants        Receivable         (Deficit)          Stock              Total
                               -------------     -------------     -------------     -------------     -------------
Balance, June 30, 2004         $    206,295      $     (4,000)     $(18,912,866)     $    (76,984)     $ (4,855,744)
 Preferred stock converted
  to common stock                        --                --                --                --                --
Debentures converted to
  common stock                           --                --                --            76,984            26,712
 Net loss                                --                --          (158,943)               --          (158,943)

                               -------------     -------------     -------------     -------------     -------------
Balance, December 31, 2004     $    206,295      $     (4,000)     $(19,071,809)     $         --      $ (4,987,975)
                               =============     =============     =============     =============     =============

See accompanying notes to condensed consoliated financial statements.


                                                         6
</TABLE>
<PAGE>


<TABLE>
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
                                                                         2004             2003
                                                                     ------------     ------------
<S>                                                                  <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                             $  (158,943)     $(6,694,850)
 Loss from discontinued operations                                        (4,582)      (6,498,376)
                                                                     ------------     ------------
   Loss from continuing operations                                      (154,361)        (196,474)
Adjustments to reconcile net loss to net
 cash used by operating activities:
  Depreciation                                                             1,542               --
  Amortization                                                            22,608               --
  Unrealized gain from marketable equity securities                       (9,000)
  Common stock issued for services                                            --          113,750
  Common stock option expense                                                 --         (135,414)
  Changes in operating assets and liabilities, net of effects of
    acquisitions and divestitures:
     Accounts and notes receivable                                       (31,207)              --
     Inventories                                                         (32,573)              --
     Prepaid expenses and other assets                                        --           13,315
     Accounts payable and accrued expenses                                95,853           42,757
                                                                     ------------     ------------
        Net cash used by continuing operations                          (107,138)        (162,066)
        Net cash provided (used) by discontinued operations               36,329         (282,743)
                                                                     ------------     ------------
          Net cash used by operations                                    (70,809)        (444,809)
                                                                     ------------     ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets of subsidiary                                    --           60,000
                                                                     ------------     ------------
Net cash provided by continuing operations                                    --           60,000
        Net cash used by discontinued operations                              --          (10,967)
                                                                     ------------     ------------
          Net cash provided by investing activities                           --           49,033
                                                                     ------------     ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds                                                                 --          365,000
Repayment of notes payable                                                (2,311)        (180,000)
Loans and advances from related parties                                   55,475          281,332
Loans made                                                                (6,500)         (15,000)
                                                                     ------------     ------------
Net cash provided by continuing operations                                46,664          451,332
        Net cash used by discontinued operations                              --          (51,006)
                                                                     ------------     ------------
          Net cash provided by financing activities                       46,664          400,326
                                                                     ------------     ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     (24,145)           4,550
CASH AND CASH EQUIVALENTS, beginning of period                            33,947           27,757
                                                                     ------------     ------------
CASH AND CASH EQUIVALENTS, end of period                             $     9,802      $    32,307
                                                                     ============     ============

See accompanying notes to condensed consolidated financial statements.


                                                7
</TABLE>
<PAGE>

LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


A.       BASIS OF PRESENTATION AND ORGANIZATION

         (1)      PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION - The
                  consolidated financial statements include the accounts of
                  Lifestyle Innovations, Inc. ("LFSI") and its wholly owned
                  subsidiaries: LST of Baltimore, Inc. ("LBI"); Lifestyle
                  Technologies Franchising Corp. ("Franchising"); Brittany
                  Enterprises, Inc. ("Brittany"); SYSLYNC - COLORADO, Inc.
                  ("Colorado") and FutureSmart Systems, Inc. ("FutureSmart")
                  (collectively the "Company"). Franchising, Brittany, Colorado
                  and FutureSmart are included in discontinued operations. All
                  material intercompany accounts and transactions have been
                  eliminated.

                  LST Integrators, Inc. ("Integrators") and its wholly owned
                  subsidiaries: LST, Inc., d/b/a Lifestyle Technologies ("LST");
                  Lifestyle Technologies Atlanta, Inc. ("LSTA"); Lifestyle
                  Technologies Charlotte, Inc. ("LS-Charlotte); and Lifestyle
                  Security, Inc. ("LS-Security") were all sold to Sports
                  Management & Recreation, Inc. ("Sports"), a Nevada
                  corporation, on May 24, 2004, in exchange for 25,000 shares of
                  Sports' common stock. Integrators and its subsidiaries are
                  included in discontinued operations during the period owned by
                  LFSI.

                  SYSLYNC-GEORGIA, Inc. ("Georgia") was incorporated by the
                  Company on December 1, 2003, and commenced operations on
                  February 6, 2004. Georgia was formed to provide builders,
                  homeowners and commercial customers with complete installation
                  and equipment for audio, video, home theater, security,
                  computer networking, central vacuum and accent lighting in the
                  Georgia market. Georgia was also sold to Sports on May 24,
                  2004, in exchange for 50,000 shares of Sports' common stock
                  and is included in discontinued operations.

         (2)      ORGANIZATION - On May 5, 2004, the Company, LFSI Acquisition,
                  Inc. (a wholly-owned subsidiary), and LST of Baltimore, Inc.
                  entered into an Agreement and Plan of Merger (the "Merger
                  Agreement"). The merger contemplated by the Merger Agreement
                  (the "Merger") was also completed on May 5, 2004. As a result
                  of the Merger, LBI became a wholly-owned subsidiary of the
                  Company and all outstanding shares of LBI's capital stock were
                  exchanged for 1,900,000 shares of the Company's common stock.
                  The Company also assumed an obligation to issue an additional
                  800,000 shares of its common stock as a fee for facilitating
                  the acquisition. LBI was a private company which provided
                  builders, homeowners and commercial customers with complete
                  installation and equipment for structured wiring, security,
                  personal computer networking, audio, video, home theater,
                  central vacuum and accent lighting. LBI was a franchisee of
                  Franchising until Franchising discontinued operations
                  effective April 1, 2004.


                                       8
<PAGE>

                  LFSI completed its acquisition of FutureSmart effective March
                  7, 2003. On May 28, 2003, the Board of Directors approved a
                  plan to dispose of FutureSmart. Accordingly, its operations
                  since March 7, 2003, have been included in discontinued
                  operations.

                  On September 5, 2002, LFSI acquired LST, a Delaware
                  corporation, and its wholly owned subsidiaries, Franchising,
                  LS-Security and LSTA, all organized in July 2001. LFSI issued
                  16,000,000 shares of its common stock to RCG Companies
                  Incorporated, formerly eResource Capital Group, Inc. ("RCG"),
                  to acquire 100% interest in LST. On February 20, 2003, LFSI
                  reorganized its corporate structure. Integrators became a
                  wholly owned subsidiary of LFSI and the company-store
                  operations located in Charlotte, NC and Atlanta, GA were
                  transferred to Integrators. Simultaneously, Franchising became
                  a subsidiary of LFSI, while LST and LS-Security became
                  inactive. LFSI had only nominal operations prior to the
                  merger, leasing two condominium units. Accordingly, for
                  accounting purposes the transaction was treated as the
                  issuance of stock by LST for the net monetary assets of LFSI,
                  accompanied by a recapitalization of LST. The accounting
                  treatment is identical to accounting for a reverse
                  acquisition, except that no goodwill or other intangible asset
                  is recorded. The historical financial statements prior to
                  September 5, 2002, are those of LST. At December 31, 2004, RCG
                  owns 43% of the outstanding common stock of LFSI.

         (3)      NATURE OF BUSINESS AND CURRENT OPERATIONS - LBI is a full
                  service home technology integration company providing
                  builders, homeowners, and commercial customers with complete
                  installation and equipment for structured wiring, security,
                  personal computer networking, audio, video, home theater,
                  central vacuum and accent lighting.

                  Brittany owned two condominium units in Dallas, Texas until
                  October 2004, when they were sold. Brittany has been included
                  in discontinued operations for all periods presented.

         (4)      GENERAL - The financial statements included in this report
                  have been prepared by the Company pursuant to the rules and
                  regulations of the Securities and Exchange Commission for
                  interim reporting and include all adjustments (consisting only
                  of normal recurring adjustments) that are, in the opinion of
                  management, necessary for a fair presentation. These financial
                  statements have not been audited.

                  Certain information and footnote disclosures normally included
                  in financial statements prepared in accordance with accounting
                  principles generally accepted in the United States of America
                  have been condensed or omitted pursuant to such rules and
                  regulations for interim reporting. The Company believes that
                  the disclosures contained herein are adequate to make the
                  information presented not misleading. However, these financial


                                       9
<PAGE>

                  statements should be read in conjunction with the financial
                  statements and notes thereto included in LFSI's Annual Report
                  for the period ended June 30, 2004, which is included in the
                  Company's Form 10-KSB filed on October 14, 2004.

         (5)      FISCAL YEARS - As used herein, fiscal 2005 refers to the
                  periods included in the fiscal year ended June 30, 2005, and
                  fiscal 2004 refers to the periods included in the fiscal year
                  ended June 30, 2004.

         (6)      GOING CONCERN - At December 31, 2004, the Company has a
                  significant working capital deficit of $5,138,309. The major
                  components of the working capital deficit include: $1,138,999
                  due to affiliates, $1,029,158 in accounts payable and accrued
                  expenses, current portion of long-term debt and notes payable
                  in the amount of $923,024, notes payable due related parties
                  of $1,124,267 and net current liabilities of discontinued
                  operations in the amount of $1,147,158. The Company does not
                  have sufficient cash flows to meet its obligations currently
                  due within the next 12 months. These conditions raise
                  substantial doubt about the Company's ability to continue as a
                  going concern. The Company is currently exploring additional
                  sources of liquidity, through debt and equity financing
                  alternatives and potential sales of its common stock in
                  private placement transactions. Additionally, the Company has
                  extended some of its notes payable and plans on negotiating
                  with its remaining debt holders to continue to extend or
                  convert some or all of the debt. If the Company is (i) unable
                  to grow its business or improve its operating cash flows as
                  expected, (ii) unsuccessful in extending a substantial portion
                  of the debt repayments currently past due, or (iii) unable to
                  raise additional funds through private placement sales of its
                  common stock, then the Company may be unable to continue as a
                  going concern. There can be no assurance that additional
                  financing will be available when needed or, if available, that
                  it will be on terms favorable to the Company and its
                  stockholders. If the Company is not successful in generating
                  sufficient cash flows from operations, or in raising
                  additional capital when required in sufficient amounts and on
                  terms acceptable to the Company, these failures would have a
                  material adverse effect on the Company's business, results of
                  operations and financial condition. If additional funds are
                  raised through the issuance of equity securities, the
                  percentage ownership of the Company's current shareholders
                  would be diluted. These consolidated financial statements do
                  not include any adjustments that may result from the outcome
                  of these uncertainties.

B.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         STOCK OPTIONS AND WARRANTS

         The Company accounts for stock-based awards to employees using the
         intrinsic value method described in Accounting Principles Board Opinion
         (APB) No. 25, "Accounting for Stock Issued to Employees" and its
         related interpretations. Accordingly, no compensation expense has been
         recognized in the accompanying condensed consolidated financial
         statements for stock-based awards to employees when the exercise price
         of the award is equal to or greater than the quoted market price of the
         stock on the date of the grant.


                                       10
<PAGE>

         On March 7, 2003, pursuant to her employment agreement, Jacqueline E.
         Soechtig, Chief Executive Officer until October 14, 2003, was granted
         (1) an incentive stock option to purchase 500,000 shares of common
         stock at an exercise price equal to the trading price of such stock on
         the last trading day prior to Board approval ($5.10), with 166,666
         option shares to vest and become exercisable on the effective date of
         the agreement and 166,667 option shares to vest and become exercisable
         on each of the first and second anniversaries of the effective date,
         subject to her continued employment and (2) a non-qualified stock
         option to purchase 500,000 shares at an exercise price equal to $2.50,
         with 166,666 option shares to vest and become exercisable on the
         effective date of this agreement and 166,667 option shares to vest and
         become exercisable on each of the first and second anniversaries of the
         effective date, subject to her continued employment. Both options will
         expire ten years from the effective date. The options which were not
         vested were forfeited as a result of Ms. Soechtig's resignation.
         Accordingly, the accrued option expense associated with her un-vested
         options in the amount of $243,748 was reversed in October 2003.

         On September 5, 2002, Paul Johnson, President of the Company and Chief
         Executive Officer of the Company until March 7, 2003, was granted an
         option to acquire 400,000 shares of common stock at an exercise price
         of $2.20, the trading price on that day. The option will expire three
         years from the effective date.

         On February 13, 2004, the Company granted an option to the general
         manager of Georgia for 113,795 shares of common stock with an exercise
         price of $1.45, which was the trading price of the common stock on that
         date. The option will expire three years from the effective date.

         SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No.
         148, "Accounting for Stock-Based Compensation - Transition and
         Disclosure - an amendment of FASB Statement No. 123" require
         disclosures as if the Company had applied the fair value method to
         employee awards rather than the intrinsic value method. The fair value
         of stock-based awards to employees is calculated through the use of
         option pricing models, which were developed for use in estimating the
         fair value of traded options, which have no vesting restrictions and
         are fully transferable. These models also require subjective
         assumptions, including future stock price volatility and expected time
         to exercise, which greatly affect the calculated values. The Company's
         fair value calculations for awards from stock option plans were made
         using the Black-Scholes option pricing model with the following
         weighted average assumptions: expected term, three and ten years from
         the date of grants in fiscal 2003; stock price volatility, 104% to
         122%; risk free interest rate, 4.5% to 4.67%; and no dividends during
         the expected term as the Company does not have a history of paying cash
         dividends. The Company's fair value calculations for awards from stock
         option plans were made using the Black-Scholes option pricing model
         with the following weighted average assumptions: expected term, one
         year from the date of grants in fiscal 2004; stock price volatility,
         126%; risk free interest rate, 4.67%; and no dividends during the
         expected term as the Company does not have a history of paying cash
         dividends.


                                       11
<PAGE>

         If the computed fair values of the stock-based awards had been
         amortized to expense over the vesting period of the awards, net income
         (loss) and net income (loss) per share, basic and diluted, would have
         been as follows:

<TABLE>
         Three Months Ended December 31, 2004 and 2003
         ---------------------------------------------

                                                                Fiscal 2005      Fiscal 2004
                                                                ------------     ------------
<S>                                                             <C>              <C>
         Net loss, as reported                                  $   (47,515)     $(5,681,671)

         Add:  Stock-based employee compensation included
            in reported net loss                                         --         (243,748)

         Deduct:  Total stock-based compensation expense
            determined under fair value method for all awards           (--)             (--)
                                                                ------------     ------------

         Net loss, proforma                                     $   (47,515)     $(5,925,419)
                                                                ============     ============

         Net loss per share, basic and diluted                  $      (.00)     $      (.28)
                                                                ============     ============


         Six Months Ended December 31, 2004 and 2003
         -------------------------------------------

                                                                Fiscal 2005      Fiscal 2004
                                                                ------------     ------------
         Net loss, as reported                                  $  (158,943)     $(6,694,850)

         Add:  Stock-based employee compensation included
            in reported net loss                                         --         (135,414)

         Deduct:  Total stock-based compensation expense
            determined under fair value method for all awards           (--)             (--)
                                                                ------------     ------------

         Net loss, proforma                                     $  (158,943)     $(6,830,264)
                                                                ============     ============

         Net loss per share, basic and diluted                  $      (.01)     $      (.33)
                                                                ============     ============

</TABLE>

         Options and warrants issued to non-employees are accounted for under
         FAS No. 123, "Accounting for Stock Based Compensation". For the options
         and warrants issued to non-employees, the fair value of each award is
         calculated using the Black-Scholes Model in accordance with FAS No.
         123.


                                       12
<PAGE>

         On May 7, 2002, the Board of Directors adopted and the shareholders
         approved by majority consent the Princeton Mining Company 2002 Stock
         Option Plan. The plan provides for the issuance of up to 2 million
         shares of the Company's $.001 par value common stock in connection with
         stock options and other awards under the plan. The plan authorizes the
         grant of incentive stock options and non-statutory stock options. At
         December 31, 2004, there were options granted under the plan for
         680,461 shares (net of forfeitures), all of which are vested and
         1,319,539 shares available for grant. There are non-qualified options
         to purchase 166,666 shares (all vested) outstanding at December 31,
         2004, which are not granted under the plan.

         NET LOSS PER COMMON SHARE

         The Company has adopted SFAS No. 128 which establishes standards for
         computing and presenting earnings per share (EPS) for entities with
         publicly held common stock. The standard requires presentation of two
         categories of EPS - basic EPS and diluted EPS. Basic EPS excludes
         dilution and is computed by dividing income available to common
         stockholders by the weighted-average number of common shares
         outstanding for the year. Diluted EPS reflects the potential dilution
         that could occur if securities or other contracts to issue common stock
         were exercised or converted into common stock or resulted in the
         issuance of common stock that then shared in the earnings of the
         Company. All potential dilutive securities are antidilutive as a result
         of the Company's net loss for the three and six month periods ended
         December 31, 2004 and 2003, respectively. Accordingly, basic and
         diluted EPS are the same for each period.

         USE OF ESTIMATES

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


C.       ACQUISITIONS AND DISCONTINUED OPERATIONS

         LST OF BALTIMORE, INC.
         ----------------------

         On May 5, 2004, the Company, LFSI Acquisition, Inc. (a wholly-owned
         subsidiary), and LST of Baltimore, Inc. entered into a Merger
         Agreement. The merger contemplated by the Merger Agreement was also
         completed on May 5, 2004. As a result of the Merger, LBI became a
         wholly-owned subsidiary of the Company and all outstanding shares of
         LBI's capital stock were exchanged for 1,900,000 shares of the
         Company's common stock. The Company also assumed an obligation to issue
         an additional 800,000 shares of its common stock as a fee for
         facilitating the acquisition. LBI was a private company which provided
         builders, homeowners and commercial customers with complete
         installation and equipment for structured wiring, security, personal
         computer networking, audio, video, home theater, central vacuum and
         accent lighting. LBI was a franchisee of Franchising until Franchising
         discontinued operations effective April 1, 2004.


                                       13
<PAGE>

         The purchase price consisted of 1,900,000 shares of the Company's
         common stock which was valued at $76,000, based upon the trading price
         of the stock on the date of the transaction.

         LST INTEGRATORS, INC. AND SYSLYNC-GEORGIA, INC.
         -----------------------------------------------

         Integrators and its wholly owned subsidiaries: LST, LSTA, LS-Charlotte
         and LS-Security were all sold to Sports on May 24, 2004, in exchange
         for 25,000 shares of Sports' common stock. Integrators and its
         subsidiaries are included in discontinued operations during the period
         owned by LFSI.

         Georgia was incorporated by the Company on December 1, 2003, and
         commenced operations on February 6, 2004. Georgia was also sold to
         Sports in exchange for 50,000 shares of Sports' common stock on May 24,
         2004, and is included in discontinued operations.

         Sports' common stock was not trading at the time of the exchange, and
         the companies that were sold had liabilities which exceeded their
         assets. Based on this information, the Company's management believes
         the value of the Sports common stock owned had no value on the date of
         the exchange. Accordingly, the Company has recorded a zero value for
         the stock received in the above transactions. At December 31, 2004,
         Sports had changed its name to Lauraan Corp. ("LRCJ") and with limited
         trading closed at $.12 per share at the end of the quarter. The Company
         recognized an unrealized gain of $9,000 during the quarter ended
         December 31, 2004.

         FUTURESMART SYSTEMS, INC.
         -------------------------

         On March 7, 2003, LFSI completed its acquisition of FutureSmart
         Systems, Inc., a manufacturer and distributor of structured wiring and
         home networking distribution panels. On May 28, 2003, the Board of
         Directors approved a plan to dispose of FutureSmart. Accordingly, its
         operations since March 7, 2003, have been included in discontinued
         operations.

         The purchase price of $876,910 consisted of the issuance of 1,000,000
         shares of LFSI's $.10 par value convertible preferred stock, a bridge
         loan by LFSI to FutureSmart of $224,830 and $552,080 in direct
         transaction costs.

         The acquisition of FutureSmart was accounted for as a purchase in
         accordance with SFAS 141, and the Company has accordingly allocated the
         purchase price of FutureSmart based upon the fair values of the net
         assets acquired and liabilities assumed.

         On October 17, 2003, the Company completed its sale of all of the
         assets of FutureSmart for an "Initial Purchase Price" of $1,500,000,
         which is subject to adjustment as provided in the Asset Purchase
         Agreement to the "Final Purchase Price." The Initial Purchase Price is
         allocated to the secured creditors of FutureSmart; $200,000 to the
         Company, and $1,300,000 to the other secured creditors. Thirty percent
         ($450,000) of the Initial Purchase Price was paid at closing pro rata
         to the secured creditors ($60,000 to the Company) and the remainder of
         $1,050,000 was placed in escrow. The escrowed amount is subject to
         various adjustments, including determination of the final net assets as


                                       14
<PAGE>

         of the closing date and settlement of certain other obligations. The
         remaining balance was scheduled to be disbursed by the escrow agent no
         later than one year and one day after the closing date. The buyer has
         made claims against this amount which have not been resolved.
         Accordingly, the amount the Company might receive and when it will be
         available is not currently known.

         DISCONTINUED OPERATIONS
         -----------------------

         Discontinued operations include the results of operations for Georgia,
         Franchising, Brittany, FutureSmart, Colorado and Integrators and its
         wholly owned subsidiaries during the periods owned by the Company and
         may be summarized for the three and six months ended December 31, 2004
         and 2003 as follows:

<TABLE>
         THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003

<S>                                                      <C>              <C>
         Revenues                                        $        --      $   367,392
                                                         ============     ============
         Net earnings (loss) from operations             $       654      $  (261,970)
         Asset impairment                                         --       (6,089,540)
         Gain (loss) on sale of assets                        (6,924)         629,510
                                                         ------------     ------------

           Net loss                                      $    (6,270)     $(5,722,000)
                                                         ============     ============

         Net loss per share, basic and diluted           $      (.00)     $      (.27)
                                                         ============     ============

         SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003

         Revenues                                        $        --      $ 1,662,267
                                                         ============     ============
         Net earnings (loss) from operations             $     2,342      $(1,038,346)
         Asset impairment                                         --       (6,089,540)
         Gain (loss) on sale of assets                        (6,924)         629,510
                                                         ------------     ------------

           Net loss                                      $    (4,582)     $(6,498,376)
                                                         ============     ============

         Net loss per share, basic and diluted           $      (.00)     $      (.31)
                                                         ============     ============

</TABLE>

         Net non-current assets of discontinued operations includes fixed assets
         which are fully depreciated.

         Net current liabilities of discontinued operations includes: accounts
         receivable (fully reserved); $130,681 in accounts payable; $232,023 due
         to RCG and subsidiaries; $295,000 in notes payable; and $489,454 in
         accrued expenses as of December 31, 2004.


                                       15
<PAGE>

<TABLE>
D.       NOTES PAYABLE AND LONG-TERM DEBT

         Long-term debt and notes payable at December 31, 2004, consists of the
         following:

<S>                                                                                                        <C>
         Unsecured note payable - due in monthly installments of $1,450, commencing
            November 1, 2004 with interest at 12% until the principal is paid in full;
            convertible into the Company's common stock at $2.50 per share; past due                      $  145,000
         Note payable - due June 30, 2005; with interest at 12%                                               34,919
         Convertible debentures - due May 4, 2009; with interest at 1% (1)                                   150,833
         Note payable - due upon demand; with interest at 4.5%;
            Uncollateralized (2)                                                                              45,274
         Note payable to bank - due July 31, 2004; with interest at 8.5%; collateralized by a blanket
            lien on all business assets of LBI; guaranteed by the president of LBI                            43,495
         Note payable - due in monthly installments of $361; with final payment due on
            October 17, 2007; collateralized by a vehicle; non-interest bearing                               12,646
         Note payable - due in August 2003 with interest at 12% and collateralized by certain home
            technology accounts receivable and inventory (3)                                                 650,000
                                                                                                          -----------
              Total notes payable and long-term debt                                                       1,082,167
              Less current portion of long-term debt                                                         923,024
                                                                                                          -----------
                Long-term debt less current portion                                                       $  159,143
                                                                                                          ===========

</TABLE>

         (1) Immediately prior to the Merger, LBI entered into a Convertible
         Debenture Purchase Agreement (the "Purchase Agreement"), dated as of
         May 5, 2004, with HEM Mutual Assurance LLC (HEM), pursuant to which it
         sold and issued convertible debentures to HEM in an aggregate principal
         amount of up to $1,000,000 in a private placement pursuant to Rule 504
         of Regulation D under the Securities Act of 1933, as amended. Two
         debentures in the aggregate principal amount of $999,200 were issued
         for gross proceeds of $249,200 in cash ( "First Debenture A") and an
         additional debenture in the aggregate principal amount of $750,000 (the
         "Contingent Debenture" or "First Debenture B") was issued in exchange
         for a promissory note from HEM in the principal amount of $750,000 (the
         "Note"). The Contingent Debenture does not become an obligation until
         the Note is funded. In addition, as a fee for facilitating the LBI
         acquisition, a debenture of $800 ("Second Debenture") was issued for
         gross proceeds of $800 in cash and the right to exchange the debenture
         for 800,000 shares of the Company's common stock. The Second Debenture
         was issued as a finder's fee for the LBI acquisition. Each of the
         debentures has a maturity date of May 4, 2009, subject to earlier
         conversion or redemption pursuant to its terms, and bears interest at
         the rate of 1% per year, payable in cash or shares of common stock at
         the option of the holder of the debentures. As a result of the Merger,
         the Company has assumed the rights and obligations of LBI in the
         private placement, including the gross proceeds raised through the sale
         of the debentures, the Note issued by HEM to LBI, and LBI's obligations
         under the debentures and the Purchase Agreement.

         As a result of the Merger at May 5, 2004, $249,200 and $800 in
         principal amount of the initial debentures are convertible into
         unrestricted shares of the Company's common stock at a conversion price
         that is the lower of $0.42 or the average of the three lowest closing
         per share bid prices for the common stock during the 40 trading days


                                       16
<PAGE>

         prior to conversion and $0.001 per share, respectively. The $750,000
         Contingent Debenture will become convertible and subject to repayment
         if and when the related Note from HEM is paid in full to the Company in
         cash. The Contingent Debenture would be convertible into unrestricted
         shares of the Company's common stock at a conversion price that is
         based upon the trading prices of the Company's common stock at the time
         the Note is funded.

         Since the $250,000 in convertible debentures bear interest at 1%, the
         Company discounted this amount by 6% to arrive at an effective cost of
         7%. The discount of $64,687 was recorded as additional paid-in capital.
         The additional 6% interest will accrue monthly and be added to the
         convertible debenture balance. The discount associated with any
         principal conversion is immediately recorded as interest expense.
         During the three and six months ended December 31, 2004, $2,566 and
         $5,773, respectively, in interest was accrued and added to the
         convertible debenture balance.

         The First Debenture A conversion price of $0.42 per share was higher
         than the per share price of the Company's common stock on the issuance
         date of May 5, 2004. The Second Debenture conversion price of $0.001
         per share was lower than the per share price of the Company's common
         stock on the issuance date of May 4, 2004. In accordance with the
         provisions of EITF 98-5, "Accounting for Convertible Securities with
         Beneficial Conversion Features or Contingently Adjustable Conversion
         Ratios to Certain Convertible Instruments," and EITF 00-27,
         "Application of Issue No. 98-5 to Certain Convertible Instruments," the
         Company should record a beneficial conversion feature related to the
         debentures. However, since the debenture was converted prior to June
         30, 2004, no beneficial conversion was recorded as it would have been
         fully amortized at June 30, 2004. In connection with the convertible
         debt financing, the Company capitalized $58,400 of debt issuance costs,
         which are included in other assets. These costs are being amortized
         over the life of the convertible debentures. As of December 31, 2004,
         $39,690 of the debt financing costs remain and $2,617 and $5,234 was
         amortized during the three and six months ended December 31, 2004,
         respectively. In addition, loan costs in the amount of $5,396 were
         expensed when the related principal obligation of $26,596 (face value)
         was converted during the quarter ended December 31, 2004.

         On May 24, 2004, $800 in debenture principal and the related interest
         was converted into 800,438 shares of the Company's common stock. On
         June 16, 2004, $26,972 in debenture principal and the related interest
         was converted into 1,000,030 shares of the Company's common stock. The
         1,800,468 shares were issued from the 4,000,000 shares of treasury
         stock contributed by RCG. During the quarter ended December 31, 2004,
         debenture principal in the face amount of $26,596 was converted into
         2,581,443 shares of the Company's common stock. The shares included the
         Company's remaining treasury stock of 2,199,532 shares and 381,911
         newly issued shares.

         The conversion price and number of shares of common stock issuable upon
         conversion of the debentures is subject to adjustment for stock splits
         and combinations and other dilutive events. To satisfy its conversion
         obligations under the debentures, the Company placed 50,000,000 shares
         of its common stock into escrow for potential issuance to HEM upon
         conversion of the debentures. As of December 31, 2004, 45,618,089
         shares of common stock remain in escrow. Unless and until the
         debentures are converted, HEM has no voting or other ownership rights
         in any of the shares of the Company's common stock held in escrow and
         the shares in escrow are not treated by the Company as being issued and
         outstanding.


                                       17
<PAGE>

         The debentures may never be converted into an aggregate of more than
         50,000,000 shares of the Company's common stock unless the Company
         elects to increase the number of shares held in escrow in accordance
         with and subject to any applicable rules or regulations of the
         exchange, market or system on which the Company's common stock is then
         listed requiring stockholder approval prior to such additional
         issuance. In the event that the conversion rate of the debentures would
         require the Company to issue more than an aggregate of 50,000,000
         shares of the Company's common stock upon conversion of the debentures
         and the Company elects not to increase the number of shares held in
         escrow (or the Company fails to obtain any required stockholder
         approval for such proposed increase), the Company will be required to
         redeem the unconverted amount of the debentures for 125% of the
         principal amount thereof, plus accrued and unpaid interest.

         In addition to the foregoing, the debentures may not be converted if
         and to the extent that after such conversion the holder would
         beneficially own more than 5% of the Company's then outstanding common
         stock, unless the holder waives this limitation by providing the
         Company 75 days prior notice of the waiver.

         The Company has the right to redeem the debentures, in whole or in
         part, at any time on 30 days advance notice for 125% of the principal
         amount of the outstanding debentures being redeemed, plus accrued and
         unpaid interest. In addition, if at any time any of the debentures are
         outstanding, the Company receives debt or equity financing in an amount
         equal to or exceeding five million dollars ($5,000,000) in a single
         transaction or series of related transactions (excluding any portion of
         such financing consisting of forgiveness of debt or other obligations),
         the Company is required to redeem the debentures for 125% of the amount
         of the then outstanding debentures. If trading in the Company's common
         stock is suspended (other than suspensions of trading on such market or
         exchange generally or temporary suspensions pending the release of
         material information) for more than 10 trading days, or if the
         Company's common stock is delisted from the exchange, market or system
         on which it is then traded and not relisted on another exchange, market
         or the Over the Counter Bulletin Board within 10 trading days, HEM may
         elect to require us to redeem all then outstanding debentures in the
         manner set forth in the Purchase Agreement.

         Until such time as it no longer holds any debentures, neither HEM nor
         its affiliates may engage in any short sales of the Company's common
         stock if there is no offsetting long position in the Company's common
         stock then held by HEM or such affiliates.

         (2) This note payable was originally payable to a bank. The individual
         guarantor of the note paid the note in June 2004 and has obtained a
         judgment against LBI in the amount of $51,179, plus interest and costs
         from August 23, 2004. The Company is attempting to negotiate some form
         of payout.

         (3) At the option of the note holder, this note can be converted into
         RCG's common stock at a ratio of one share of common stock for each
         $4.55 of outstanding principal and interest. RCG's common stock closed
         at $1.25 on December 31, 2004.


                                       18
<PAGE>

<TABLE>
E.       NOTES PAYABLE - RELATED PARTIES

         Notes payable to related parties at December 31, 2004, consist of the
         following:

<S>                                                                                                    <C>
         Note payable to the wife of G. David Gordon - due April 1, 2005; interest payable monthly
            from November 1, 2004 at 12%; convertible into the Company's common stock at $2.50 per
            share after January 1, 2005; collateralized by a security interest in the Company's
            investment in LBI; past due                                                                $  500,000
         Unsecured note payable to G. David Gordon - due in monthly installments of
            $5,056 with interest at 12% until paid in full; convertible into the
            Company's common stock at $2.50 per share; past due                                           505,558
         Unsecured note payable to Mike Pruitt - due in monthly payments of $791 with
            interest at 8% until the principal is paid in full; convertible into the
            Company's common stock at $2.50 per share; past due                                           118,709
                                                                                                       -----------

              Total                                                                                    $1,124,267
                                                                                                       ===========

</TABLE>

F.       INCOME TAXES

         Deferred income taxes at December 31, 2004 consist primarily of net
         operating loss carryforwards, which amount to approximately $19,600,000
         and expire between 2020 and 2024. A valuation allowance has been
         recorded for the full amount of the deferred tax assets. Further, due
         to substantial limitations placed on the utilization of net operating
         losses following a change in control, utilization of such NOL's could
         be limited.

G.       CONVERTIBLE SERIES A PREFERRED STOCK

         Effective March 3, 2003, the Company amended its Articles of
         Incorporation to authorize the issue of 1,000,000 shares of Series A
         convertible preferred stock, par value $.10 per share. The principal
         preferences and rights of the Series A preferred stock are: (i)
         entitled to receive dividends when and if declared; (ii) liquidation
         value of $2.75 per share plus an amount equal to 5% per annum on the
         original issue price; (iii) each holder of shares shall be entitled to
         the number of votes equal to the number of shares of common stock into
         which each share of Series A preferred stock could be converted; (iv)
         conversion is at the option of the holder until 51% of the then
         outstanding shares elect to convert, at which time all remaining
         outstanding Series A preferred stock shall automatically be converted
         into common stock; (v) and the initial conversion price of $2.75 per
         share is subject to adjustment in the event of certain occurrences.

         During the three months ended September 30, 2004, 204,363 shares of
         preferred stock were converted into 449,598 shares of common stock. At
         December 31, 2004, 577,389 shares of preferred stock are outstanding.


                                       19
<PAGE>

<TABLE>
H.       TRANSACTIONS WITH RELATED PARTIES

         At December 31, 2004, notes and advances due to affiliates from
         continuing operations consisted of the following:

<S>                                                                                                    <C>
         Due to RCG and its subsidiaries                                                               $  945,372
         Advance from and accrued interest payable to Michael Pruitt, CEO of RCG                           10,688
         Advances from and accrued interest payable to G. David Gordon, a shareholder
            and creditor of LFSI and RCG                                                                  167,388
         Advances from Steven Zink, President of LBI                                                       15,551
                                                                                                       -----------

                                                                                                       $1,138,999
                                                                                                       ===========

</TABLE>

         The amount due to RCG and its subsidiaries represents net advances to
         and from RCG and its subsidiaries. RCG also has provided various
         services to the Company, including accounting and finance assistance,
         capital and debt raising, human resources and other general and
         administrative services, until November 2003. For the three and six
         months ended December 30, 2003, RCG charged the Company $15,000 and
         $25,000, respectively, (none was charged in fiscal 2005).

         During fiscal 2004, RCG returned 4,000,000 shares of the Company's
         common stock, which has been recorded as treasury stock. This
         transaction was related to an indemnification agreement between RCG and
         the Company, where RCG is indemnified against potential liabilities as
         a shareholder of the Company.

         At December 31, 2004, total debt outstanding to G. David Gordon, his
         wife and a company in which he is the principal shareholder, was
         $1,005,558 which is included in notes payable to related parties. Mr.
         Gordon acts as special legal counsel to RCG and the Company from time
         to time and is a shareholder of both.

         Paul B. Johnson, President and acting Chief Executive Officer of the
         Company, is owed $28,544 in accrued compensation at December 31, 2004,
         which is included in accrued expenses.

         TRANSACTIONS WITH RELATED PARTIES IN DISCONTINUED OPERATIONS

         Mr. Pruitt, Mr. Gordon, Mr. Johnson, and Glenn Barrett, former
         President of LST, had transactions with the discontinued operations of
         the Company.

         Net current liabilities of discontinued operations include $232,023 due
         to RCG and its subsidiaries.

         Mr. Pruitt is also a minority investor in a company that had purchased
         franchise licenses and business operations of LST's home technology
         business in three markets in South Carolina and in another company that
         had purchased franchise licenses in three locations in Maryland. The
         franchise locations in South Carolina were closed in fiscal 2004. The
         amounts due to the Company and its subsidiaries were paid by the
         shareholders of these franchisees. The franchise location in Maryland,
         LBI, was purchased by the Company in May 2004.


                                       20
<PAGE>

         Mr. Johnson was an investor in a company, which in November 2001 became
         a franchisee of the Company's home technology business in the Dallas,
         Texas market and purchased two additional locations in that market
         during the quarter ended March 31, 2003. The Dallas franchise locations
         were closed during fiscal 2004 and all amounts due the Company and its
         subsidiaries were paid by the shareholders.

         During fiscal 2002, Mr. Barrett resigned as President of Lifestyle and
         began LVA Technologies LLC ("LVA"), a low voltage wiring business that
         operates as a Lifestyle franchisee headquartered in Charlotte, NC to
         service the commercial market. The Company waived LVA's initial
         franchise fee for the commercial franchise. LVA also owns the
         Greenville and Columbia, SC franchises. LVA's low voltage wiring
         business was charged royalties on products purchased from the Company
         at the same rate as the Company's other franchisees, however, it does
         not pay royalties on revenue generated from products purchased
         elsewhere as required of the Company's other franchisees, including the
         Greenville and Columbia, SC franchises. All amounts due by LVA and its
         subsidiaries to the Company and its subsidiaries have been fully
         reserved.

         Mr. Gordon had an ownership interest in the three markets in South
         Carolina along with Mr. Pruitt, as discussed above; three locations in
         the Dallas market along with Mr. Johnson; and four additional markets
         in Houston, Texas; Raleigh, North Carolina; Wilmington, North Carolina;
         and Greensboro, North Carolina. These four markets had paid the Company
         and its subsidiaries all amounts owed during fiscal 2004.

         Revenues from these franchisees for the three and six months ended
         December 31, 2003, are as follows (there were no sales during the
         current fiscal year):

         Houston and three North Carolina markets     $ 20,000     $ 79,000
         Three South Carolina markets                    1,000       26,000
         Three Maryland markets                          4,000       10,000
         LVA and subsidiaries                            4,000       30,000
         Dallas                                          3,000       21,000
                                                      ---------    ---------

                                                      $ 32,000     $166,000
                                                      =========    =========


I.       BUSINESS SEGMENT INFORMATION

         As of December 31, 2004, the Company's continuing operations consisted
         of one location. Accordingly, the Company only operates in one business
         segment.


                                       21
<PAGE>

J.       COMMITMENTS AND CONTINGENCIES

         Future minimum operating lease commitments under non-cancelable leases
         for office space is summarized as follows:

         Fiscal year                                              Total
         -----------                                            --------

         2005 (balance of fiscal year)                          $24,850
         2006                                                    49,700
         2007                                                     4,200
                                                                --------

                                                                $78,750
                                                                ========

         Rent expense from continuing operations for the three and six months
         ended December 31, 2004, amounted to $12,483 and $28,942, respectively.
         There was no rent expense in continuing operations during fiscal 2004.

         On April 6, 2004, Mercator Momentum Fund LP ("Mercator") filed a
         complaint (case number BC313358, Superior Court of California, County
         of Los Angeles, Stanley Mosk Central District) against Lifestyle
         Innovations, Inc. as an alter ego and RichMark Capital Corp. relating
         to a past due loan obligation of Lifestyle Integrators, Inc., a wholly
         owned subsidiary of Lifestyle, in the amount of $295,000. The loan
         amount is included in current liabilities of discontinued operations.
         Integrators was sold in May 2004. On September 3, 2004, Mercator filed
         a request for entry of default against Integrators and RichMark.

         On September 29, 2004, LBI received notice that the guarantor of a
         $50,000 note payable to a bank had obtained a judgment against LBI on
         August 23, 2004, in the amount of $51,179 plus costs and post-judgment
         interest at 6.5%. (Case number 03-C-04-008855CJ, Circuit Court for
         Baltimore County). LBI had made an initial payment on the judgment of
         approximately $10,000 as partial settlement of the judgment and is
         negotiating a pay-out schedule for the balance.

         On April 23, 2004, Meyer Saltzman etal ("Saltzman") filed a complaint
         (Case No. 2004-CV-2440, State District Court of Denver, Colorado)
         against SYSLYNC-COLORADO, Inc. and Lifestyle Innovations, Inc. for
         their part in the acquisition of the assets of Homesync. Saltzman's
         claim against LFSI is for fraud and breach of contract under an
         alter-ego theory. Both sides have agreed to transfer the dispute to
         arbitration. The Company has not recorded an accrual for this dispute.


                                       22
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
         ---------------------------------------------------------

>From time to time, the Company may publish forward-looking statements relative
to such matters as anticipated financial performance, business prospects,
technological developments and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. All statements other than statements of historical fact included in
this section or elsewhere in this report are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Important
factors that could cause actual results to differ materially from those
discussed in such forward-looking statements include, but are not limited to,
the following: changes in the economy or in specific customer industry sectors;
changes in customer procurement policies and practices; changes in product
manufacturer sales policies and practices; the availability of product and
labor; changes in operating expenses; the effect of price increases or
decreases; the variability and timing of business opportunities including
acquisitions, alliances, customer agreements and supplier authorizations; the
Company's ability to realize the anticipated benefits of acquisitions and other
business strategies; the incurrence of debt and contingent liabilities in
connection with acquisitions; changes in accounting policies and practices; the
effect of organizational changes within the Company; the emergence of new
competitors, including firms with greater financial resources than the Company;
adverse state and federal regulation and legislation; and the occurrence of
extraordinary events, including natural events and acts of God, fires, floods
and accidents.

LFSI through LBI is a full service home technology integration company providing
builders, homeowners, and commercial customers with complete installation and
equipment for audio, video, home theater, security, computer networking, central
vacuum and accent lighting.

Brittany was the owner of two condominium units in Dallas, Texas which were sold
in October 2004. The operations of Brittany are included in discontinued
operations for all periods presented.

Effective December 1, 2003, the operations of Charlotte were discontinued, and
the operations of Integrators and Atlanta were discontinued effective March 1,
2004.

LST Integrators, Inc. and its wholly owned subsidiaries were all sold to Sports
Management & Recreation, Inc. ("Sports") on May 24, 2004, in exchange for 25,000
shares of Sports' common stock. Integrators and its subsidiaries are included in
discontinued operations during the period owned by LFSI.

SYSLYNC-GEORGIA, Inc. ("Georgia") was incorporated by the Company on December 1,
2003, and commenced operations on February 6, 2004. Georgia was also sold to
Sports on May 24, 2004, in exchange for 50,000 shares of Sports' common stock
and is included in discontinued operations.


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<PAGE>

Effective November 15, 2003, pursuant to an Asset Purchase Agreement, LFSI,
through its wholly owned subsidiary, Colorado, completed the acquisition of the
majority of the assets of HomeSync Corporation ("HomeSync") by assuming certain
liabilities of HomeSync. The purchase price was recorded in an amount equal to
the assumed liabilities of approximately $750,000. Shortly after completing the
acquisition and prior to December 31, 2003, a significant portion of the assets
of HomeSync, which were supposedly acquired by Colorado, were seized by the
Colorado Department of Revenue to satisfy certain unpaid tax obligations. Upon
notifying HomeSync of the seizure, the Company was informed that HomeSync would
be filing for Chapter 7 Bankruptcy. Based upon that information, the Company was
informed by counsel that, due to the U.S. Bankruptcy rules regarding
preferential transfer, the Company was instructed to deliver control of the
HomeSync assets acquired back to HomeSync. The Company had only nominal costs
associated with the acquisition, which have been expensed. Accordingly, the
Company has treated the transaction as if it were rescinded with the only
financial impact being the acquisition costs discussed above.

LFSI completed its acquisition of FutureSmart effective March 7, 2003. On May
28, 2003, the Board of Directors approved a plan to dispose of FutureSmart.
Accordingly, its operations since March 7, 2003 have been included in
discontinued operations.

On October 17, 2003, the Company completed its sale of all of the assets of
FutureSmart for an "Initial Purchase Price" of $1,500,000, which is subject to
adjustment as provided in the Asset Purchase Agreement to the "Final Purchase
Price." The Initial Purchase Price is allocated to the secured creditors of
FutureSmart; $200,000 to the Company, and $1,300,000 to the other secured
creditors. Thirty percent ($450,000) of the Initial Purchase Price was paid at
closing pro rata to the secured creditors ($60,000 to the Company) and the
remainder of $1,050,000 was placed in escrow. The escrowed amount is subject to
various adjustments, including determination of the final net assets as of the
closing date and settlement of certain other obligations. The remaining balance
was scheduled to be disbursed by the escrow agent no later than one year and one
day after the closing date. The buyer has made claims against this amount which
have not been resolved. Accordingly, the amount the Company might receive and
when it will be available is not currently known.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2004, the Company has a significant working capital deficit of
$5,138,309. The major components of the working capital deficit include:
$1,138,999 due to affiliates, $1,029,158 in accounts payable and accrued
expenses, current portion of long-term debt and notes payable in the amount of
$923,024, notes payable due related parties of $1,124,267 and net current
liabilities of discontinued operations in the amount of $1,147,158. The Company
does not have sufficient cash flows to meet its obligations currently due within
the next 12 months. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The Company is currently exploring
additional sources of liquidity, through debt and equity financing alternatives
and potential sales of its common stock in private placement transactions.
Additionally, the Company has extended some of its notes payable and plans on
negotiating with its remaining debt holders to continue to extend or convert
some or all of the debt. If the Company is (i) unable to grow its business or


                                       24
<PAGE>

improve its operating cash flows as expected, (ii) unsuccessful in extending a
substantial portion of the debt repayments currently past due, or (iii) unable
to raise additional funds through private placement sales of its common stock,
then the Company may be unable to continue as a going concern. There can be no
assurance that additional financing will be available when needed or, if
available, that it will be on terms favorable to the Company and its
stockholders. If the Company is not successful in generating sufficient cash
flows from operations, or in raising additional capital when required in
sufficient amounts and on terms acceptable to the Company, these failures would
have a material adverse effect on the Company's business, results of operations
and financial condition. If additional funds are raised through the issuance of
equity securities, the percentage ownership of the Company's current
shareholders would be diluted. These consolidated financial statements do not
include any adjustments that may result from the outcome of these uncertainties.

During the six months ended December 31, 2004, debentures with a face value of
$26,596 were converted into 2,581,443 shares (including 2,199,532 shares of
treasury stock) of the common stock of the Company.

                  THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003

SALES AND REVENUES

During the three months ended December 31, 2004, the Company's only continuing
operation consisted of the operations of LBI, which was acquired on May 5, 2004.
All other operations were discontinued in fiscal 2004.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

Selling, general and administrative ("SG&A") expenses have decreased $46,217
(32%) during the three month period ended December 31, 2004, as compared to the
year earlier period. The fiscal 2005 amount includes $61,707 in SG&A for LBI and
$36,956 for corporate SG&A. The fiscal 2004 amount includes only corporate SG&A.
During fiscal 2004, the Company issued common stock valued at $113,750 in
exchange for marketing and consulting services.

STOCK OPTION AND WARRANT COMPENSATION

Stock option and warrant compensation amounted to ($243,745) during the
three-month period ended December 31, 2003, and none in fiscal 2005. The Company
hired a new Chief Executive Officer in March 2003, as a part of the purchase of
FutureSmart. One-third of the options she received vested upon receipt and the
remaining two-thirds were to vest one-third at the end of year one and one-third
at the end of year two. Compensation expense was accrued on a monthly basis in
fiscal 2004 for the difference between the exercise price and the market price
on the date of the grant, until the resignation of the Chief Executive Officer
in October 2003. The accrual since March 2003 for all un-vested options was
reversed in October 2003.

INTEREST EXPENSE

Interest expense amounted to $78,533 ($32,541 for related parties) during the
three month period ended December 31, 2004, as compared to the year earlier
period amount of $48,539 ($21,961 for related parties). The increase in interest
expense of $29,994 ($10,580 for related parties) is primarily due to expensing
the unamortized loan cost associated with converted debentures, the interest
accruing on the debentures, a transfer of debt from discontinued operations to
continuing operations and an increase in related party debt of $144,401.


                                       25
<PAGE>

DISCONTINUED OPERATIONS

The loss from discontinued operations amounted to $6,270 and $5,722,000 during
the three month period ended December 31, 2004 and 2003, respectively.

                   SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003

SALES AND REVENUES

During the six months ended December 31, 2004, the Company's only continuing
operation consisted of the operations of LBI, which was acquired on May 5, 2004.
All other operations were discontinued in fiscal 2004.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

SG&A expenses have increased $41,892 (21%) during the three month period ended
December 31, 2004, as compared to the year earlier period. The fiscal 2005
amount includes $140,846 in SG&A for LBI and $99,465 for corporate SG&A. The
fiscal 2004 amount includes only corporate SG&A.

STOCK OPTION AND WARRANT COMPENSATION

Stock option and warrant compensation amounted to ($135,414) during the
six-month period ended December 31, 2003, and none in fiscal 2005. The Company
hired a new Chief Executive Officer in March 2003, as a part of the purchase of
FutureSmart. One-third of the options she received vested upon receipt and the
remaining two-thirds were to vest one-third at the end of year one and one-third
at the end of year two. Compensation expense was accrued on a monthly basis in
fiscal 2004 for the difference between the exercise price and the market price
on the date of the grant, until the resignation of the Chief Executive Officer
in October 2003. The accrual since March 2003 for all un-vested options was
reversed in October 2003.

INTEREST EXPENSE

Interest expense amounted to $140,525 ($57,582 for related parties) during the
six month period ended December 31, 2004, as compared to the year earlier period
amount of $108,469 ($39,139 for related parties). The increase in interest
expense of $32,056 ($18,443 for related parties) is primarily due to expensing
the unamortized loan cost associated with converted debentures, the interest
accruing on the debentures, a transfer of debt from discontinued operations to
continuing operations and an increase in related party debt of $144,401.

DISCONTINUED OPERATIONS

The loss from discontinued operations amounted to $4,582 and $6,498,376 during
the six month period ended December 31, 2004 and 2003, respectively.


                                       26
<PAGE>

ITEM 3.  CONTROLS AND PROCEDURES

(a)      Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
are filed or submitted under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the reports that are filed under the Exchange Act is
accumulated and communicated to management, including the principal executive
officer and principal accounting officer, as appropriate to allow timely
decisions regarding required disclosure. Under the supervision of and with the
participation of management, including the principal executive officer and
principal accounting officer, the Company has evaluated the effectiveness of the
design and operation of its disclosure controls and procedures as of December
31, 2004, and based on its evaluation, our principal executive officer and
principal accounting officer have concluded that these controls and procedures
are effective.

(b)      Changes in Internal Controls

There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation described above, including any corrective actions with regard to
significant deficiencies and material weaknesses.


                                       27
<PAGE>

PART II - OTHER INFORMATION


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

During the six month period ended December 31, 2004, the Company issued
2,581,443 shares of its common stock (including 2,199,532 from treasury stock)
in exchange for convertible debentures with a face value of $26,596. The shares
were sold pursuant to an exemption from registration under Section 4(2)
promulgated under the Securities Act of 1933, as amended.

ITEM 5.  OTHER INFORMATION

Although the Company does not currently employ a Chief Financial Officer, Paul
Johnson, President and Acting CEO, is also the principal accounting officer.

ITEM 6.  EXHIBITS

31       Certifications pursuant to 18 U.S.C. Section 1350,
         Section 302 of the Sarbanes-Oxley Act of 2002                  Page 29

32       Certifications pursuant to 18 U.S.C. Section 1350,
         Section 906 of the Sarbanes-Oxley Act of 2002                  Page 30


                                    SIGNATURE

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

                                            LIFESTYLE INNOVATIONS, INC.

         Date:    February 10, 2005         By: /s/ Paul Johnson
                                                ---------------------------
                                                Paul Johnson, President
                                                Acting CEO and Principal
                                                Accounting Officer


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