**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-KSB/A**

**(AMENDMENT NO. 2)**

**ý****ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIESAND EXCHANGE ACT OF 1934**

**For thefiscal year ended December 31, 2004**

**o****TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For thetransition period from                   to                  **

**Commission file Number 333-107715**

**DATAMEG CORP.**

(Name of SmallBusiness Issuer in Its Charter)
| **New York**                                      |   | **13-3134389**          |
|---------------------------------------------------|--------|-------------------------|
| (State or  other jurisdiction of                  |   | (I.R.S.  Employer       |
| Incorporation  or organization)                   |   | Identification  Number) |
|                                              |   |                    |
| **9 West  Broadway, Suite #214, Boston, MA** |   | **02127**               |
| (Address of  principal executive offices)         |   | (Zip Code)              |

Issuer’stelephone number: **(413)642-0160**

Securitiesregistered pursuant to Section 12(b) of the Exchange Act:
| **Title of Each Class** | ** ** | **Name of each exchange on  which registered** |
|-------------------------|------------|------------------------------------------------|
|                    |       |                                           |

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

(Title of class)

Check whetherissuer (1) filed all reports to be filed by Section 13 or 15(d) ofthe Exchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý No o

 Check if disclosure ofdelinquent filers in response to Item 405 of Regulation S-B is not contained inthis form, and no disclosure will be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by referencein Part III of this form 10-KSB or any amendment to this form 10-KSB. o

State the issuer’s revenues for the most recent fiscal year: $46,100

State the aggregate market value of the voting and non-voting commonequity held by non-affiliates computed by reference to the price at which thecommon equity was sold, or the average bid and asked price of such commonequity, as of a specified date within the past 60 days. (See definition ofaffiliate in Rule 12b-2 of the Exchange Act.) $24,742,961 as of March 31,2005.

Note: If determining whether a person is anaffiliate will involve an unreasonable effort and expense, the issuer maycalculate the aggregate market value of the common equity held bynon-affiliates on the basis of reasonable assumptions, if the assumptions arestated.

(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Check whether the issuer has filed alldocuments and reports required to be filed by Section 12, 13, or 15(d) ofthe Exchange Act after the distribution of securities under a plan confirmed bya court. Yes o   No o

(APPLICABLEONLY TO CORPORATE REGISTRANTS)

State the number of shares outstanding ofeach of the issuer’s classes of common equity, as of the latest practicabledate. 252,086,074 shares of common stock outstanding as of December 31,2004 and 292,429,607 shares of common stock outstanding as of March 31,2005.

DOCUMENTSINCORPORATED BY REFERENCE

If thefollowing documents are incorporated by reference, briefly describe them andidentify the part of the Form 10-KSB (e.g. Part I, Part II,etc.) into which the document is incorporated: (1) any annual report tosecurity holders; (2) any proxy or information statement; and (3) anyprospectus filed pursuant to Rule 424(b) or (c) under theSecurities Act of 1933 (“Securities Act”). The listed documents should beclearly described for identification purposes (e.g., annual report to securityholders for fiscal years ended December 24, 1990).

Transitional Small Business Disclosure Format(Check one): Yes o; No ý

 

 

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PART I

 

ITEM 1.                             DESCRIPTIONOF BUSINESS

 

Overview

 

We are a development stage communications technology company focused onthe development and the supply of voice-quality products and related servicesthat support critical network performance requirements in the voice segment ofthe rapidly converging voice, data and video communications industry.  Specifically, through our wholly-ownedsubsidiary North Electric Company, Inc. (“North Electric”), we design,develop and offer network-wide fault identification, fault isolation and voicequality assurance products and critical real-time network health andperformance monitoring services for both providers and end-users of Internettelephony, now commonly referred to as Voice over Internet Protocol (“VoIP”).  The VoIP industry critically depends on theability to deliver voice service over the Internet infrastructure with the highquality that end-users have grown to expect with traditional telephonyservices.  We believe network monitoringfor voice quality is a vital function for a successful commercial future of IPtelephony.

 

DataMEG Corp. is a New York corporation and was incorporated inOctober, 1982 as The Viola Group, Inc. In August 2000 the Companyexchanged 90% of our common stock for 100% of the stock of DataMEG Corp., aVirginia corporation that was incorporated in January 1999. Wesubsequently changed our name to DataMEG Corp.

 

In March 2005, our shareholders voted to authorize us toreincorporate in Delaware.  We plan tofinalize the reincorporation within the next 30 days by filing appropriatedocuments with the Secretary of State of New York, where we are currentlyincorporated, and the Secretary of State of Delaware, where we will beincorporated upon those filings.

 

Also in March 2005, our shareholders approved (1) amendmentsto our Bylaws, (2) fixing the number of directors at one and electingAndrew Benson as our sole director, (3) our Restated Certificate ofIncorporation filed with the Secretary of State of New York on August 4,2000, and all subsequent amendments, and (4) an increase the number of ourauthorized shares to 493,000,000 common shares, which will be effective uponour reincorporation in Delaware.

 

We have two subsidiaries: CASCommunications, Inc., a Floridacorporation, of which we own 40%, and North Electric Company, Inc., aNorth Carolina corporation, which we wholly own.  CASCommunications is inactive and we do notexpect that CASCommunications will generate any revenue in 2005.  We, along with our subsidiaries, are adevelopment stage enterprise.

 

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North Electric focuses on becoming a providerof network assurance products and services. North Electric network assurance products are designed to enablecommunications network operators and service providers to quickly andautomatically determine if their network is meeting its quality and serviceexpectations, while lowering network operating costs.  North Electric has developed their NAS-6131Network Assurance System that covers the existing traditional telephonenetworks, networks that use the same communication technology as the Internet,and converged networks comprised of both of these network types. Communicationsnetworks that deploy advanced technologies will receive additional faultisolation and related benefits.  In thelatter half of 2004, North Electric began to deploy equipment to customer sitesunder three purchase on approval agreements. In October 2004, NorthElectric obtained its first approved purchase and recorded approximately $41,000in revenues related to this sale in 2004. North Electric is actively pursuingadditional near-term sales opportunities with its existing customer and othersfor its NAS-6131 Network Assurance System and anticipates realization ofthese opportunities in the near-term.

 

We operate under the name of DataMEG Corp.and trades under the symbol DTMG on the Over-the-Counter Bulletin Board.

 

As of March 31, 2005, we had a total of three(3) full-time employees and ten (10) full-time independentcontractors or consultants. Of these, one (1) employee and one (1) full-timecontractor focus primarily on inventory management, product assembly,installation and support and maintenance, eight (8) full-time contractorsfocus on continued product enhancements, one (1) part-time contractorfocus on sales and marketing and one (1) full-time employee serves in administrativeand senior management capacities at our subsidiary North Electric Company, Inc.The balance are comprised of one full-time employee, our president and soledirector, one full-time consultant acting as in-house legal counsel and onepart-time consultant who provides financial and accounting management services.

 

Recent Developments

 

On April 1, 2005, we executed a termsheet with 350 Group, an enterprise development firm led by managing directorsReznor Orr, Craig Lyons and Tim Cartwright. 350 Group will serve as a strategic advisor, financing advisor andoperations support provider to the Company. 350 Group has committed to apply its resources, including a globalprofessional network, operational expertise, and corporate finance solutions tohelp the Company develop as a profitable provider of products and services tothe Voice of Internet Protocol telephony industry.

 

Under the terms of the 350 Group term sheet, 350 Group will assist theCompany in identifying and recruiting independent Board members, businessplanning, financing and operations.  Inaddition, 350 Group agreed to assist the Company in developing distributionchannel partnerships, provide management development services and form atechnical advisory board.  In exchangefor these services, the Company will issue to 350 Group shares of the Company’scommon stock in amounts that vary based on the achievement of certain milestonesby the Company, including major commercial successes, achieving certain revenuelevels and implementing business systems and financial reporting systemssuitable for the Company.  Shares will beearned by 350 Group in increments ranging from 1.25% to 5% of the Company’sshares outstanding on April 1, 2005, with an aggregate maximum of 25% of

 

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the Company’s shares outstanding on April 1, 2005 if allmilestones are achieved.  The Companybelieves that these arrangements are in the best interests of shareholdersbecause they closely align the interests of 350 Group with those of ourshareholders.

 

We intend to engage in the business ofproviding products and services that will ensure the integrity and fullfunctionality of communications networks. These types of products and servicesare typically referred to as Network Assurance Products. We are designing our NetworkAssurance Products to enable a communications network operator, such as VerizonCommunications, Inc., AT&T Corp., Qwest Communications InternationalInc. or Sprint Corp., to quickly and automatically determine if its network ismeeting the quality and service expectations of its customers, while loweringnetwork operating costs.

 

We expect that our Network Assurance Productsand products in development will perform this function for the existingtraditional telephone networks, networks that use the same communicationtechnology as the internet and converged networks that use both of these networktypes. We believe that our products will provide communications networks thatdeploy advanced technologies with an enhanced ability to detect and locatefailures in their networks. The initial market for our products will be in thetraditional wire line telephone industry; however, we may design these sameproducts in the future to address the cable television and the wirelesstelephone industries.

 

Products inDevelopment

 

Our products and products in developmentcombine software we have developed with third party hardware. Our two mostsignificant products in development are the Network Assurance System and theMPLS Monitor and Test.

 

NetworkAssurance System

 

Since the end of 2002, our primarydevelopment focus has been on the Network Assurance System. We are designingthis product to ensure the integrity and full functionality of communicationsnetworks and to quickly and automatically determine if the networks are meetingthe quality and service expectations of customers. We believe that this productwill enable communications network operators and service providers to quickly,efficiently and automatically determine if their networks are meeting theirquality and service expectations through active testing and monitoring,automatic detection and location of errors and confirmation that any correctiveactions have been successful. We are ready to begin accepting customer ordersthat can be delivered 30 days after the order is received.

 

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MPLS Monitorand Test

 

We are also developing another networkassurance product, the MPLS Monitor and Test, which we expect will provideautomatic detection and monitoring of all of a network’s equipment and theidentification and location of system or equipment failures for newcommunication technologies. We produced a pre-prototype version of MPLS Monitorand Test in 2002. During the fourth quarter of 2002, economic, technologydeployment and potential customer buying trends caused us to halt furtherdevelopment of MPLS Monitor and Test, but we expect that once technology deploymentand potential customer buying trends change, and assuming that we raiseappropriate funding, we will resume development of this product.

 

Description of Primary Industry

 

Public and private telephone networks areevolving from traditional telephone networks to an internet-based networkinfrastructure that makes more efficient use of network resources. Various newtechnologies are enhancing internet-based networks to provide new carrier classservices while lowering capital and operating costs. These rapidly changingtechnological developments, coupled with increased bandwidth availability, haveenabled the launch of a new generation of network services, such asinternet-based telephony that permits the transfer of voice data over theinternet and secure private networks for the exchange of sensitive data. Asthis transition takes place, service providers and large corporate enterprisesare focusing on delivery and receipt of specific high levels of performance.

 

The next generation of networks, such asinternet-based telephony, are introducing new capabilities and opportunitiesfor the sale of new products and services. However, for network operators andservice providers, the implementation of new network technologies introduces anew set of operational challenges. Many of these challenges arise from theintegration of innovative communications systems technologies with existingoperational infrastructure. Service providers and enterprise network operatorsmust verify that the new technologies have been installed and are workingproperly within the framework of their existing network. This verificationprocess and actions to correct detected errors can be very labor intensive andmay negatively affect customers by lowering the level of quality below theservice level guaranteed to customers. This market segment is the focus andtarget of our current and future technologies, which will assist our customersin satisfying their obligations to customers with respect to agreed-upon levelsof service quality.

 

Integrated and automated network monitoring,testing and automatic detection and location of errors are essential toreliable communications on which enterprise customers depend formission-critical business communications. Our research and development isdedicated towards products and services which will solve the

 

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challenging aspects of deploying new technologies into the advancednetworks and network services of the future, and monitoring and testing thosetechnologies.

 

Competition

 

We face a broad range of competitive threats.Competition in the current communications industry is very robust, with manycompanies from many different backgrounds wrestling for their piece of thebusiness.

 

Investors can best understand our competitiveenvironment by considering several axes that characterize the operationalsupport system and service assurance market:

 

• ENTERPRISE VS. CARRIER - Differentcompanies dominate the market for services to enterprise or large businesscustomers and the market for services to the public network operators orcarriers. We target the carrier market segment, but focus on new technologiesand service types which are typically first implemented and proven in theenterprise arena. Therefore, we anticipate that competitive threats will comeboth from carrier service assurance companies seeking to expand theirestablished business and from enterprise service assurance companies seeking totake their expertise from the enterprise into the carrier domain.

 

• DATACOM VS. TELECOM - Differentcompanies dominate the telecom, or telephone networking sector of thecommunications networking business, and the datacom, or data/computernetworking sector. Our target market is at the convergence of telecom anddatacom in the networking world. Therefore, we expect firms specializing in thedata/computer networking sector will seek to expand their market by addingtelephone communications functionality to their products in the carrier networkinfrastructure areas. Similarly, we expect telecom infrastructure serviceassurance companies will try to expand into the data communications areas.

 

• TEST EQUIPMENT VS. NETWORK MANAGEMENTSYSTEMS - The market for operational support systems is generally dividedbetween the test equipment vendors, who make specialized equipment designed totest particular functions in a piece of networking equipment, and the networkmanagement system vendors, who make systems that provide integrative overviewsof the network status. We are developing a system that will enable automationof test equipment deployed around a network. With this system in place, anetwork operator in a single location will have the ability to assess the network’squality of service and to identify and locate errors. This puts us in the pathof potential expansion from both the established test equipment vendors seekingto expand their product line into systems-level products, and the networkmanagement system vendors seeking to broaden their integrated control of thenetwork to include the network test functions previously provided by testequipment vendors.

 

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Our current strategy for competing in thiscomplex environment is to:

 

• remain focused on the networkassurance market;

 

•begin on-site product testing at strategic telecommunication service providers;and

 

• establish alliances with selectedmanufacturers and service providers and implement international distributionagreements to help us gain rapid market acceptance on an international scale.

 

IntellectualProperty

 

We do not presently own any patents or patentfilings. Our intellectual property is in our software products and hardwareconfigurations, which are principally protected by copyright and trade secretlaw.

 

Research andDevelopment

 

North Electric Company is now the onlyoperating unit that is performing research and development and through which weconduct most of our business. For the years ended December 31, 2003 and2004, our research and development expenses were approximately $1,184,000 and $1,492,000,respectively.

 

BusinessOverview of CASCommunications

 

CASCommunications, Inc., a Florida corporationin which we hold a 40% equity interest, halted development of its devices relatedto high-speed broadband access in 2004 due to a lack of sufficient capital. CASCommunicationsis inactive and we do not expect that CASCommunications will generate anyrevenue in 2005.

 

For the years ended December 31, 2003and 2004, research and development expenses related to the development of CASCommunications’technology were approximately $40,000 and $0 (zero), respectively.

 

ITEM 2.                             DESCRIPTIONOF PROPERTY

 

Our wholly owned subsidiary, North Electric Company,leases approximately 2,600 square feet of space at One Springfield Center, 6131Falls of the Neuse, Raleigh, North Carolina 27609. The term of the lease is for37 months beginning December 1, 2004 and expiring January 31, 2008.The monthly rent is

 

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approximately $5,000. The property is being used to market and developNorth Electric Company’s products. Our management believes that our insurancecoverage is adequate.

 

ITEM 3.                             LEGALPROCEEDINGS

 

On October 29, 2001, the Company signed aconfessed judgment promissory note with Hunton & Williams, PC, a law firm,acknowledging monies owed amounting to $568,382, which had been previouslyaccrued. The balance of the promissory note accrued interest at a rate of 9%and matured on December 31, 2001.  OnJanuary 7, 2002 the Company received a notice of default relating to thePromissory Note and as of January 1, 2002 the outstanding balance wasincreased five percent (5%) and began to accrue interest at an annual rate of15%. The balance including accrued interest and legal fees was approximately$806,000 and $878,000 as of December 31, 2003 and 2004, respectively.

 

During 2002, the Company entered into severalstock purchase agreements with Hickey Hill Partners LLC and Miami AssociatesInvestors, LLC (“Investors”) to purchase shares of the Company’s common stock.  The Company discounted the purchase pricebased upon market conditions at the time of issuance of the stock and theimmediately following several days. The Company held advances in the amount of$35,000 for which stock was not issued.  TheCompany believed that the investors defaulted on the stock purchase agreementsand the investors believed that the Company defaulted on the stock purchaseagreements.  Hickey Hill Partners LLCfiled a lawsuit against the Company and the Company’s Chairman in the CircuitCourt of the 15th Judicial Circuit in and for Palm Beach County, Florida.  On April 3, 2003, the court issued adefault judgment against the Company and our Chairman in the amount of $64,352that bears interest at the rate of 6% a year and prejudgment interest of$1,716. The Company has recorded a liability for the judgment and additionalaccrued interest at December 31, 2003 in the amount of $68,945 that isincluded in accounts payable and accrued expenses. Funds were transferred in March 2004and the balance, including accrued interest, at December 31, 2004 wasapproximately $67,000. In March 2005, the Company entered into anagreement to pay Hickey Hill Partners, LLC $45,000 by May 15, 2005 in fullsatisfaction of all outstanding, current and pending claims regarding thisjudgment.

 

Miami Associates Investors, LLC also filed alawsuit against the Company and the Company’s Chairman in the Circuit Court ofthe 17th Judicial Circuit in and for Broward County, Florida for damages in theamount of $54,850 together with the awarding of treble damages, attorneys feesand interest.  On April 24, 2003,the court determined that the Company and our Chairman defaulted.  A final judgment was ordered and finalized onDecember 3, 2003. The Company has recorded a liability for the judgmentand accrued interest at December 31, 2003 in the amount of $118,350 thatis recorded in accounts payable and accrued expenses. The balance, includingaccrued interest, at December 31, 2004 was approximately $125,000. In March 2005,the Company entered into an agreement to pay Miami Associates Investors, LLC$55,000 by April 15, 2005 in full satisfaction of all outstanding, currentand pending claims regarding this litigation.

 

In July 2004, the Company received aletter from a law firm representing former counsel to the Company, Gibson, Dunn &Crutcher LLP, concerning fees and costs that Gibson Dunn asserts are due fromthe Company.  The Company has notreceived any communications from Gibson Dunn or its counsel since the initialletter.  While the Company believes thatsome monies may be due to Gibson Dunn, it does not believe that the full amountsought by Gibson Dunn of $240,000 is due and owing.  Nevertheless, the Company has reservedapproximately $245,000 as a liability pending a settlement with Gibson Dunn.

 

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ITEM 4.                             SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

There was no submission of matter to a voteof security holder in the fourth quarter of 2004, however, in March 2005,our shareholders voted to authorize us to reincorporate in Delaware.  We plan to finalize the reincorporation byfiling within the next 30 days appropriate documents with the Secretary ofState of New York, where we are currently incorporated, and the Secretary ofState of Delaware, where we will be incorporated upon those filings.

 

Also in March 2005, our shareholdersapproved (1) amendments to our Bylaws, (2) fixing the number ofdirectors at one and electing Andrew Benson as the sole director, (3) ourRestated Certificate of Incorporation filed with the Secretary of State of NewYork on August 4, 2000, and all subsequent amendments, and (4) anincrease the number of our authorized shares to 493,000,000 common shares,which will be effective upon our reincorporation in Delaware.

 

The following table illustrates the officialvote for each proposal: 

 
| ** **     | ** ** | **Proposal 1** | ** ** | **Proposal 2** | ** ** | **Proposal 3** | ** ** | **Proposal 4** | ** ** | **Proposal 5** | ** ** |
|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
| Votes For      |       | 141,563,854    |       | 134,633,098    |       | 199,892,339    |       | 136,520,490    |       | 196,806,163    |       |
| Percentage     |       | 54.7           | %          | 52.0           | %          | 77.2           | %          | 52.7           | %          | 76.0           | %          |
|           |       |           |       |           |       |           |       |           |       |           |       |
| Votes  Against |       | 3,517,759      |       | 4,456,622      |       | 12,555,365     |       | 3,617,534      |       | 15,930,389     |       |
| Percentage     |       | 1.4            | %          | 1.7            | %          | 4.8            | %          | 1.4            | %          | 6.2            | %          |

 

The balance of the shares outstanding did not vote, were brokernon-votes or abstained.

 

Proposal 1 asked shareholders to approve a proposed change in the stateof incorporation of Datameg Corp. from New York to Delaware.

 

Proposal 2 asked shareholders to approve a proposal to amend theDatameg Bylaws.

 

Proposal 3 asked shareholders to approve a proposal to fix the numberof directors at one and to elect Andrew Benson as the sole director, to serveuntil the next annual meeting of the stockholders of Datameg.

 

Proposal 4 asked shareholders to approve a proposal to ratify, confirm,and approve, in all respects, the Restated Certificate of Incorporation ofDatameg filed on August 4, 2000, and all subsequent amendments.

 

Proposal 5 asked shareholders to approve a proposal to increase thenumber of authorized shares of Datameg to 493,000,000 common shares.

 

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PART II

 

ITEM 5.                             MARKET FORCOMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASESOF EQUITY SECURITIES

 

Market Information

 

Our common stock has been listed on the Over-the-Counter Bulletin Boardsponsored by the National Association of Securities Dealers, Inc. underthe symbol DTMG.OB since September 19, 2000.

 

The following table sets forth the range of high and low bid prices forthe our common stock as reported on the Over-the-Counter Bulletin Board foreach quarter since January 2003 for the periods indicated, as reported bythe Over-the-Counter Bulletin Board for the each period mentioned below. Such informationreflects inter-dealer prices without retail mark-up, mark down or commissionsand may not represent actual transactions. 

 
| ** **                                           | ** ** | **Low** | ** ** | **High** | ** ** |
|------------------------------------------------------|------------|---------|------------|----------|------------|
| January 1,  2003 through March 31, 2003    |       | $       | 0.01       |     | $          | 0.27 |   |
| April 1,  2003 through June 30, 2003       |       | $       | 0.13       |     | $          | 0.34 |   |
| July 1,  2003 through September 30, 2003   |       | $       | 0.12       |     | $          | 0.25 |   |
| October 1,  2003 through December 31, 2003 |       | $       | 0.14       |     | $          | 0.23 |   |
|                                                 |       |    |       |     |       |
| January 1,  2004 through March 31, 2004    |       | $       | 0.14       |     | $          | 0.29 |   |
| April 1,  2004 through June 30, 2004       |       | $       | 0.06       |     | $          | 0.19 |   |
| July 1,  2004 through September 30, 2004   |       | $       | 0.09       |     | $          | 0.20 |   |
| October 1,  2004 through December 31, 2004 |       | $       | 0.07       |     | $          | 0.11 |   |

 

Dividend Policy

 

It is our present policy not to pay cash dividends and to retain futureearnings for use in the operations of the business and to fund future growth.Any payment of cash dividends in the future will depend on the amount of fundslegally available, our earnings, financial condition, capital requirements andother factors that the board of directors may think are relevant.

 

We do not contemplate or anticipate paying any dividends in cash on thecommon stock in the foreseeable future.

 

We issued a 10% stock dividend on June 6, 2003 to shareholders ofrecord on January 8, 2003.

 

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Holders of Record of Common Stock

 

As of March 31, 2005, we had outstanding 292,429,607 shares of ourcommon stock and approximately 375 holders of record.

 

Equity Compensation Plan Information

 

In July 2000, we adopted a stock incentive plan for employees. Themaximum number of shares that may be awarded under the plan is 3,000,000. Anyperson deemed eligible by the stock incentive committee of the board ofdirectors may receive shares or options under the plan; option awards may be inthe form of an incentive option or a nonqualified stock option. Stock optionsissued under the plan vest over several years, unless accelerated by the stockincentive committee. Pursuant to the plan, as of March 31, 2004, wegranted options to employees and consultants to purchase up to 3,000,000 sharesof our common stock, all of which were exercised. The stock incentive plan isnow expired.

 

In addition, we granted options and warrants to employees andconsultants to purchase up to 65,025,891 shares of our common stock at pricesranging from $0.01 to $5 per share from inception (January 13, 1999)through March 31, 2005. As of March 31, 2005, options and warrantswhich would permit the purchase of 10,170,238 shares were exercised and optionsand warrants for which would permit the purchase of 495,949 shares expired. Theremaining options and warrants to purchase up to 54,849,704 shares expirebetween August 2005 and January 2013.

 

The following table shows the aggregate amount of securities authorizedfor issuance under all equity compensation plans as of December 31, 2004: 

 
| **Plan Category**                                           | ** ** | **Number  of Securities to  be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise  price of outstanding  options,  warrants and rights** | ** ** | **Number  of securities  remaining available  for future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation  plans approved by security holders     |       | —                                                                                               |       | —                                                                              |       | —                                                                                                                                                 |       |
|                                                        |       |                                                                                                 |       |                                                                                |       |                                                                                                                                                   |       |
| Equity compensation  plans not approved by security holders |       | 29,002,352                                                                                           |       | $                                                                                   | 0.15       |                                                                                                                                                   | —     |   |
|                                                             |            |                                                                                                      |            |                                                                                     |            |                                                                                                                                                        |            |  |

 

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Securities that were not registered under the Securities Act but wereissued under equity compensation plans: 

 
| **Date of  Issuance** | ** ** | **Purchaser** | ** ** | **Number  of  Securities** | ** ** | **Type  of  Securities** | ** ** | **Non-Cash  Consideration** | ** ** | **Non-Cash  Consideration  Description** | ** **               | **Fair  Value  Per Share** | ** ** |
|-----------------------|------------|---------------|------------|----------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------------------|--------------------------|----------------------------|------------|
| 1/27/2004             |       | M  Mitsunaga  |       | 250,000                    |       | Common  Stock            |       | $                           | 40,000     |                                     | In  Lieu of Compensation |                       | $          | 0.16 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 8/2/2004              |       | A  Benson     |       | 5,000,000                  |       | Common  Stock            |       | $                           | 658,750    |                                     | In  Lieu of Compensation |                       | $          | 0.13 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 8/5/2004              |       | D  Ference    |       | 2,000,000                  |       | Common  Stock            |       | $                           | 320,000    |                                     | In  Lieu of Compensation |                       | $          | 0.16 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 8/5/2004              |       | R  Dove       |       | 3,000,000                  |       | Common  Stock            |       | $                           | 420,750    |                                     | In  Lieu of Compensation |                       | $          | 0.14 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 8/6/2004              |       | J  Murphy     |       | 5,000,000                  |       | Common  Stock            |       | $                           | 544,000    |                                     | In  Lieu of Compensation |                       | $          | 0.11 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 8/13/2004             |       | F  Noser      |       | 100,000                    |       | Common  Stock            |       | $                           | 11,050     |                                     | In  lieu of compensation |                       | $          | 0.11 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 8/13/2004             |       | C  Erickson   |       | 100,000                    |       | Common  Stock            |       | $                           | 11,050     |                                     | In  lieu of compensation |                       | $          | 0.11 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 8/13/2004             |       | M  VanCooney  |       | 100,000                    |       | Common  Stock            |       | $                           | 11,050     |                                     | In  lieu of compensation |                       | $          | 0.11 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 8/13/2004             |       | B  Fayette    |       | 100,000                    |       | Common  Stock            |       | $                           | 11,050     |                                     | In  lieu of compensation |                       | $          | 0.11 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 8/13/2004             |       | R  Schwartz   |       | 100,000                    |       | Common  Stock            |       | $                           | 11,050     |                                     | In  lieu of compensation |                       | $          | 0.11 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 8/13/2004             |       | J  Smith      |       | 100,000                    |       | Common  Stock            |       | $                           | 11,050     |                                     | In  lieu of compensation |                       | $          | 0.11 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 8/13/2004             |       | R  Adam       |       | 100,000                    |       | Common  Stock            |       | $                           | 11,050     |                                     | In  lieu of compensation |                       | $          | 0.11 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 8/13/2004             |       | C  Mottayaw   |       | 100,000                    |       | Common  Stock            |       | $                           | 11,050     |                                     | In  lieu of compensation |                       | $          | 0.11 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 8/13/2004             |       | R  VanSchaik  |       | 100,000                    |       | Common  Stock            |       | $                           | 11,050     |                                     | In  lieu of compensation |                       | $          | 0.11 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 10/29/2004            |       | K  Purohit    |       | 1,000,000                  |       | Common  Stock            |       | $                           | 73,100     |                                     | In  lieu of compensation |                       | $          | 0.07 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| 10/29/2004            |       | R  Hester     |       | 7,000,000                  |       | Common  Stock            |       | $                           | 1,075,250  |                                     | In  lieu of compensation |                       | $          | 0.15 |   |
|                  |       |          |       |                       |       |                     |       |                        |       |                                     |                     |                       |       |
| Total                 |       |          |       | 24,150,000                 |       |                     |       | $                           | 3,231,300  |                                     |                     |                       |       |   |
|                       |            |               |            |                            |            |                          |            |                             |            |                                          |                          |                            |            |  |  |  |  |

 

12

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Recent Sales of Unregistered Securities:

 
| **Date of  Issuance** | ** ** | **Purchaser**  | ** ** | **Number  of  Securities** | ** ** | **Type  of  Securities** | ** ** | **Cash  Consideration** | ** ** | **Non-Cash  Consideration** | ** ** | **Exercise  Price  per Share  (if  applicable)** | ** ** |
|-----------------------|------------|----------------|------------|----------------------------|------------|--------------------------|------------|-------------------------|------------|-----------------------------|------------|--------------------------------------------------|------------|
| 1/27/2004             |       | M  Mitsunaga   |       | 250,000                    |       | Common  Stock            |       |                    |       | $                           | 40,000     |                                             | $          | 0.16 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 4/1/2004              |       | M  Tang Lee(1) |       | 2,941,178                  |       | Common  Stock            |       | $                       | 500,000    | (2)                         |       |                                             | $          | 0.17 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 8/2/2004              |       | A  Benson      |       | 5,000,000                  |       | Common  Stock            |       |                    |       | $                           | 658,750    |                                             | $          | 0.13 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 8/5/2004              |       | D  Ference     |       | 2,000,000                  |       | Common  Stock            |       |                    |       | $                           | 320,000    |                                             | $          | 0.16 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 8/5/2004              |       | R  Dove        |       | 3,000,000                  |       | Common  Stock            |       |                    |       | $                           | 420,750    |                                             | $          | 0.14 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 8/6/2004              |       | J  Murphy      |       | 5,000,000                  |       | Common  Stock            |       |                    |       | $                           | 544,000    |                                             | $          | 0.11 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 8/13/2004             |       | F  Noser       |       | 100,000                    |       | Common  Stock            |       |                    |       | $                           | 11,050     |                                             | $          | 0.11 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 8/13/2004             |       | C  Erickson    |       | 100,000                    |       | Common  Stock            |       |                    |       | $                           | 11,050     |                                             | $          | 0.11 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 8/13/2004             |       | M  VanCooney   |       | 100,000                    |       | Common  Stock            |       |                    |       | $                           | 11,050     |                                             | $          | 0.11 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 8/13/2004             |       | B  Fayette     |       | 100,000                    |       | Common  Stock            |       |                    |       | $                           | 11,050     |                                             | $          | 0.11 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 8/13/2004             |       | R  Schwartz    |       | 100,000                    |       | Common  Stock            |       |                    |       | $                           | 11,050     |                                             | $          | 0.11 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 8/13/2004             |       | J  Smith       |       | 100,000                    |       | Common  Stock            |       |                    |       | $                           | 11,050     |                                             | $          | 0.11 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 8/13/2004             |       | R  Adam        |       | 100,000                    |       | Common  Stock            |       |                    |       | $                           | 11,050     |                                             | $          | 0.11 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 8/13/2004             |       | C  Mottayaw    |       | 100,000                    |       | Common  Stock            |       |                    |       | $                           | 11,050     |                                             | $          | 0.11 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 8/13/2004             |       | R  VanSchaik   |       | 100,000                    |       | Common  Stock            |       |                    |       | $                           | 11,050     |                                             | $          | 0.11 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 10/29/2004            |       | K  Purohit     |       | 1,000,000                  |       | Common  Stock            |       |                    |       | $                           | 73,100     |                                             | $          | 0.07 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| 10/29/2004            |       | R  Hester      |       | 7,000,000                  |       | Common  Stock            |       |                    |       | $                           | 1,075,250  |                                             | $          | 0.15 |   |
|                  |       |           |       |                       |       |                     |       |                    |       |                        |       |                                             |       |
| Total                 |       |           |       | 27,091,178                 |       |                     |       | $                       | 500,000    |                        | $          | 3,231,300                                        |       |   |   |
|                       |            |                |            |                            |            |                          |            |                         |            |                             |            |                                                  |            |  |  |  |  |  |  |  |  |

 

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(1)                                  Residentof Taiwan

 

(2)                                  Of the $500,000, we received $80,000 andrecorded a stock subscription receivable in the amount of $420,000 that remainsoutstanding at December 31, 2004.

 

During the year ended December 31, 2004, we issued approximately 27,091,000shares of our common stock in exempt transactions. In consideration, we have

 

13

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received approximately $500,000 in cash or stock subscriptionsreceivable and services with a fair value of $3,231,300. These issuances weremade in reliance upon the exemptions from registration set forth in Section 4(2) ofthe Securities Act and the transaction did not involve a distribution or publicoffering. We issued stock to Ms. Mei Chung Tang Lee(1) in reliance onRegulation S of the Securities Act of 1933.

 

Issuance of Convertible Notes

 

In the period April through December 2004, the Companyentered into agreements to issue convertible notes with approximately fifty(50) investors in an aggregate amount of $1,088,995. The convertible notesaccrue simple interest at an annual rate of 1.47% and converted any timebetween the issuance of the agreement and within six months of the originalissuance date of the notes into an aggregate of approximately 23,392,000shares.  The notes automaticallyconverted to shares on the respective conversion dates reducing the convertiblepromissory note balance to a net of $13,660 at December 31, 2004 andincreasing the liability to issue stock account by $1,042,245.  A beneficial conversion value calculatedbased on an intrinsic method that compared the fair value of the stock on thedate of the issuance of the note to the conversion strike price. The beneficialconversion value was recognized as debt discount and paid in capital was addedin the amount of $855,328. For the year ended December 31, 2004, thediscount amortized to interest expense was approximately $847,000. In January andFebruary 2005, all but 373,485 of the shares required to be issued as aresult of the conversions, had been issued.

 

ITEM 6.                             PLAN OF OPERATION 

 

We are a development stagecommunications technology company focused on development and supply ofvoice-quality products and related services that support critical networkperformance requirements in the voice segment of the rapidly converging voice,data and video communications industry. Specifically, through our wholly-owned subsidiary North ElectricCompany, Inc. (“North Electric”), we design, develop and offer network-widefault identification, fault isolation and voice quality assurance products andcritical real-time network health and performance monitoring services for bothproviders and end-users of Internet telephony, now commonly referred to asVoice over Internet Protocol (“VoIP”). The VoIP industry critically depends on the ability to deliver voiceservice over the Internet infrastructure with the high quality that end-usershave grown to expect with traditional telephony services.  We believe network monitoring for voicequality is a vital function for a successful commercial future of IP telephony.

 

VoIP Market Overview

 

VoIP is one of the fastestgrowing segments in the telecommunications sector.  Yankee Group, a leading market research firm,estimated that the number of VoIP subscribers would grow from a base of 131,000subscribers in 2003 to one million by year end 2004 and  with growth to 17.5 million subscribers by2008.  A recent report by research firmIDC says the number of VoIP subscribers in the U.S. will jump from threemillion in 2005 to 27 million in 2009. The primary VoIP service providers are expected to include local andlong distance telephone companies such as SBC, Verizon, Bellsouth, Qwest,Sprint, AT&T, and MCI; cable multi-service operators (MSOs) such asCablevision, Comcast, Cox, Rogers, and Time Warner Cable; and alternatetelephone service providers such as Vonage. The Yankee Group also estimated that the cable MSOs will capture 56percent of the VoIP subscribers by the end of 2005.

 

The dollar value of the VoIPsubscriber market for US and Canadian cable operators, according to KineticStrategies, is estimated to be $15 billion by the end of 2009.  We believe our primary business opportunityis driven by this VoIP subscriber growth and therefore, our operating plan focuseson sales to the VoIP network owners and operators and enterprise networkusers.  North Electric is our primaryoperating entity and is expected to account for the company’s total revenuesover the next twelve months.

 

CasCommunications

 

Weown 40% of CasCommunications, a development stage entity.

 

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North Electric Company

 

Wedesign, develop and offer an end-to-end network fault identification, faultisolation and voice quality assurance product, and critical real-time networkhealth and performance monitoring services for VoIP service providers and,potentially, mission critical end-users.

 

Tomaintain or increase their subscriber base, while reducing operating costs,most cable MSOs, local and long distance network operators, and alternate telephonyproviders are migrating to Internet infrastructure as the low-costcommunications technology leader.  Voiceover the Internet introduces the need to assure high quality voice servicecomparable to that which customers have grown to expect with traditional voicetelephony networks.

 

Webelieve the North Electric product enables VoIP service providers to assurevoice quality and enables them to detect incipient network degradation andpinpoint network problems so they may be repaired to avoid customersexperiencing a loss of service or poor voice quality.

 

Weare building upon the early success of our network voice-quality trials withcertain IP cable network operators. Specifically, during 2004, we shipped North Electric NAS 6131 evaluationsystems to the first three of Time Warner Cable’s 29 divisions to support theirVoIP service roll-out.  Our first systemevaluation trial completed successfully in the fourth  quarter of 2004 and resulted in Time Warner’sfirst expansion order in that same quarter. Evaluation systems 2 and 3 are expected to complete their trial programsin the second quarter of 2005.  Earlysuccesses of evaluation system 2 resulted in an additional expansion order fromTime Warner in the first quarter of 2005.

 

NorthElectric anticipates shipping an evaluation system to its first major localtelephone company in April 2005.  Webelieve the successes achieved in these initial trials establishes the patternof efficacy and value of our IP network monitoring and critical fault isolationsolutions for IP service providers, which we believe indicates the potentialfor network-wide implementation of our products and services.

 

During the next twelvemonths, we plan to continue to focus on product development and expansion ofour marketing, sales and customer service efforts.

 

Product Development

 

North Electric’s flagshipproduct, the NAS-6131, is comprised of an array of Network Access Probes(“NAPs”) that are distributed throughout a customer’s IP network and a CentralServer that controls and receives information from the array of distributedNetwork Access Probes.  The NetworkAccess Probes autonomously originate and terminate telephone calls and perform

 

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various tests andmeasurements across the network.   OurCentral Server is a proprietary Network Data Acquisition system thatcontinuously collects and compiles the results of the Network Access Probeactivity and should network faults be detected, our system alerts the networkowner/operator of the incipient voice quality degradation or otherdeteriorating network faults as well as identifying the precise location andnature of each VoIP network disturbance.

 

Our product developmentinitiatives focus on advanced fault isolation and alerting methodologies.  We believe our existing product andtechnology development skill set enable us to set the standard for faultisolation and strategic developments in this functional area. We expect toexpand the range of Network Access Probe types and functions as needed toenable sales into new markets.  Webelieve our present Network Access Probe types are adequate not only to servethe needs of cable, local and long distance carriers, but they are also able tosupport Fortune 500 enterprise and federal government sales as well.

 

Marketing and Sales

 

We commenced sales of ourproducts in the second quarter of 2004, shipped the first evaluation system onJuly 29, 2004 and received our first revenue in December 2004.  Through April 15, 2005 North Electric hasshipped evaluation product totaling more than $430,000.  Of these evaluation systems, $87,000 hasalready converted to invoiced shipments based upon trial performancevalidation.  We anticipate that thepresent installed base of evaluation NAP systems will (?) convert toinvoiceable shipments upon the completion of the programmed trial andvalidation sequence.

 

We are developing a servicelevel agreement (“SLA”) business to complement our “product sales”business.  Under such a business model,we would sell certain equipment components of the NAS-6131 system whileretaining ownership of others, thereby establishing the basis for operationalservices contracts with our customers. We believe such a strategy would provide a sustainable long-term revenuesource while building a suite of value-added customer services and customerloyalty. Accordingly, we have allocated $302,000 of the $430,000 totalequipment shipped through April 15, 2005 to our proposed SLA business model.  We anticipate formally introducing our SLAmodel during second quarter of 2005. We continue to expand our marketing andselling efforts to recruit new customers within the cable, MSO, and local andlong distance telephony provider segments.

 

We plan to commence theFortune 500 enterprise and federal government market segment development duringthe second quarter of 2005. We are actively developing our strategic partnerprogram, identifying certain alliance candidates who presently enjoyconsiderable market presence; through these channels we expect to broaden thecustomer reach for our North Electric products and services.  We presently have Joint Marketing and SalesAgreements with both Teckno Telecom LLC (www.TecknoTelecom.com) and Acterna LLC(www.Acterna.com) both of which have network performance management productscomplementary to our North Electric NAS-6131 system.

 

While overseas opportunitiesare not a primary market focus at this stage of our development, we arenevertheless responding in collaboration with our strategic partners torequests for information from certain major European and Asian communicationscompanies.

 

The company is in transitionto volume commercial operations from a product evaluation stage of operationsand is in the early stages of securing revenue generating commercial contracts.As

 

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such, management believesthat the major expenses incurred over the next twelve months will continue toinclude the necessary emphasis on customer development, new product researchand development and will also begin to bolster sales and marketing efforts,customer service effort and market segment-specific product enhancements toaddress this reality.

 

Liquidity andCapital Resources

 

Projected CashFlows for the year ended December 31, 2005:

 
| ** **                                      | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3**     | ** ** | **Q4** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|--------|------------|--------|------------|------------|------------|--------|------------|-----------|------------|
| Cash on Hand Beginning of Quarter               |       | $      | 0          |   | $          | (1,131,625 | )          | $      | (2,013,250 | )         | $          | (2,269,875 | ) |   |   |
| Revenues Received from Customers                |       | $      | 0          |   | $          | 500,000    |       | $      | 1,500,000  |      | $          | 2,186,000 |   | $ | 4,186,000 |   |
| Cost of Sales (Purchase of  Inventory/Licenses) |       | $      | (50,000    | )      | $          | (300,000   | )          | $      | (675,000   | )         | $          | 858,700 |   | $ | (1,883,700 | ) |
| Sales/Marketing/Sales Support                   |       | $      | (93,750    | )      | $          | (93,750    | )          | $      | (93,750    | )         | $          | 93,750 |   | $ | (375,000 | ) |
| Development/R&D                             |       | $      | (451,875   | )      | $          | (451,875   | )          | $      | (451,875   | )         | $          | 451,875 |   | $ | (1,807,500 | ) |
| Adminstrative and Misc.                         |       | $      | (536,000   | )      | $          | (536,000   | )          | $      | (536,000   | )         | $          | 536,000 |   | $ | (2,144,000 | ) |
| Cash on Hand End of Quarter                     |       | $      | (1,131,625 | )      | $          | (2,013,250 | )          | $      | (2,269,875 | )         | $          | (2,023,200 | ) |   |   |

 

Current cashon hand and projected cash on hand is inadequate to execute our plan ofoperation.  We continue to seek additional financing through the offeringand sale of our securities in order to satisfy our immediate and short-termcash needs.  We intend to raise additional capital in part through our newassociation with 350 Group, as further described below.  Given the lossesincurred to date and the lack of substantial revenue generated, we have littleor no access to conventional debt markets.  Funding to support

 

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both short andmid-term requirements for product development and launch will be done throughadditional sale of shares and potentially, to a lesser extent, from workingcapital that might be generated from customer revenue in the future.

 

During Aprilthrough December 2004, we entered into agreements to issue convertible notes toapproximately fifty (50) investors for a total aggregate investment to date of$1,088,995.  These funds were used to fund operations during 2004.

 

On April 1,2005, we executed a term sheet with 350 Group, an enterprise development firmled by managing directors Reznor Orr, Craig Lyons and Tim Cartwright.  350Group will serve as a strategic advisor, financing advisor and operationssupport provider to the Company.  350 Group has committed to apply itsresources, including a global professional network, operational expertise, andcorporate finance solutions to help the Company develop as a profitableprovider of products and services to the Voice of Internet Protocol telephony industry. We plan to work with 350 Group to identify financing sources to continue thedevelopment of the Company.

 

There can beno assurance that we will be able to raise additional capital on acceptableterms or at all.  If we are unable to raise additional capital, we wouldneed to curtail or reduce some or all of our operations, and some or all of theoperations of North Electric.

 

18

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CriticalAccounting Policies

 

Ourdiscussion and analysis of our financial condition and results of operations arebased upon our condensed consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates. The preparation of our consolidated financial statements requires us tomake estimates and judgments that affect the reported amounts of assets, liabilitiesand equity and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. These estimates have a material impact on ourfinancial statements.

 

RevenueRecognition

 

TheCompany derives revenue from three primary sources: (1) system hardwarecomponent sales revenue, (2) software license revenue and (3) servicesand maintenance and right to use revenue, which include support, maintenance,right to use fees and consulting.  Revenueon system hardware component sales is recognized upon delivery to, andacceptance by the customer.  Softwarelicense revenue recognition is substantially governed by the provisions ofStatement of Position No. 97-2, “Software Revenue Recognition,” (“SOP97-2”) issued by the American Institute of Certified Public Accountants.  The Company exercises judgment and uses estimatesin connection with the determination of the amount of software license andservices revenue to be recognized in each accounting period.  For software license arrangements that do notrequire significant modification or customization of the underlying software,the Company recognizes revenue when: (1) it enters into a legally bindingarrangement with a customer for the license of software; (2) it deliversthe products or perform the services; (3) customer payment is deemed fixedor determinable and free of contingencies or significant uncertainties and (4) collectionis probable and (5) vendor-specific objective evidence (“VSOE”) of fairvalue exists to allocate the total fee among all delivered and undeliveredelements in the arrangement.

 

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MultipleElement Arrangements

 

TheCompany typically enters into arrangements with customers that includeperpetual software licenses, system hardware, maintenance and right to usefees. Software licenses are sold on a per copy basis. Per copy licenses givecustomers the right to use a single copy of licensed software for exclusive useon the Company’s system hardware. Assuming all other revenue recognitioncriteria are met, license revenue is recognized upon delivery using theresidual method in accordance with SOP No. 98-9. Under the residualmethod, the Company allocates and defers revenue for the undelivered elements,based on VSOE of fair value, and recognizes the difference between the totalarrangement fee and the amount deferred for the undelivered elements asrevenue. The determination of fair value of each undelivered element inmultiple element arrangements is based on the price charged when the sameelement is sold separately. If sufficient evidence of fair value cannot bedetermined for any undelivered item, all revenue from the arrangement isdeferred until VSOE of fair value can be established or until all elements ofthe arrangement have been delivered. If the only undelivered element ismaintenance and technical support for which the Company cannot establish VSOE,the Company will recognize the entire arrangement fees ratably over themaintenance and support term.

 

Systemhardware is hardware that is installed at a customer site for the purpose ofthe utilizing the licensed software and as such, does not qualify as aseparately deliverable element. The timing of revenue recognition from the saleof system hardware is therefore dependent upon the recognition of revenue forthe related software licenses.

 

Maintenanceand right to use fees includes updates (unspecified product upgrades andenhancements) on a when-and-if-available basis, telephone support and bug fixesor patches and maintenance of  thesystems hardware, which would include repairs or replacement as necessary. VSOEof fair value for maintenance and right to use fees is based upon stated annualrenewal rates. Maintenance and right to use fees revenue is recognized ratablyover the maintenance and right to use term.

 

*Revenue Recognition Criteria*

 

The Company defines revenue recognition criteria asfollows:

 

•      *Persuasive Evidence of an Arrangement Exists.*It is the Company’s customary practice to have a  purchase order prior to recognizing revenueon an arrangement.

 

•      *Delivery has Occurred.* The Company’ssoftware and systems hardware are physically delivered and installed at itscustomers site. The Company considers delivery complete when the software andsystem hardware products have been installed and the testing phase completed.The Company defers  all the revenue untilthe testing phase had been completed and the Company receives customeracceptance.

 

•      *The Vendor’s Fee is Fixed or Determinable.*The Company’s customary payment terms are generally within 30 days afterthe invoice date.

 

•      *Collection is Probable.* Due to a lack ofcustomer history upon which a judgment could be made as to the collectibilty ofa particular receivable, revenue is currently recognized upon receipt ofpayment assuming all other conditions of the sale have been met.

 

***Cost of Revenue***

 

Cost of revenue includes costs related to userlicense, systems hardware and maintenance and right to use fees revenue. Costof user license revenue includes material, packaging, shipping and otherproduction costs and third-party royalties. Cost of systems hardware includesthe cost of goods sold and installation costs. Cost of maintenance and right touse fees and consulting fees include related personnel costs, and hardwarerepair costs. Third-party consultant fees are also included in cost ofservices.

 

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Inventory:

TheCompany’s inventory is stated at the lower of cost or market value. Cost isdetermined using the first-in, first-out method.  Unusual losses resulting from lower of costor market adjustments or losses on firm purchase commitments, if any, aredisclosed, and if material, separately stated from cost of goods sold in thestatement of operations.

 

Commitmentsand Contingencies

 

Commitmentsand contingencies are evaluated on an individual basis to determine the impacton current and future liabilities and assets. We make a determination as towhether such a liability or loss is reasonably possible, and we either estimatethe amount of possible loss or liability or range of loss or liability. In rarecases, we are not able to determine the amount of such loss or liability oreven a range of amounts in a way that would not be misleading. We may be unableto calculate a liability or loss if substantiated information is unavailable orthe amount of the loss or liability depends significantly on future events.

 

Inaddition to evaluating estimates relating to the items discussed above, we alsoconsider other estimates, including but not limited to, those related to softwaredevelopment costs, goodwill and identifiable intangible assets. We base ourestimates on historical experience and on various other assumptions that we believeare reasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets, liabilities and equitythat are not readily apparent from other sources. Actual results and outcomescould differ from these estimates and assumptions. An explanation of significantestimates and related judgments made in these areas are noted below. Since December 31,2004, there have been no significant changes to our critical accountingpolicies.

 

Goodwilland Identifiable Intangible Assets

 

Goodwillrepresents the excess of cost over the fair value of net tangible and identifiableintangible assets of acquired companies. As a result of the

 

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acquisition of substantially all of the assets and certain of theliabilities of North Electric Company in April 2002, the Company recordedapproximately $207,000 of goodwill. In accordance with the provisions of SFAS No. 142,we no longer amortize goodwill. However, goodwill must be reviewed at leastannually for impairment. We have elected to perform its annual review at theend of each fiscal year. If the carrying value of our goodwill were to exceedthe fair value at some time in the future, we would be required to reportgoodwill impairment charges as an operating expense in our statement ofoperations. Whenever events or changes in circumstances indicate that thecarrying value of goodwill may not be recoverable, we must conduct animpairment assessment of its goodwill and identifiable intangible assets.Factors that could trigger an impairment review include:

 

•                                          Significantunderperformance relative to expected historical or projected future researchand development and operating results;

 

•                                          Significantchanges in the manner of use of the acquired assets or the strategy for theoverall business;

 

•                                          Significantnegative industry or economic trends; and

 

•                                          Whenit appears that the carrying value of intangibles or goodwill might not berecoverable based on one or more of the above criteria, management will useprojected discounted cash flow, independent valuation or other means to measureany impairment.

 

Software development costs

 

Statement of Financial Accounting Standard (“SFAS”) No. 86, “Accountingfor the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”,requires capitalization of certain software development costs subsequent to theestablishment of technological feasibility and readiness of general release. In2004, certain costs were incurred subsequent to the establishment oftechnological feasibility and prior to the readiness of general release. Theseexpenses were immaterial in nature and in total and therefore not capitalized.

 

Fair value of financial instruments

 

The carrying value of cash, notes receivable, accounts payable andaccrued expenses and notes payable approximate fair value because of therelatively short maturity of these instruments.

 

Stock-based compensation

 

The Company follows guidance provided in SFAS No. 123, “Accountingfor Stock-Based Compensation”, which encourages companies to recognize expensefor stock-based awards based on their estimated fair value on the grant date.SFAS No. 123 permits companies to account for stock-based compensationbased on provisions prescribed in SFAS No. 123 or based on theauthoritative guidance in Accounting Principles Board

 

22

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Opinion No. 25, “Accounting for Stock Issued to Employees”. TheCompany uses the fair value method of SFAS No. 123 to account for allstock options including those issued to employees.

 

Income Taxes

 

TheCompany, a C-corporation, accounts for income taxes under Statement ofFinancial Accounting Standards No. 109, “Accounting for Income Taxes.”Under this method, deferred tax assets and liabilities are determined based ondifferences between the financial reporting and tax basis of assets and liabilitiesand are measured using the enacted tax rates and laws that will be in effectwhen the differences are expected to reverse. Valuation allowances areestablished when necessary to reduce deferred tax assets to the amount expectedto be realized. The principal differences are net operating losses, start-upcosts and the use of accelerated depreciation methods to calculate depreciationexpense for income tax purposes.

 

Consolidationof Variable Interest Entities

 

InJanuary 2003 and revised December 2003, the FASB issued FIN No. 46,“Consolidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements”, requires consolidation by business enterprises ofvariable interest entities, as defined, when certain conditions are met.  Pursuant to FIN No. 46, the Companycontinues to consolidate CASCommunications, Inc.

 

Accounting for Convertible Notes

 

The Company issues convertible debt securities with non-detachable andautomatic conversion features. The note holders have the right to have thenotes converted into a number of shares of the Company’s Common Stock atconversion prices ranging $0.033 to $0.10 per share.  The conversion prices on all the convertiblenotes are “in the money” on the date of the agreement resulting in a beneficialconversion feature. The Company computes the fair value of the beneficialconversion feature based on the intrinsic method that computes the differencebetween the conversion price and the fair market price of the Company’s stockon the date of the agreement. The Company records the fair value of thebeneficial conversion feature as an increase to paid in capital and a debtdiscount. The debt discount is amortized over the period between the date ofthe agreement and the automatic conversion date. The amortized debt discount isrecorded as interest expense.

 

In eight agreements, due to a typographical error, the automaticconversion date occurred before the date of the agreement. The agreements werenot amended. In these eight agreements only, the transactions are recorded as asale of securities and no beneficial conversion feature is recognized.

 

23

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ITEM 7.                             FINANCIAL STATEMENTS

 

INDEX

 

DataMEG Corp. and Subsidiaries (A Development Stage Enterprise)

 

Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004

 

CONTENTS

 
| Report  of Independent Registered Public Accounting Firm |   |
|----------------------------------------------------------|--------|
|                                                     |   |
| Balance  sheets                                          |   |
|                                                     |   |
| Statements  of operations                                |   |
|                                                     |   |
| Statements  of stockholders’ equity (deficit)       |   |
|                                                     |   |
| Statements  of cash flows                                |   |
|                                                     |   |
| Notes to  Consolidated Financial Statements              |   |

 

24

----

 

REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

 
| TO THE BOARD OF DIRECTORS AND STOCKHOLDERS       |
|--------------------------------------------------|
| DATAMEG CORP. (A  DEVELOPMENT STAGE ENTERPRISE), |
| Boston, MA                                       |

 

Wehave audited the accompanying consolidated balance sheets of DATAMEG CORP. ANDSUBSIDIARIES, (a development stage enterprise), (the “Company”) as of December 31,2003 and 2004, and the related consolidated statements of operations,stockholders’ equity (deficit) and cash flows for the years then ended. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of DATAMEG CORP. ANDSUBSIDIARIES, as of December 31, 2003 and 2004 and the results of itsoperations and its cash flows for the years then ended, in conformity withaccounting principles generally accepted in the United States of America.

 

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern. As discussed in Note R to the financialstatements, the Company has suffered a significant loss from operations and hasa net capital deficiency, which raises substantial doubt about its ability tocontinue as a going concern. Management’s plans regarding those matters alsoare described in Note R.  The financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

Asmore fully described in Note B, the Company has restated its 2003 financialstatements to adjust the accounting for stock options granted to employees andconsultants and to remove preferred stock previously reported on the balancesheet.

 
| Fitzgerald, Snyder & Co., P.C. |
|-----------------------------------------|
| McLean, Virginia                        |
| April 13, 2005                     |

 

25

----

 

**DataMEG Corp. and Subsidiaries(A Development Stage Enterprise)****Consolidated Balance Sheets**
| ** **                                                                                                                                                                                  | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | **2003**         | ** ** | **2004**         | ** ** |
| ** **                                                                                                                                                                                  | ** ** | **(restated)**   | ** ** | ** **       | ** ** |
| **ASSETS**                                                                                                                                                                                  |       |             |       |             |       |
|                                                                                                                                                                                        |       |             |       |             |       |
| CURRENT ASSETS:                                                                                                                                                                             |       |             |       |             |       |
| Cash                                                                                                                                                                                        |       | $                | 312,321    |             | $          | — |   |
|                                                                                                                                                                                        |       |             |       |             |       |
| Accounts receivable, net                                                                                                                                                                    |       | —           |       | 50               |       |
|                                                                                                                                                                                        |       |             |       |             |       |
| Inventory                                                                                                                                                                                   |       | —           |       | 116,407          |       |
| Total current assets                                                                                                                                                                        |       | 312,321          |       | 116,457          |       |
|                                                                                                                                                                                        |       |             |       |             |       |
| PROPERTY AND EQUIPMENT, net                                                                                                                                                                 |       | 29,036           |       | 40,242           |       |
|                                                                                                                                                                                        |       |             |       |             |       |
| OTHER ASSETS:                                                                                                                                                                               |       |             |       |             |       |
| Goodwill                                                                                                                                                                                    |       | 206,746          |       | 206,746          |       |
| Prepaid expenses                                                                                                                                                                            |       | 17,267           |       | 16,867           |       |
| Deposits                                                                                                                                                                                    |       | 6,945            |       | 7,218            |       |
| Total other assets                                                                                                                                                                          |       | 230,958          |       | 230,831          |       |
|                                                                                                                                                                                        |       |             |       |             |       |
|                                                                                                                                                                                        |       | $                | 572,315    |             | $          | 387,530 |   |
|                                                                                                                                                                                        |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)**                                                                                                                                    | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                                                                                                                        |       |             |       |             |       |
| CURRENT LIABILITIES:                                                                                                                                                                        |       |             |       |             |       |
| Capital lease obligation                                                                                                                                                                    |       | $                | 8,302      |             | $          | 8,302 |   |
| Promissory notes                                                                                                                                                                            |       | 1,075,896        |       | 1,214,138        |       |
| Accounts payable and accrued expenses                                                                                                                                                       |       | 777,500          |       | 1,284,633        |       |
| Accrued compensation                                                                                                                                                                        |       | 695,891          |       | 1,596,013        |       |
| Due to stockholders and officers                                                                                                                                                            |       | 265,180          |       | 84,626           |       |
| Convertible promissory notes, net of  amortization                                                                                                                                          |       | —           |       | 20,837           |       |
| Convertible subordinated debentures                                                                                                                                                         |       | 20,000           |       | 20,000           |       |
| Deferred revenue                                                                                                                                                                            |       | —           |       | 9,456            |       |
| Liability for stock to be issued                                                                                                                                                            |       | 818              |       | 1,488,463        |       |
| Total current liabilities                                                                                                                                                                   |       | 2,843,587        |       | 5,726,468        |       |
|                                                                                                                                                                                        |       |             |       |             |       |
| Total liabilities                                                                                                                                                                           |       | 2,843,587        |       | 5,726,468        |       |
|                                                                                                                                                                                        |       |             |       |             |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                               |       | —           |       | —           |       |
|                                                                                                                                                                                        |       |             |       |             |       |
| MINORITY INTEREST IN CONSOLIDATED  SUBSIDIARY                                                                                                                                               |       | (67,939          | )          | (67,939          | )          |
|                                                                                                                                                                                        |       |             |       |             |       |
| STOCKHOLDERS’ EQUITY (DEFICIT):                                                                                                                                                        |       |             |       |             |       |
| Common stock, $.01 par value; 340,000,000  shares authorized at December 31, 2003 and 2004; 226,029,772 and 252,086,074  issued and outstanding at December 31, 2003 and 2004, respectively |       | 2,260,298        |       | 2,520,861        |       |
| Common stock subscriptions receivable                                                                                                                                                       |       | (120,056         | )          | (420,056         | )          |
| Additional paid-in capital                                                                                                                                                                  |       | 12,916,675       |       | 17,144,573       |       |
| Treasury stock                                                                                                                                                                              |       | (75,392          | )          | (75,392          | )          |
| Stock options                                                                                                                                                                               |       | 1,025,155        |       | 3,029,050        |       |
| Deferred compensation                                                                                                                                                                       |       | (42,917          | )          | —           |       |
| Accumulated deficit during development  stage                                                                                                                                               |       | (18,167,096      | )          | (27,470,035      | )          |
| Total stockholders’ equity (deficit)                                                                                                                                                   |       | (2,203,333       | )          | (5,270,999       | )          |
|                                                                                                                                                                                        |       |             |       |             |       |
|                                                                                                                                                                                        |       | $                | 572,315    |             | $          | 387,530 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

26

----

 

**DataMEG Corp. and Subsidiaries(A Development Stage Enterprise)****Consolidated Statements ofOperations**
| ** **                                                  | ** ** | **For the**      | ** ** | **For the**      | ** ** | **Cumulative**            | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                  | ** ** | **year ended**   | ** ** | **year ended**   | ** ** | **from inception**        | ** ** |
| ** **                                                  | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **(January 13, 1999) to** | ** ** |
| ** **                                                  | ** ** | **2003**         | ** ** | **2004**         | ** ** | **December 31, 2004**     | ** ** |
| ** **                                                  | ** ** | **(restated)**   | ** ** | ** **       | ** ** | **(unaudited)**           | ** ** |
| ** **                                                  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **                | ** ** |
| REVENUE:                                                    |       |             |       |             |       |                      |       |
| Hardware and software sales                                 |       | $                | —     |             | $          | 39,459                    |       | $ | 39,459 |   |
| Maintenance and support fees                                |       | —           |       | 1,891            |       | 1,891                     |       |
| Consulting fee income                                       |       | —           |       | 4,750            |       | 4,750                     |       |
| Total Revenue                                               |       | —           |       | 46,100           |       | 46,100                    |       |
|                                                        |       |             |       |             |       |                      |       |
| COST OF REVENUES                                            |       | —           |       | 23,980           |       | 23,980                    |       |
| Gross Profit                                                |       | —           |       | 22,120           |       | 22,120                    |       |
|                                                        |       |             |       |             |       |                      |       |
| OPERATING EXPENSES:                                         |       |             |       |             |       |                      |       |
| General and administrative                                  |       | 3,144,030        |       | 4,688,389        |       | 18,660,166                |       |
| Selling and marketing                                       |       | —           |       | 2,139,103        |       | 2,139,103                 |       |
| Research and development                                    |       | 1,184,445        |       | 1,491,660        |       | 5,202,160                 |       |
| Total operating expenses                                    |       | 4,328,475        |       | 8,319,152        |       | 26,001,429                |       |
|                                                        |       |             |       |             |       |                      |       |
| Loss from operations                                        |       | (4,328,475       | )          | (8,297,032       | )          | (25,979,309               | )     |
|                                                        |       |             |       |             |       |                      |       |
| OTHER INCOME (EXPENSES):                                    |       |             |       |             |       |                      |       |
| Interest income                                             |       | —           |       | —           |       | 225                       |       |
| Interest expense                                            |       | (170,196         | )          | (1,005,932       | )          | (1,333,797                | )     |
| Loss on acquisition fee                                     |       | (50,000          | )          | —           |       | (123,950                  | )     |
| Loss on disposal of property and equipment                  |       | (401             | )          | —           |       | (1,459                    | )     |
| Gain on disposal of property and equipment                  |       | —           |       | 25               |       | 25                        |       |
| Loss on impairment of patents                               |       | —           |       | —           |       | (127,274                  | )     |
| Loss on litigation                                          |       | (132,540         | )          | —           |       | (159,240                  | )     |
| Realized gains on sale of securities                        |       | —           |       | —           |       | 8,530                     |       |
| Total other income (expenses)                               |       | (353,137         | )          | (1,005,907       | )          | (1,736,940                | )     |
|                                                        |       |             |       |             |       |                      |       |
| LOSS BEFORE BENEFIT FOR INCOME TAXES AND  MINORITY INTEREST |       | (4,681,612       | )          | (9,302,939       | )          | (27,716,249               | )          |
|                                                        |       |             |       |             |       |                      |       |
| Benefit for income taxes                                    |       | —           |       | —           |       | —                    |       |
|                                                        |       |             |       |             |       |                      |       |
| LOSS BEFORE MINORITY INTEREST                               |       | (4,681,612       | )          | (9,302,939       | )          | (27,716,249               | )          |
|                                                        |       |             |       |             |       |                      |       |
| MINORITY INTEREST                                           |       | 233,202          |       | —           |       | 246,214                   |       |
|                                                        |       |             |       |             |       |                      |       |
| NET LOSS                                                    |       | (4,448,410       | )          | $                | (9,302,939 | )                         | $          | (27,470,035 | ) |
|                                                        |       |             |       |             |       |                      |       |
| Net loss per common share (basic and  diluted)              |       | (0.02            | )          | $                | (0.04      | )                         | $          | (0.26 | )  |
|                                                        |       |             |       |             |       |                      |       |
| Weighted average number of common shares  outstanding       |       | 197,536,041      |       | 234,978,056      |       | 104,088,795               |       |
|                                                             |            |                  |            |                  |            |                           |            |  |  |  |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

27

----

 

**DataMEG Corp. and Subsidiaries(A Development Stage Enterprise)****Consolidated Statements ofStockholders’ Equity (Deficit)**

 
| ** **                                                                              | ** ** | ** **    | ** ** | **Common**      | ** ** | ** ** | ** **  |
|-----------------------------------------------------------------------------------------|------------|---------------|------------|-----------------|------------|------------|-------------|
| ** **                                                                              | ** ** | ** **    | ** ** | **Stock**       | ** ** | ** ** | ** **  |
| ** **                                                                              | ** ** | **Price Per** | ** ** | **Shares**      | ** ** | **Common** | ** **  |
| ** **                                                                              | ** ** | **Share**     | ** ** | **Outstanding** | ** ** | **Stock**  | ** **  |
| ** **                                                                              | ** ** | ** **    | ** ** | ** **      | ** ** | ** ** | ** **  |
| **Balance, January 13, 1999**                                                           |       |          |       | —          |       | $          | —      |   |
|                                                                                    |       |          |       |            |       |       |        |
| January 13, 1999 - stock issued for  services at fair value to Benson, Phillips, Cairns |       | $             | 0.00       |            | 27,420,529 |       | 274,205     |   |
| January 29, 1999 - stock issued for cash                                                |       | $             | 0.35       |            | 138,546    |       | 1,386       |   |
| February 12, 1999 - stock issued for cash                                               |       | $             | 0.35       |            | 190,501    |       | 1,905       |   |
| February 17, 1999 - stock issued for cash                                               |       | $             | 0.35       |            | 43,296     |       | 433         |   |
| March 1, 1999 - stock issued for cash                                                   |       | $             | 0.35       |            | 127,000    |       | 1,270       |   |
| March 2, 1999 - stock issued for cash                                                   |       | $             | 0.35       |            | 28,864     |       | 289         |   |
| March 17, 1999 - stock issued for cash                                                  |       | $             | 0.35       |            | 43,296     |       | 433         |   |
| March 19, 1999 - stock issued for cash                                                  |       | $             | 0.35       |            | 43,296     |       | 433         |   |
| April 2, 1999 - stock issued for cash                                                   |       | $             | 0.35       |            | 101,023    |       | 1,010       |   |
| April 9, 1999 - stock issued for cash                                                   |       | $             | 0.35       |            | 42,141     |       | 421         |   |
| April 13, 1999 - stock issued for cash                                                  |       | $             | 0.35       |            | 14,432     |       | 144         |   |
| April 14, 1999 - stock issued for cash                                                  |       | $             | 0.35       |            | 9,236      |       | 92          |   |
| April 15, 1999 - stock issued for cash                                                  |       | $             | 0.35       |            | 57,727     |       | 577         |   |
| April 16, 1999 - stock issued for cash                                                  |       | $             | 0.35       |            | 28,864     |       | 289         |   |
| April 23, 1999 - stock issued for cash                                                  |       | $             | 0.35       |            | 187,614    |       | 1,876       |   |
| April 26, 1999 - stock issued for services  at fair value -Driscoll                     |       | $             | 0.35       |            | 28,864     |       | 289         |   |
| May 3, 1999 - stock issued for cash                                                     |       | $             | 0.35       |            | 101,023    |       | 1,010       |   |
| July 19, 1999 - stock issued for cash                                                   |       | $             | 0.46       |            | 75,958     |       | 760         |   |
| July 26, 1999 - stock issued for cash                                                   |       | $             | 0.46       |            | 21,703     |       | 217         |   |
| July 30, 1999 - stock issued for services  at fair value - Barr-Haneau                  |       | $             | 0.35       |            | 21,648     |       | 216         |   |
| July 30, 1999 - stock issued for services  at fair value - Titus                        |       | $             | —     |            | 28,864     |       | 289         |   |
| August 2, 1999 - stock issued for cash                                                  |       | $             | 0.46       |            | 21,706     |       | 217         |   |
| August 4, 1999 - stock issued for cash                                                  |       | $             | 0.46       |            | 23,091     |       | 231         |   |
| August 10, 1999 - stock issued for cash                                                 |       | $             | 0.46       |            | 28,864     |       | 289         |   |
| August 23, 1999 - stock issued for cash                                                 |       | $             | 0.46       |            | 52,737     |       | 529         |   |
| August 24, 1999 - stock issued for cash                                                 |       | $             | 0.46       |            | 43,734     |       | 437         |   |
| September 13, 1999 - stock issued for cash                                              |       | $             | 0.46       |            | 57,727     |       | 577         |   |
| September 17, 1999 - stock issued for cash                                              |       | $             | 0.46       |            | 237,430    |       | 2,374       |   |
| October 15, 1999 - stock issued for cash                                                |       | $             | 0.46       |            | 17,318     |       | 173         |   |
| October 21, 1999 - stock issued for cash                                                |       | $             | 0.46       |            | 86,808     |       | 868         |   |
| October 22, 1999 - stock issued for cash                                                |       | $             | 0.46       |            | 111,333    |       | 1,113       |   |
| October 25, 1999 - stock issued for cash                                                |       | $             | 0.46       |            | 119,478    |       | 1,195       |   |
| October 26, 1999 - stock issued for cash                                                |       | $             | 0.46       |            | 36,080     |       | 361         |   |
| November 5, 1999 - stock issued for cash                                                |       | $             | 0.46       |            | 43,405     |       | 434         |   |
| November 5, 1999 - stock issued for cash                                                |       | $             | 10.00      |            | 100        |       | 1           |   |
| November 9, 1999 - stock issued for cash                                                |       | $             | 10.05      |            | 995        |       | 10          |   |
| November 18, 1999 - stock issued for cash                                               |       | $             | 10.05      |            | 995        |       | 10          |   |
| November 23, 1999 - stock issued for cash                                               |       | $             | 10.06      |            | 11,406     |       | 114         |   |
| December 3, 1999 - stock issued for cash                                                |       | $             | 10.05      |            | 1,194      |       | 12          |   |
| December 7, 1999 - stock issued for cash                                                |       | $             | 10.05      |            | 2,488      |       | 25          |   |
| December 16, 1999 - stock issued for cash                                               |       | $             | 10.05      |            | 398        |       | 4           |   |
| December 17, 1999 - stock issued for cash                                               |       | $             | 10.05      |            | 995        |       | 10          |   |
| December 31, 1999 - stock issued for cash                                               |       | $             | 10.05      |            | 995        |       | 10          |   |
| December 31, 1999 - adjust stock issued for  cash                                       |       | $             | —     |            | 141        |       | —      |   |
| Net loss (comprehensive net loss)                                                       |       |          |       | —          |       | —     |        |
| **Balance, December 31, 1999**                                                          |       |          |       | **29,653,843**  | ** ** | **$**      | **296,538** |   |
|                                                                                    |       |          |       |            |       |       |        |   |
| January 3, 2000 - stock issued for cash                                                 |       | $             | 10.05      |            | 1,991      |       | 20          |   |
| January 14, 2000 - stock issued for cash                                                |       | $             | 5.02       |            | 4,977      |       | 50          |   |
| Janaury 14, 2000 - stock issued for  services at fair value - Infocall                  |       | $             | 5.02       |            | 3,981      |       | 40          |   |

 

28

----

 
| February 9, 2000 - stock issued for cash                                                       |   | $      | 10.05  |   | 1,991     |   | 20     |   |
|------------------------------------------------------------------------------------------------|--------|--------|--------|--------|-----------|--------|--------|--------|
| February 10, 2000 - stock issued for cash                                                      |   | $      | 10.05  |   | 1,493     |   | 15     |   |
| February 14, 2000 - stock issued for cash                                                      |   | $      | 10.04  |   | 498       |   | 5      |   |
| February 15, 2000 - stock issued for cash                                                      |   | $      | 10.05  |   | 995       |   | 10     |   |
| February 22, 2000 - stock issued for cash                                                      |   | $      | 10.05  |   | 5,424     |   | 54     |   |
| February 25, 2000 - stock issued for cash                                                      |   | $      | 10.05  |   | 1,294     |   | 13     |   |
| February 28, 2000 - stock issued for cash                                                      |   | $      | 10.05  |   | 1,692     |   | 17     |   |
| February 29, 2000 - stock issued for cash                                                      |   | $      | 10.05  |   | 1,991     |   | 20     |   |
| March 2, 2000 - stock issued for cash                                                          |   | $      | 10.05  |   | 597       |   | 6      |   |
| March 7, 2000 - stock issued for cash                                                          |   | $      | 10.05  |   | 199       |   | 2      |   |
| March 8, 2000 - stock issued for cash                                                          |   | $      | 10.05  |   | 13,138    |   | 131    |   |
| March 10, 2000 - stock issued for cash                                                         |   | $      | 10.05  |   | 995       |   | 10     |   |
| March 13, 2000 - stock issued for cash                                                         |   | $      | 10.05  |   | 995       |   | 10     |   |
| March 16, 2000 - stock issued for cash                                                         |   | $      | 10.05  |   | 995       |   | 10     |   |
| March 20, 2000 - stock issued for cash                                                         |   | $      | 10.05  |   | 2,389     |   | 24     |   |
| March 23, 2000 - stock issued for cash                                                         |   | $      | 10.05  |   | 199       |   | 2      |   |
| March 24, 2000 - stock issued for cash                                                         |   | $      | 10.05  |   | 3,981     |   | 40     |   |
| March 29, 2000 - stock issued for cash                                                         |   | $      | 10.05  |   | 995       |   | 10     |   |
| March 30, 2000 - stock issued for cash                                                         |   | $      | 10.05  |   | 995       |   | 10     |   |
| April 19, 2000 - stock issued for cash                                                         |   | $      | 10.05  |   | 995       |   | 10     |   |
| April 27, 2000 - stock issued for cash                                                         |   | $      | 10.05  |   | 1,891     |   | 19     |   |
| May 10, 2000 - stock issued for cash                                                           |   | $      | 10.05  |   | 995       |   | 10     |   |
| May 12, 2000 - stock issued for cash                                                           |   | $      | 10.05  |   | 16,920    |   | 169    |   |
| May 19, 2000 - stock issued for cash                                                           |   | $      | 10.05  |   | 2,030     |   | 20     |   |
| June 19, 2000 - stock issued for cash                                                          |   | $      | 10.05  |   | 2,986     |   | 30     |   |
| June 21, 2000 - stock issued for cash                                                          |   | $      | 10.05  |   | 4,180     |   | 42     |   |
| June 30, 2000 - adjust stock issued for  cash                                                  |   | $      | 20.00  |   | 1,660     |   | 17     |   |
| June 30, 2000 - adjust stock issued for  cash                                                  |   | $      | 20.00  |   | (4,620    | )      | (31    | )      |
| July 1, 2000 - adjust stock issued for cash  (Driscoll)                                        |   | $      | 0.69   |   | (14,500   | )      | — |   |
| July 1, 2000 - adjust stock issued for  cash(Wallet)                                           |   | $      | 3.88   |   | (3,093    | )      | — |   |
| August 18, 2000 - share exchange adjustment                                                    |   | $      | — |   | (14,467   | )      | (350   | )      |
| August 18, 2000 - stock issued as part of  merger - Viola Group                                |   | $      | 0.00   |   | 3,300,007 |   | 33,000 |   |
| August 18, 2000 - stock options granted and  exercised for services at fair value - Clever     |   | $      | 2.42   |   | 25,000    |   | 250    |   |
| August 18, 2000 - stock options granted and  exercised for subscription receivable - Benson    |   | $      | — |   | 93,750    |   | 937    |   |
| August 18, 2000 - stock options granted and  exercised for subscription receivable, - Phillips |   | $      | — |   | 93,750    |   | 937    |   |
| August 18, 2000 - stock options granted and  exercised for subscriptions receivable - Cairns   |   | $      | — |   | 32,500    |   | 325    |   |
| August 22, 2000 - stock options granted at  fair value - Kaiser                                |   |   |   | — |      | — |   |
| October 1, 2000 - payment of subscription  receviable for services at fair value - Clever      |   |   |   | — |      | — |   |
| October 1, 2000 - payment of subscription  receviable for services at fair value - Benson      |   |   |   | — |      | — |   |
| October 23, 2000 - stock options granted  and exercised for services at fair value - Clever    |   | $      | 2.25   |   | 25,000    |   | 250    |   |
| October 30, 2000 - stock options granted  and exercised for services at fair value - Benson    |   | $      | 2.90   |   | 93,750    |   | 938    |   |
| October 30, 2000 - stock options granted  and exercised for services at fair value - Phillips  |   | $      | 4.60   |   | 93,750    |   | 937    |   |
| October 30, 2000 - stock options granted  and exercised for services at fair value - Cairns    |   | $      | 2.92   |   | 32,500    |   | 325    |   |
| November 14, 2000 - stock issued services at  fair value - Infocall                            |   | $      | 1.91   |   | 990,000   |   | 9,900  |   |
| November 28, 2000 - stock issued for  services at fair value - Net Connection Corp             |   | $      | 2.71   |   | 340,000   |   | 3,400  |   |
| November 28, 2000 - stock issued for  services at fair value - Clever                          |   | $      | 2.25   |   | 25,000    |   | 250    |   |
| November 28, 2000 - stock issued for  services at fair value - Dodrill                         |   | $      | 2.56   |   | 40,000    |   | 400    |   |
| November 28, 2000 - stock issued for  services at fair value - Richfield                       |   | $      | 2.56   |   | 20,000    |   | 200    |   |
| November 28, 2000 - share exchange  adjustment (Benson, Phillips, Cairns, miscellaneous)       |   | $      | — |   | 117,180   |   | 1,186  |   |
| December 20, 2000 - stock options granted  at fair value - Adams                               |   |   |   |   |      |   |   |

 

29

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| December 21, 2000 - conversion of  debentures                                          |   | $      | 2.50   |       | 38,000  |   | 380     |   |
|----------------------------------------------------------------------------------------|--------|--------|--------|------------|---------|--------|---------|--------|
| December 21, 2000 - stock options granted,  exercised and issued (3rd Round Investors) |   | $      | 0.09   |       | 174,590 |   | 1,746   |   |
| December 21, 2000 - stock options granted  at fair value - Rivero                      |   |   |   | —     |    | — |    |
| December 31, 2000 - stock options granted  at fair value - Jacobs                      |   |   |   | —     |    | — |    |
| December 31, 2000 - stock options granted  at fair value - Royal                       |   |   |   |       |    |   |    |
| December 31, 2000 - stock options granted  at fair value - Shewmaker                   |   |   |   |       |    |   |    |
| Net loss (comprehensive net loss)                                                      |   |   |   | —     |    | — |    |
| **Balance, December 31, 2000**                                                         |   |   |   | 35,235,402 |    | $      | 352,354 |   |
|                                                                                        |        |        |        |            |         |        |         |        |  |

 

30

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| January 2, 2001 - stock issued for services  at fair value - Net Connection Corp.          |   | $      | 2.84   |   | 340,000 |   | 3,400  |   |
|--------------------------------------------------------------------------------------------|--------|--------|--------|--------|---------|--------|--------|--------|
| January 29, 2001 - stock issued for  services at fair value - Richfield                    |   | $      | 3.00   |   | 30,000  |   | 300    |   |
| January 29, 2001 - stock issued for  services at fair value - Kolb                         |   | $      | 1.56   |   | 200,000 |   | 2,000  |   |
| January 29, 2001 - stock issued for  services at fair value - Silvasy                      |   | $      | 2.56   |   | 5,000   |   | 50     |   |
| January 29, 2001 - stock issued for  services at fair value - Young                        |   | $      | 2.56   |   | 2,500   |   | 25     |   |
| January 29, 2001 - stock issued for  services at fair value - Adams                        |   | $      | 2.56   |   | 5,000   |   | 50     |   |
| January 29, 2001 - stock issued for  services at fair value - Transmedia                   |   | $      | 2.92   |   | 9,000   |   | 90     |   |
| January 29, 2001 - stock options exercised  and issued for cash - 3rd round investors      |   | $      | 0.10   |   | 27,993  |   | 280    |   |
| January 29, 2001 - stock issued for cash                                                   |   | $      | 3.00   |   | 30,800  |   | 308    |   |
| January 29, 2001 - conversion of debentures                                                |   | $      | 2.50   |   | 8,000   |   | 80     |   |
| March 29, 2001 - stock options exercised  and issued for cash - 3rd round investors        |   | $      | 0.16   |   | 34,615  |   | 346    |   |
| March 31, 2001 - payment of subscription  receivable for services at fair value - Benson   |   |   |   | — |    | — |   |
| March 31, 2001 - payment of subscription  receivable for services at fair value - Phillips |   |   |   | — |    | — |   |
| March 31, 2001 - payment of subscription  receivable for services at fair value - Cairns   |   |   |   | — |    | — |   |
| March 31, 2001 - adjust stock issued for  cash                                             |   | $      | — |   | (12     | )      | — |   |
| April 4, 2001 - stock issued for services  at fair value - Kolb                            |   | $      | 2.16   |   | 50,000  |   | 500    |   |
| April 4, 2001 - stock issued for services  at fair value - Annis                           |   | $      | 1.10   |   | 5,000   |   | 50     |   |
| May 1, 2001 - stock options granted at fair  value - Kaiser                                |   |   |   |   |    |   |   |
| May 4, 2001 - stock issued for services at  fair value - Dove                              |   | $      | 1.54   |   | 30,000  |   | 300    |   |
| May 21, 2001 - stock issued for services at  fair value - Dove                             |   | $      | 0.83   |   | 30,000  |   | 300    |   |
| May 21, 2001 - stock issued for services at  fair value - Cairns                           |   | $      | 1.22   |   | 32,500  |   | 325    |   |
| June 5, 2001 - stock issued for services at  fair value - Young                            |   | $      | 0.83   |   | 5,000   |   | 50     |   |
| June 5, 2001 - stock issued for services at  fair value - Silvasy                          |   | $      | 1.10   |   | 5,000   |   | 50     |   |
| June 12, 2001 - stock issued for services  at fair value - Kolb                            |   | $      | 4.11   |   | 60,000  |   | 600    |   |
| June 12, 2001 - stock issued for services  at fair value - Dean-Dastvan                    |   | $      | 0.60   |   | 20,000  |   | 200    |   |
| June 12, 2001 - adjust merger shares                                                       |   |   |   | 2,508  |    | 25     |   |
| June 25, 2001 - stock issued for services  at fair value - Dove                            |   | $      | 0.86   |   | 30,000  |   | 300    |   |
| July 5, 2001 - stock issued for services at  fair value - Young                            |   | $      | 1.05   |   | 20,000  |   | 200    |   |
| July 5, 2001 - stock issued for services at  fair value - Silvasy                          |   | $      | 1.17   |   | 30,000  |   | 300    |   |
| July 5, 2001 - stock issued for services at  fair value - McGrath                          |   | $      | 0.69   |   | 10,000  |   | 100    |   |
| July 12, 2001 - stock issued for services  at fair value - Dean-Dastvan                    |   | $      | 0.81   |   | 20,000  |   | 200    |   |
| July 12, 2001 - stock issued for services  at fair value - Annis                           |   | $      | 2.54   |   | 10,000  |   | 100    |   |
| July 25, 2001 - stock issued for services  at fair value - Dove                            |   | $      | 0.92   |   | 30,000  |   | 300    |   |
| July 25, 2001 - stock issued for services at  fair value - Kolb                            |   | $      | 1.31   |   | 100,000 |   | 1,000  |   |
| August 13, 2001 - stock issued for services  at fair value - Dodrill                       |   | $      | 0.66   |   | 10,515  |   | 105    |   |
| August 13, 2001 - stock issued for services  at fair value - Silvasy                       |   | $      | 0.28   |   | 10,000  |   | 100    |   |

 

31

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| August 13, 2001 - stock issued for services  at fair value - Young                         |   | $      | 0.36   |   | 10,000  |   | 100    |   |
|--------------------------------------------------------------------------------------------|--------|--------|--------|--------|---------|--------|--------|--------|
| August 13, 2001 - stock issued for services  at fair value - McGrath                       |   | $      | 0.29   |   | 15,000  |   | 150    |   |
| August 20, 2001 - stock issued for services  at fair value - Net Connection Corp.          |   | $      | 0.49   |   | 150,000 |   | 1,500  |   |
| August 23, 2001 - stock issued for services  at fair value - Dodrill                       |   | $      | 0.49   |   | 40,000  |   | 400    |   |
| August 23, 2001 - stock issued for services  at fair value - Hester                        |   | $      | 0.38   |   | 40,000  |   | 400    |   |
| August 23, 2001 - stock issued for services  at fair value - DeVal                         |   | $      | 0.39   |   | 40,000  |   | 400    |   |
| August 23, 2001 - stock issued for services  at fair value - Noser                         |   | $      | 0.39   |   | 40,000  |   | 400    |   |
| August 23, 2001 - stock issued for services  at fair value - Aro                           |   | $      | 0.39   |   | 40,000  |   | 400    |   |
| August 23, 2001 - stock issued for services  at fair value - Holzworth                     |   | $      | 0.40   |   | 40,000  |   | 400    |   |
| August 23, 2001 - stock issued for services  at fair value - Silvasy                       |   | $      | 0.33   |   | 5,000   |   | 50     |   |
| August 23, 2001 - stock issued for services  at fair value - Young                         |   | $      | 0.35   |   | 5,000   |   | 50     |   |
| August 23, 2001 - stock issued for services  at fair value - McGrath                       |   | $      | 0.32   |   | 10,000  |   | 100    |   |
| October 1, 2001 - stock issued for services  at fair value - DeVal                         |   | $      | 0.16   |   | 30,000  |   | 300    |   |
| October 1, 2001 - stock issued for services  at fair value - Holzworth                     |   | $      | 0.25   |   | 30,000  |   | 300    |   |
| October 1, 2001 - stock issued for services  at fair value - Hester                        |   | $      | 0.37   |   | 30,000  |   | 300    |   |
| October 1, 2001 - stock issued for services  at fair value - Noser                         |   | $      | 0.27   |   | 30,000  |   | 300    |   |
| October 1, 2001 - stock issued for services  at fair value - Silvasy                       |   | $      | 0.28   |   | 5,000   |   | 50     |   |
| October 1, 2001 - stock issued for services  at fair value - Young                         |   | $      | 0.30   |   | 5,000   |   | 50     |   |
| October 1, 2001 - stock issued for services  at fair value - Dean-Dastvan                  |   | $      | 0.13   |   | 30,000  |   | 300    |   |
| October 1, 2001 - stock issued for services  at fair value - Dodrill                       |   | $      | 0.26   |   | 40,000  |   | 400    |   |
| October 1, 2001 - stock issued for services  at fair value - Kolb                          |   | $      | 0.40   |   | 30,000  |   | 300    |   |
| October 1, 2001 - stock options granted at  fair value - Dove                              |   |   |   | — |    | — |   |
| October 15, 2001 - stock issued for  services at fair value - Hester                       |   | $      | 0.26   |   | 250,000 |   | 2,500  |   |
| October 15, 2001 - stock issued for  services at fair value - Dean-Dastvan                 |   | $      | 0.13   |   | 30,000  |   | 300    |   |
| October 15, 2001 - stock issued for  services at fair value - DeVal                        |   | $      | 0.09   |   | 27,000  |   | 270    |   |
| October 15, 2001 - stock issued for  services at fair value - Noser                        |   | $      | 0.16   |   | 27,000  |   | 270    |   |
| October 15, 2001 - stock issued for  services at fair value - Holzworth                    |   | $      | 0.15   |   | 27,000  |   | 270    |   |
| October 15, 2001 - stock issued for  services at fair value - Dodrill                      |   | $      | 0.34   |   | 50,000  |   | 500    |   |
| November 5, 2001 - stock issued for  services at fair value - Dove                         |   | $      | 0.12   |   | 55,000  |   | 550    |   |
| November 5, 2001 - stock issued for  services at fair value - Adams                        |   | $      | 0.25   |   | 12,000  |   | 120    |   |
| November 5, 2001 - stock issued for  services at fair value - Calver                       |   | $      | 0.25   |   | 8,000   |   | 80     |   |
| November 7, 2001 - stock issued for  services at fair value - Hester                       |   | $      | 0.16   |   | 250,000 |   | 2,500  |   |
| November 7, 2001 - stock issued for  services at fair value - Kolb                         |   | $      | 0.14   |   | 30,000  |   | 300    |   |
| December 6, 2001 - stock issued for  services at fair value - Dodrill, Hester, Kolb, Dove) |   | $      | 0.12   |   | 200,000 |   | 2,000  |   |

 

32

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| December 6, 2001 - stock issued for services  at fair value - Hester          |       | $      | 0.12   |   | 500,000    |   | 5,000  |    |
|-------------------------------------------------------------------------------|------------|--------|--------|--------|------------|--------|--------|---------|
| December 6, 2001 - stock issued for  services at fair value - Kolb            |       | $      | 0.09   |   | 40,000     |   | 400    |    |
| December 6, 2001 - stock issued for  services at fair value - Dove            |       | $      | 0.16   |   | 30,000     |   | 300    |    |
| December 21, 2001 - stock issued for  deferred financing at fair value        |       | $      | — |   | 1,500,000  |   | 15,000 |    |
| December 21, 2001 - stock issued for  services at fair value - Hester         |       | $      | 0.11   |   | 500,000    |   | 5,000  |    |
| December 31, 2001 - stock options expired  (Rivero, Jacobs, Royal, Shewmaker) |       |   |   | — |       | — |   |
| Net loss (comprehensive net loss)                                             |       |   |   | — |       | — |   |
| **Balance, December 31, 2001**                                                | ** ** |   |   | $      | 40,639,821 |   | $      | 406,398 | ** ** |
|                                                                               |            |        |        |        |            |        |        |         |  |  |

 

33

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| January 2, 2002 - financing fees recognized                                                                  |   |   |   | — |       | — |    |
|--------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|------------|--------|---------|
| January 7, 2002 - stock issued towards  purchase of subsidiary at fair value - North Electric Company, Inc.  |   | $      | 0.08   |   | 500,000    |   | 5,000   |   |
| January 9, 2002 - stock issued towards  purchase of subsidiary at fair value - North Electric Company, Inc.  |   | $      | 0.07   |   | 430,000    |   | 4,300   |   |
| February 1, 2002 - stock issued for  services at fair value -Dodrill                                         |   | $      | 0.05   |   | 100,000    |   | 1,000   |   |
| February 1, 2002 - stock issued for  services at fair value - Dove                                           |   | $      | 0.03   |   | 100,000    |   | 1,000   |   |
| February 1, 2002 - stock issued for  services at fair value - Benson                                         |   | $      | 0.03   |   | 1,000,000  |   | 10,000  |   |
| February 1, 2002 - stock issued towards  purchase of subsidiary at fair value - North Electric Company, Inc. |   | $      | 0.02   |   | 500,000    |   | 5,000   |   |
| February 8, 2002 - stock issued for  services at fair value - Kristoff                                       |   | $      | 0.03   |   | 100,000    |   | 1,000   |   |
| February 14, 2002 - stock issued for cash                                                                    |   | $      | 0.04   |   | 5,000,000  |   | 50,000  |   |
| February 20, 2002 - stock issued for  services at fair value - Dodrill                                       |   | $      | 0.06   |   | 100,000    |   | 1,000   |   |
| March 6, 2002 - stock issued for services  at fair value - Dean-Dastvan                                      |   | $      | 0.02   |   | 100,000    |   | 1,000   |   |
| March 31, 2002 - stock options granted at  fair value - Dove                                                 |   |   |   |   |       |   |    |
| April 23, 2002 - stock issued towards  purchase of subsidiary at fair value - North Electric Company, Inc.   |   | $      | 0.02   |   | 1,000,000  |   | 10,000  |   |
| May 1, 2002 - stock issued for services at  fair value - Dean-Dastvan                                        |   | $      | 0.02   |   | 1,000,000  |   | 10,000  |   |
| May 1, 2002 - stock issued for services at  fair value - Dodrill                                             |   | $      | 0.01   |   | 400,000    |   | 4,000   |   |
| May 1, 2002 - stock issued for services at  fair value - Kristoff                                            |   | $      | 0.02   |   | 300,000    |   | 3,000   |   |
| May 6, 2002 - stock issued for services at  fair value - Orr                                                 |   | $      | 0.02   |   | 500,000    |   | 5,000   |   |
| May 7, 2002 - stock issued for service at  fair value - Collins                                              |   | $      | 0.01   |   | 200,000    |   | 2,000   |   |
| May 7, 2002 - stock issued for service at  fair value - DeVal                                                |   | $      | 0.01   |   | 200,000    |   | 2,000   |   |
| May 7, 2002 - stock issued for service at  fair value - Holzworth                                            |   | $      | 0.03   |   | 200,000    |   | 2,000   |   |
| May 20, 2002 - stock issued towards  purchase of subsidiary at fair value - North Electric Company, Inc.     |   | $      | 0.03   |   | 15,000,000 |   | 150,000 |   |
| May 21, 2002 - stock issued for services at  fair value - Kristoff                                           |   | $      | 0.01   |   | 500,000    |   | 5,000   |   |
| May 21, 2002 - stock issued for services at  fair value - Kaiser                                             |   | $      | 0.02   |   | 200,000    |   | 2,000   |   |
| May 28, 2002 - stock options granted at  fair value - Gibson                                                 |   | $      | 0.04   |   | —     |   | —  |   |
| May 29, 2002 - stock options granted at  fair value - Bragg                                                  |   |   |   |   |       |   |    |
| June 6, 2002 - stock issued for services at  fair value - Ashley Associates                                  |   | $      | 0.03   |   | 2,500,000  |   | 25,000  |   |
| June 12, 2002 - stock options granted at  fair value - Erickson                                              |   |   |   |   |       |   |    |
| June 13, 2002 - stock options granted at  fair value - Tate                                                  |   |   |   |   |       |   |    |
| June 21, 2002 - stock options granted at  fair value - Rugerro                                               |   |   |   |   |       |   |    |
| June 30, 2002 - stock warrants granted at  fair value - QAT                                                  |   |   |   |   |       |   |    |
| July 5, 2002 - stock issued for services at  fair value - Galpern                                            |   | $      | 0.02   |   | 1,500,000  |   | 15,000  |   |
| July 5, 2002 - stock issued for services at  fair value - Sellars                                            |   | $      | 0.02   |   | 350,000    |   | 3,500   |   |
| July 5, 2002 - stock issued for services at  fair value - Cella                                              |   | $      | 0.02   |   | 350,000    |   | 3,500   |   |
| July 12, 2002 - stock options granted at  fair value - Tanzini                                               |   |   |   |   |       |   |    |
| July 12, 2002 - stock options granted at  fair value - Krishnan                                              |   |   |   |   |       |   |    |
| July 31, 2002 - stock issued for services  at fair value - Seymour                                           |   | $      | 0.02   |   | 300,000    |   | 3,000   |   |
| August 18, 2002 - adjust issuances to  investor to satisfy litigation - La Jolla Cove Investors              |   |   |   | — |       | — |    |
| August 19, 2002 - stock issued to satisfy  litigation with investor at fair value - La Jolla Cove Investors  |   | $      | 0.01   |   | 5,000,000  |   | 50,000  |   |

 

34

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| August 19, 2002 - stock issued to satisfy  note payable litigation at fair value - North Atlantic Partners |   | $      | 0.03   |   | 3,272,727 |   | 32,727 |   |
|------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|-----------|--------|--------|--------|
| August 19, 2002 - stock issued for services  at fair value - Dean-Dastvan                                  |   | $      | 0.01   |   | 1,000,000 |   | 10,000 |   |
| August 19, 2002 - stock issued for services  at fair value - Dodrill                                       |   | $      | 0.01   |   | 1,000,000 |   | 10,000 |   |
| August 19, 2002 - stock issued for cash                                                                    |   | $      | 0.01   |   | 5,500,000 |   | 55,000 |   |
| August 21, 2002 - stock warrants granted to  investor (La Jolla Cove Investors)                            |   | $      | 0.01   |   | —    |   | — |   |
| August 22, 2002 - stock options expired -  Kaiser                                                          |   |   |   | — |      | — |   |
| August 22, 2002 - stock options granted at  fair value - Kaiser                                            |   |   |   |   |      |   |   |
| August 29, 2002 - stock options granted at  fair value - Erickson                                          |   |   |   |   |      |   |   |
| September 12, 2002 - stock issued for  services at fair value - BJG Holdings                               |   | $      | 0.03   |   | 600,000   |   | 6,000  |   |
| September 30, 2002 - stock warrants granted  at fair value - QAT                                           |   |   |   |   |      |   |   |
| October 9, 2002 - stock issued for services  at fair value - Adam                                          |   | $      | — |   | 400,000   |   | 4,000  |   |
| October 9, 2002 - stock issued for services  at fair value - Mottayaw                                      |   | $      | — |   | 400,000   |   | 4,000  |   |
| October 9, 2002 - stock issued for services  at fair value - Ference                                       |   | $      | — |   | 1,600,000 |   | 16,000 |   |
| October 9, 2002 - stock issued for services  at fair value - Erickson                                      |   | $      | — |   | 300,000   |   | 3,000  |   |
| October 9, 2002 - stock issued for services  at fair value - Noser                                         |   | $      | — |   | 300,000   |   | 3,000  |   |
| October 9, 2002 - stock issued for services  at fair value - Hester                                        |   | $      | — |   | 600,000   |   | 6,000  |   |
| October 16, 2002 - stock issued for cash                                                                   |   | $      | 0.01   |   | 1,339,286 |   | 13,392 |   |
| October 18, 2002 - stock issued for cash                                                                   |   | $      | 0.02   |   | 921,659   |   | 9,217  |   |
| October 18, 2002 - adjust stock warrant  grant to investor (La Jolla Cove Investors)                       |   |   |   | — |      | — |   |
| October 23, 2002 - stock issued for service  at fair value - Kaiser                                        |   | $      | — |   | 650,000   |   | 6,500  |   |
| October 23, 2002 - stock warrants exercised  and issued                                                    |   | $      | 0.00   |   | 250,000   |   | 2,500  |   |
| October 23, 2002 - stock issued for cash                                                                   |   | $      | 0.02   |   | 921,659   |   | 9,217  |   |

 

35

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| October 25, 2002 - stock issued for  services at fair value - Benson                                       |       | $      | 0.01   |            | 6,000,000  |   | 60,000        |       |
|------------------------------------------------------------------------------------------------------------|------------|--------|--------|-----------------|------------|--------|---------------|------------|
| October 30, 2002 - stock warrants exercised  and issued                                                    |       | $      | 0.00   |            | 1,500,000  |   | 15,000        |       |
| November 5, 2002 - stock issued for cash                                                                   |       | $      | 0.01   |            | 2,000,000  |   | 20,000        |       |
| November 6, 2002 - stock issued for cash                                                                   |       | $      | 0.01   |            | 904,977    |   | 9,050         |       |
| November 6, 2002 - stock warrants exercised  and issued                                                    |       | $      | 0.00   |            | 500,000    |   | 5,000         |       |
| November 8, 2002 - stock issued for cash                                                                   |       | $      | — |            | 132,836    |   | 1,329         |       |
| November 12, 2002 - stock options granted  at fair value - PMR                                             |       |   |   | —          |       | — |          |
| November 18, 2002 - stock warrants  exercised and issued                                                   |       | $      | 0.00   |            | 1,568,182  |   | 15,682        |       |
| November 19, 2002 - stock warrants  exercised and issued                                                   |       | $      | 0.00   |            | 500,000    |   | 5,000         |       |
| November 21, 2002 - stock warrants  exercised and issued                                                   |       | $      | 0.00   |            | 2,000,000  |   | 20,000        |       |
| November 25, 2002 - stock issued for  services at fair value - PMR Group                                   |       | $      | 0.01   |            | 7,000,000  |   | 70,000        |       |
| December 4, 2002 - stock warrants granted  to investor (La Jolla Cove Investors)                           |       |   |   | —          |       | — |          |
| December 9, 2002 - stock issued for cash                                                                   |       | $      | 0.01   |            | 2,000,000  |   | 20,000        |       |
| December 11, 2002 - stock warrants  exercised and issued                                                   |       | $      | 0.00   |            | 2,000,000  |   | 20,000        |       |
| December 17, 2002 - stock options granted  at fair value - Noser                                           |       |   |   |            |       |   |          |
| December 17, 2002 - stock options granted  at fair value - Adam                                            |       |   |   |            |       |   |          |
| December 17, 2002 - stock options granted  at fair value - Mottayaw                                        |       |   |   |            |       |   |          |
| December 17, 2002 - stock options granted  at fair value - Dickman                                         |       |   |   |            |       |   |          |
| December 17, 2002 - stock options granted  at fair value - McVey                                           |       |   |   |            |       |   |          |
| December 19, 2002 - stock warrants  exercised and issued                                                   |       | $      | 0.00   |            | 1,680,843  |   | 16,808        |       |
| December 31, 2002 - adjust stock warrants  exercised                                                       |       |   |   | —          |       | — |          |
| December 31, 2002 - write-off deferred  financing costs                                                    |       |   |   | —          |       | — |          |
| December 31, 2002 - stock warrants granted  at fair value - QAT                                            |       |   |   |            |       |   |          |
| December 31, 2002 - stock options expired                                                                  |       |   |   | —          |       | — |          |
| Net loss (comprehensive net loss)                                                                          |       |   |   | —          |       | — |          |
| **Balance, December 31, 2002**                                                                             | ** ** |   |   | **124,911,990** | ** ** | **$**  | **1,249,120** | ** ** |
|                                                                                                       |       |   |   |            |       |   |          |
| January 1, 2003 - stock options granted at  fair value - PTR Group                                         |       |   |   | —          |       | — |          |
| January 6, 2003 - stock issued for services  at fair value - Benson                                        |       | $      | 0.04   |            | 4,000,000  |   | 40,000        |       |
| January 1, 2003 - stock issued for cash                                                                    |       | $      | 0.01   |            | 1,000,000  |   | 10,000        |       |
| January 7, 2003 - stock issued in lieu of  accounts payable at fair value - La Jolla Cove Investore, Inc.  |       | $      | 0.01   |            | 5,000,000  |   | 50,000        |       |
| January 14, 2003 - stock issued in lieu of  accounts payable at fair value - La Jolla Cove Investore, Inc. |       | $      | 0.01   |            | 5,000,000  |   | 50,000        |       |
| January 31, 2003 - stock issued for  services at fair value - Dodrill                                      |       | $      | 0.02   |            | 3,000,000  |   | 30,000        |       |
| January 31, 2003 - stock issued for  services at fair value - Dove                                         |       | $      | 0.02   |            | 3,000,000  |   | 30,000        |       |
| January 31, 2003 - stock options exercised  and issued                                                     |       | $      | 0.04   |            | 3,000,000  |   | 30,000        |       |
| February 3, 2003 - stock issued for  services at fair value - Dickman                                      |       | $      | 0.02   |            | 100,000    |   | 1,000         |       |
| February 3, 2003 - stock issued for  services at fair value - Adam                                         |       | $      | 0.02   |            | 200,000    |   | 2,000         |       |
| February 3, 2003 - stock issued for  services at fair value - Mottayaw                                     |       | $      | 0.02   |            | 200,000    |   | 2,000         |       |
| February 3, 2003 - stock issued for cash                                                                   |       | $      | 0.01   |            | 1,688,000  |   | 16,880        |       |
| February 4, 2003 - stock options exercised  and issued                                                     |       | $      | 0.01   |            | 928,571    |   | 9,286         |       |
| February 4, 2003 - stock issued for cash                                                                   |       | $      | 0.01   |            | 928,571    |   | 9,286         |       |
| February 5, 2003 - Stock issued for  services at fair value - VanSchaik                                    |       | $      | 0.02   |            | 200,000    |   | 2,000         |       |
| February 5, 2003 - Stock issued for cash                                                                   |       | $      | 0.01   |            | 1,428,571  |   | 14,286        |       |
| February 7, 2003 - stock issued for  services at fair value - Brantley                                     |       | $      | 0.02   |            | 3,000,000  |   | 30,000        |       |
| February 10, 2003 - stock issued for  services at fair value - Collins                                     |       | $      | 0.02   |            | 775,000    |   | 7,750         |       |
| February 10, 2003 - stock issued for  services at fair value - McVey                                       |       | $      | 0.02   |            | 200,000    |   | 2,000         |       |
| February 12, 2003 - stock issued for services  at fair value - Yes, International                          |       | $      | 0.02   |            | 200,000    |   | 2,000         |       |
| February 14, 2003 - stock issued for  services at fair value - Silvasy                                     |       | $      | 0.07   |            | 330,000    |   | 3,300         |       |
| February 21, 2003 - stock issued for cash                                                                  |       |   |   | 750,000         |       | 7,500  |          |
|                                                                                                            |            |        |        |                 |            |        |               |            |  |

 

36

----

 
| February 26, 2003 - stock issued for  services at fair value - Bevins                                    |   | $      | 0.02   |       | 10,000,000 |    | 100,000 |   |
|----------------------------------------------------------------------------------------------------------|--------|--------|--------|------------|------------|---------|---------|--------|
| March 7, 2003 - stock options granted at  fair value - QAT                                               |   |   |   | —     |       | —  |    |
| March 12, 2003 - Stock issued in partial  satisfaction of note payable at fair value - Coldwater Capital |   | $      | 0.02   |       | 3,272,727  |    | 32,727  |   |
| March 12, 2003 - stock issued for cash                                                                   |   | $      | 0.01   |       | 423,077    |    | 4,230   |   |
| March 31, 2003 - deferred stock  compensation earned                                                     |   |   |   | —     |       | —  |    |
| March 31, 2003 - stock warrants granted at  fair value - QAT                                             |   |   |   |       |       |    |    |
| April 1, 2003 - consilidates subsidiary  sale of additional shares                                       |   |   |   | —     |       | —  |    |
| April 22, 2003 - stock options granted for  services at fair value - QAT                                 |   |   |   | —     |       | —  |    |
| April 22. 2003 - stock options granted for  services at fair value - Gordon                              |   |   |   | —     |       | —  |    |
| May 7, 2003 - stock issued for cash                                                                      |   | $      | — |       | 750,000    |    | 7,500   |   |
| May 20, 2003 - conversion of debentures                                                                  |   | $      | 0.17   |       | 28,837     |    | 288     |   |
| May 30, 2003 - stock options exercised                                                                   |   | $      | 0.01   |       | 750,000    |    | 7,500   |   |
| June 5, 2003 - stock warrants exercised                                                                  |   | $      | — |       | 5,000,000  |    | 50,000  |   |
| June 6, 2003 -10% stock dividend issued                                                                  |   |   |   | 13,999,900 |       | 140,000 |    |
| June 9, 2003 - stock warrants granted for  services at fair value - Brantley                             |   |   |   | —     |       | —  |    |
| June 11, 2003 - stock issued for cash                                                                    |   | $      | 0.10   |       | 3,083,333  |    | 30,833  |   |
| June 11, 2003 - stock options exercised -  Brantley                                                      |   | $      | 0.03   |       | 1,266,667  |    | 12,667  |   |
| June 11, 2003 - stock options exercised -  Dickman                                                       |   | $      | 0.05   |       | 105,000    |    | 1,050   |   |
| June 11. 2003 - stock options exercised -  Gibson                                                        |   | $      | 0.05   |       | 30,000     |    | 300     |   |
| June 11. 2003 - stock options exercised -  McVey                                                         |   | $      | 0.05   |       | 80,000     |    | 800     |   |
| June 11. 2003 - stock options exercised -  Brantley                                                      |   | $      | 0.07   |       | 500,000    |    | 5,000   |   |
| June 11. 2003 - stock options exercised -  Noser                                                         |   | $      | 0.05   |       | 105,000    |    | 1,050   |   |
| June 11, 2003 - stock options exercised -  Ruggero                                                       |   | $      | 0.05   |       | 180,000    |    | 1,800   |   |
| June 11, 2003 - stock options exercised -  Tate                                                          |   | $      | 0.05   |       | 150,000    |    | 1,500   |   |
| June 11. 2003 - stock issued for cash                                                                    |   | $      | 0.01   |       | 800,000    |    | 8,000   |   |
| June 11, 2003 - stock issued for services  at fair value - Noser                                         |   | $      | 0.17   |       | 300,000    |    | 3,000   |   |
| June 13, 2003 - purchase treasury stock                                                                  |   |   |   | —     |       | —  |    |
| June 20, 2003 - stock issued for services  at fair value - Yes, International                            |   | $      | 0.11   |       | 2,500,000  |    | 25,000  |   |
| June 30, 2003 - stock warrants granted at  fair value - QAT                                              |   |   |   |       |       |    |    |
| June 30, 2003 - adjust stock issued for  cash                                                            |   |   |   | —     |       | —  |    |
| July 9, 2003 - stock options exercised and  stock issued for services                                    |   |   |   | 2,900,000  |       | 29,000  |    |
| July 16, 2003 - stock options exercised in  lieu of cash for at fair value - Solnet Technologies         |   | $      | 0.05   |       | 450,000    |    | 4,500   |   |
| July 16, 2003 - stock options exercised -  Adam                                                          |   | $      | 0.05   |       | 105,000    |    | 1,050   |   |
| July 16, 2003 - stock options exercised -  Mottayaw                                                      |   | $      | 0.05   |       | 105,000    |    | 1,050   |   |
| July 16, 2003 - stock options exercised -  Tanzini                                                       |   | $      | 0.05   |       | 200,000    |    | 2,000   |   |
| July 16, 2003 - stock options exercised in  lieu of cash for at fair value - Erickson                    |   | $      | 0.05   |       | 325,000    |    | 3,250   |   |
| July 16, 2003 - stock issued for services  at fair value - Mottayaw                                      |   | $      | 0.12   |       | 400,000    |    | 4,000   |   |
| July 16, 2003 - stock issued for services  at fair value - Adam                                          |   | $      | 0.12   |       | 400,000    |    | 4,000   |   |
| July 16, 2003 - stock issued for services  at fair value - Erickson                                      |   | $      | 0.20   |       | 300,000    |    | 3,000   |   |
| July 23, 2003 - stock issued for cash                                                                    |   | $      | 0.11   |       | 750,000    |    | 7,500   |   |
| July 23, 2003 - stock issued for cash                                                                    |   | $      | 0.09   |       | 1,000,000  |    | 10,000  |   |
| July 23, 2003 - stock issued for cash                                                                    |   | $      | 0.06   |       | 4,166,000  |    | 41,660  |   |
| August 15, 2003 - stock options granted at  fair value - Polk                                            |   |   |   |       |       |    |    |
| September 30, 2003 - stock warrants granted  at fair value - QAT                                         |   |   |   |       |       |    |    |
| September 30, 2003 - adjust stock issued  for cash                                                       |   |   |   | —     |       | —  |    |
| September 30, 2003 - stock options issued  for services at fair value - Stroup                           |   |   |   | —     |       | —  |    |
| October 1, 2003 - stock options granted at  fair value - Vuksich                                         |   |   |   |       |       |    |    |
| October 3, 2003 - adjust stock issued for  cash                                                          |   |   |   | —     |       | —  |    |
| November 30, 2003 - stock options granted  for services at fair value - Ference                          |   |   |   | —     |       | —  |    |
| December 1, 2003 - stock options granted  for services at fair value - Stroup                            |   |   |   | —     |       | —  |    |
| December 16, 2003 - stock issued for cash                                                                |   | $      | 0.17   |       | 100,000    |    | 1,000   |   |
| December 16, 2003 - stock issued for cash                                                                |   | $      | 0.17   |       | 90,000     |    | 900     |   |
| December 16, 2003 - stock and stock options  issued for cash                                             |   | $      | 0.11   |       | 11,823,528 |    | 118,235 |   |

 

37

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| December 31, 2003 - treasury stock  activities                                                                        |       |       |       | (250,000        | )          | (2,500     | )             |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------|------------|------------|---------------|
| December 31, 2003 - adjust stock issued for  cash                                                                     |       |       |       | —          |       | —     |          |
| Net Loss (Comprehensive Net Loss)                                                                                     |       |       |       | —          |       | —     |          |
| **Balance December 31, 2003**                                                                                         | ** ** | ** ** | ** ** | **226,029,772** | ** ** | **$**      | **2,260,298** | ** ** |
| ** **                                                                                                            | ** ** | ** ** | ** ** | ** **      | ** ** | ** ** | ** **    |
| January 1, 2004 - stock options issued for  services as fair value - Benson                                           |       | —     |       | —          |       | —     |          |
| January 7, 2004 - stock options issued for  services at fair value - Polk                                             |       | —     |       | —          |       | —     |          |
| January 15, 2004 - stock options issued for  services at fair value - Mitsunaga                                       |       | —     |       | —          |       | —     |          |
| January 27, 2004 - stock issued for  services at fair value - AMT Management                                          |       | —     |       | 250,000         |       | 2,500      |          |
| January 29, 2004 - stock subscription  receivable payment received                                                    |       | —     |       | —          |       | —     |          |
| February 2, 2004 - stock options issued for  services at fair value - Giagtzis                                        |       | —     |       | —          |       | —     |          |
| February 12, 2004 - stock options issued  for services at fair value - Gilberg                                        |       | —     |       |            |       | —     |          |
| February 12, 2004 - stock options issued  for services at fair value - Hershman                                       |       | —     |       |            |       | —     |          |
| February 17, 2004 - subscribed stock  returned and cancelled - Brantley                                               |       | —     |       | (1,784,874      | )          | (17,849    | )             |
| March 31, 2004 - stock options issued for  services at fair value - Stroup                                            |       | —     |       |            |       | —     |          |
| March 31, 2004 - stock options issued for  services at fair value - Ference                                           |       | —     |       |            |       | —     |          |
| March 31, 2004 - stock options issued for  services at fair Value - Stroup                                            |       | —     |       |            |       | —     |          |
| April 1, 2004 - stock issued for stock  subscription receivable                                                       |       | $          | 0.17       |            | 2,941,176  |       | 29,412        |   |
| June 30, 2004 - beneficial conversion for  agreements to issue convertible promissory notes - April through June 2004 |       | —     |       |            |       | —     |          |
| June 30, 2004 - stock options issued for  services at fair value - Giagtzis                                           |       | —     |       |            |       | —     |          |
| June 30, 2004 - stock options issued for  services at fair value - Stroup                                             |       | —     |       |            |       | —     |          |
| June 30, 2004 - stock options issued for  services at fair value - Ference                                            |       | —     |       |            |       | —     |          |
| July 23, 2004 - stock options issued for  services at fair value - Ference                                            |       | —     |       |            |       | —     |          |
| August 2, 2004 - stock issued for services  at fair value - Benson                                                    |       | $          | 0.13       |            | 5,000,000  |       | 50,000        |   |
| August 5, 2004 - stock issued for services  at fair value - Ference                                                   |       | $          | 0.16       |            | 2,000,000  |       | 20,000        |   |
| August 5, 2004 - stock issued for services  at fair value - Dove                                                      |       | $          | 0.14       |            | 3,000,000  |       | 30,000        |   |
| August 6, 2004 - stock issued for services  at fair value - Murphy                                                    |       | $          | 0.11       |            | 5,000,000  |       | 50,000        |   |
| August 13, 2004 - stock issued for services  at fair value - Noser                                                    |       | $          | 0.11       |            | 100,000    |       | 1,000         |   |
| August 13, 2004 - stock issued for services  at fair value - Erickson                                                 |       | $          | 0.11       |            | 100,000    |       | 1,000         |   |
| August 13, 2004 - stock issued for services  at fair value - Van Cooney                                               |       | $          | 0.11       |            | 100,000    |       | 1,000         |   |
| August 13, 2004 - stock issued for services  at fair value - Fayette                                                  |       | $          | 0.11       |            | 100,000    |       | 1,000         |   |
| August 13, 2004 - stock issued for services  at fair value - Schwartz                                                 |       | $          | 0.11       |            | 100,000    |       | 1,000         |   |
| August 13, 2004 - stock issued for services  at fair value - Smith                                                    |       | $          | 0.11       |            | 100,000    |       | 1,000         |   |
| August 13, 2004 - stock issued for services  at fair value - Adam                                                     |       | $          | 0.11       |            | 100,000    |       | 1,000         |   |
| August 13, 2004 - stock issued for services  at fair value - Mottayaw                                                 |       | $          | 0.11       |            | 100,000    |       | 1,000         |   |
| September 14, 2004 - stock issued for  services at fair value - VanSchaik                                             |       | $          | 0.11       |            | 100,000    |       | 1,000         |   |
| September 30, 2004 - stock options issued  for services at fair value - Ference                                       |       | —     |       | —          |       | —     |          |
|                                                                                                                       |            |            |            |                 |            |            |               |  |  |

 

38

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| September 30, 2004 - stock options issued  for services at fair value - Adam                                                    |   | — |   | — |      | — |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|-----------|--------|--------|
| September 30, 2004 - stock options issued  for services at fair value - Erickson                                                |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Erickson                                                |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Fayette                                                 |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Fayette                                                 |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Holzworth                                               |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Holzworth                                               |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value -Krishnan/Solnet                                          |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Krishnan/Solnet                                         |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Mottayaw                                                |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Noser                                                   |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Noser                                                   |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Ruggero                                                 |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued for services at fair value  - Ruggero                                                 |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Schwartz                                                |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Schwartz                                                |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Smith                                                   |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Smith                                                   |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Van Cooney/MRE                                          |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Van Cooney/MRE                                          |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Van Schaik/AT Soft                                      |   | — |   | — |      | — |   |
| September 30, 2004 - stock options issued  for services at fair value - Van Schaik/AT Soft                                      |   | — |   | — |      | — |   |
| September 30, 2004 - beneficial conversion  for agreements to issue convertible promissory notes - July through September  2004 |   | — |   | — |      | — |   |
| October 29, 2004 - stock issued for  services at fair value - Purohit                                                           |   | $      | 0.07   |   | 1,000,000 |   | 10,000 |   |
| October 29, 2004 - stock issued for  services at fair value - Hester                                                            |   | $      | 0.15   |   | 7,000,000 |   | 70,000 |   |
| November 2, 2004 - stock issued upon  conversion of  convertible promissory  note - Hughes                                 |   | $      | 0.03   |   | 750,000   |   | 7,500  |   |
| November 17, 2004 - stock options issued  for services at fair value - Purohit                                                  |   | — |   | — |      | — |   |
| November 23, 2004 - stock options issued  for services at fair value - McGrath                                                  |   | — |   | — |      | — |   |
| December 31, 2004 - beneficial conversion  of agreements to issue convertible promissory notes - October through December  2004 |   | — |   | — |      | — |   |
| December 31, 2004 - stock options issued  for services at fair value value - Ference                                            |   | — |   | — |      | — |   |
| December 31, 2004 - stock options issued  for services at fair value value - Erickson                                           |   | — |   | — |      | — |   |
| December 31, 2004 - stock options issued  for services at fair value value - Fayette                                            |   | — |   | — |      | — |   |
| December 31, 2004 - stock options issued  for services at fair value value - Holzworth                                          |   | — |   | — |      | — |   |

 

39

----

 
| December 31, 2004 - stock options issued for  services at fair value value - Krishnan/Solnet    |       | —     |   | —          |       | —        |   |
|-------------------------------------------------------------------------------------------------|------------|------------|--------|-----------------|------------|---------------|--------|
| December 31, 2004 - stock options issued  for services at fair value value - Noser              |       | —     |   | —          |       | —        |   |
| December 31, 2004 - stock options issued  for services at fair value value - Ruggero            |       | —     |   | —          |       | —        |   |
| December 31, 2004 - stock options issued  for services at fair value value - Schwartz           |       | —     |   | —          |       | —        |   |
| December 31, 2004 - stock options issued  for services at fair value value - Smith              |       | —     |   | —          |       | —        |   |
| December 31, 2004 - stock options issued  for services at fair value value - Van Cooney/MRE     |       | —     |   | —          |       | —        |   |
| December 31, 2004 - stock options issued  for services at fair value value - Van Schaik/AT Soft |       | —     |   | —          |       | —        |   |
|                                                                                            |       |       |   |            |       |          |   |
| Net Loss (Comprehensive Net Loss)                                                               |       |       |   | —          |       | —        |   |
| **Balance December 31, 2004**                                                                   | ** ** | ** ** |   | **252,086,074** | ** ** | **2,520,861** |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

40

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| ** **                                                                              | ** ** | ** **           | ** **  | **Common**        | ** ** | ** **   | ** ** | **Common**         | ** ** | ** **       | ** ** | ** **   | ** ** | ** **           | ** ** | **Deficit**             | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------|-------------|-------------------|------------|--------------|------------|--------------------|------------|------------------|------------|--------------|------------|----------------------|------------|-------------------------|------------|
| ** **                                                                              | ** ** | ** **           | ** **  | **Stock**         | ** ** | **Common**   | ** ** | **Stock  options** | ** ** | ** **       | ** ** | ** **   | ** ** | ** **           | ** ** | **Accumulated  During** | ** ** |
| ** **                                                                              | ** ** | **Additional**       | ** **  | **Subscriptions** | ** ** | **Stock**    | ** ** | **Granted  and**   | ** ** | **Deferred**     | ** ** | **Treasury** | ** ** | **Deferred**         | ** ** | **Development**         | ** ** |
| ** **                                                                              | ** ** | **Paid-in  Capital** | ** **  | **Receivable**    | ** ** | **Warrants** | ** ** | **not  exercised** | ** ** | **Compensation** | ** ** | **Stock**    | ** ** | **Financing  Costs** | ** ** | **Stage**               | ** ** |
| ** **                                                                              | ** ** | ** **           | ** **  | ** **        | ** ** | ** **   | ** ** | ** **         | ** ** | ** **       | ** ** | ** **   | ** ** | ** **           | ** ** | ** **              | ** ** |
| **Balance,  January 13, 1999**                                                          |       | $                    | —      |              | $          | —       |       | $                  | —     |             | $          | —       |       | $                    | —     |                    | $          | — |   | $ | — |   | $ | — |   |
|                                                                                    |       |                 |        |              |       |         |       |               |       |             |       |         |       |                 |       |                    |       |
| January 13, 1999  - stock issued for services at fair value to Benson, Phillips, Cairns |       | (179,205             | )           | (31,300           | )          | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| January 29, 1999  - stock issued for cash                                               |       | 46,614               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| February 12, 1999  - stock issued for cash                                              |       | 64,095               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| February 17, 1999  - stock issued for cash                                              |       | 14,567               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| March 1, 1999 -  stock issued for cash                                                  |       | 42,730               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| March 2, 1999 -  stock issued for cash                                                  |       | 9,711                |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| March 17, 1999 -  stock issued for cash                                                 |       | 14,567               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| March 19, 1999 -  stock issued for cash                                                 |       | 14,567               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| April 2, 1999 - stock  issued for cash                                                  |       | 33,990               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| April 9, 1999 -  stock issued for cash                                                  |       | 14,179               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| April 13, 1999 -  stock issued for cash                                                 |       | 4,856                |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| April 14, 1999 -  stock issued for cash                                                 |       | 3,158                |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| April 15, 1999 -  stock issued for cash                                                 |       | 19,423               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| April 16, 1999 -  stock issued for cash                                                 |       | 9,711                |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| April 23, 1999 -  stock issued for cash                                                 |       | 63,124               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| April 26, 1999 -  stock issued for services at fair value -Driscoll                     |       | 9,711                |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| May 3, 1999 -  stock issued for cash                                                    |       | 33,990               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| July 19, 1999 -  stock issued for cash                                                  |       | 34,240               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| July 26, 1999 -  stock issued for cash                                                  |       | 9,783                |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| July 30, 1999 -  stock issued for services at fair value - Barr-Haneau                  |       | 7,284                |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| July 30, 1999 -  stock issued for services at fair value - Titus                        |       | (289                 | )           | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| August 2, 1999 -  stock issued for cash                                                 |       | 9,783                |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| August 4, 1999 -  stock issued for cash                                                 |       | 10,309               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| August 10, 1999 -  stock issued for cash                                                |       | 13,011               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| August 23, 1999 -  stock issued for cash                                                |       | 23,773               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| August 24, 1999 -  stock issued for cash                                                |       | 19,714               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| September 13,  1999 - stock issued for cash                                             |       | 26,023               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| September 17,  1999 - stock issued for cash                                             |       | 107,031              |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| October 15, 1999  - stock issued for cash                                               |       | 7,807                |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| October 21, 1999  - stock issued for cash                                               |       | 39,132               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| October 22, 1999  - stock issued for cash                                               |       | 50,187               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| October 25, 1999  - stock issued for cash                                               |       | 53,859               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| October 26, 1999  - stock issued for cash                                               |       | 16,264               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| November 5, 1999  - stock issued for cash                                               |       | 19,566               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| November 5, 1999  - stock issued for cash                                               |       | 999                  |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| November 9, 1999  - stock issued for cash                                               |       | 9,990                |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| November 18, 1999  - stock issued for cash                                              |       | 9,990                |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| November 23, 1999  - stock issued for cash                                              |       | 114,686              |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| December 3, 1999  - stock issued for cash                                               |       | 11,988               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| December 7, 1999  - stock issued for cash                                               |       | 24,975               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| December 16, 1999  - stock issued for cash                                              |       | 3,996                |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| December 17, 1999  - stock issued for cash                                              |       | 9,990                |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| December 31, 1999  - stock issued for cash                                              |       | 9,990                |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| December 31, 1999  - adjust stock issued for cash                                       |       | —               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  |       |
| Net loss  (comprehensive net loss)                                                      |       | —               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | (1,046,928              | )          |
| **Balance,  December 31, 1999**                                                         | ** ** | **$**                | **863,869** | ** **        | **$**      | **(31,300**  | **)**      | **$**              | **—** | ** **       | **$**      | **—**   | ** ** | **$**                | **—** | ** **              | **$**      | **—** | ** ** | **$** | **—** | ** ** | **$** | **(1,046,928** | **) ** |
| ** **                                                                              | ** ** | ** **           | ** **  | ** **        | ** ** | ** **   | ** ** | ** **         | ** ** | ** **       | ** ** | ** **   | ** ** | ** **           | ** ** | ** **              | ** ** |
| January 3, 2000 -  stock issued for cash                                                |       | 19,980               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  | ** ** |
| January 14, 2000  - stock issued for cash                                               |       | 24,950               |        | —            |       | —       |       | —             |       | —           |       | —       |       | —               |       | —                  | ** ** |

 

41

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| Janaury 14, 2000  - stock issued for services at fair value - Infocall                         |   | 19,960    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
|------------------------------------------------------------------------------------------------|--------|-----------|--------|----------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| February 9, 2000  - stock issued for cash                                                      |   | 19,980    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| February 10, 2000  - stock issued for cash                                                     |   | 14,985    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| February 14, 2000  - stock issued for cash                                                     |   | 4,995     |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| February 15, 2000  - stock issued for cash                                                     |   | 9,990     |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| February 22, 2000  - stock issued for cash                                                     |   | 54,446    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| February 25, 2000  - stock issued for cash                                                     |   | 12,987    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| February 28, 2000  - stock issued for cash                                                     |   | 16,983    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| February 29, 2000  - stock issued for cash                                                     |   | 19,980    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| March 2, 2000 -  stock issued for cash                                                         |   | 5,994     |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| March 7, 2000 -  stock issued for cash                                                         |   | 1,998     |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| March 8, 2000 -  stock issued for cash                                                         |   | 131,869   |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| March 10, 2000 -  stock issued for cash                                                        |   | 9,990     |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| March 13, 2000 -  stock issued for cash                                                        |   | 9,990     |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| March 16, 2000 -  stock issued for cash                                                        |   | 9,990     |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| March 20, 2000 -  stock issued for cash                                                        |   | 23,976    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| March 23, 2000 -  stock issued for cash                                                        |   | 1,998     |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| March 24, 2000 -  stock issued for cash                                                        |   | 39,960    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| March 29, 2000 -  stock issued for cash                                                        |   | 9,990     |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| March 30, 2000 -  stock issued for cash                                                        |   | 9,990     |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| April 19, 2000 -  stock issued for cash                                                        |   | 9,990     |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| April 27, 2000 -  stock issued for cash                                                        |   | 18,981    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| May 10, 2000 -  stock issued for cash                                                          |   | 9,990     |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| May 12, 2000 -  stock issued for cash                                                          |   | 169,831   |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| May 19, 2000 -  stock issued for cash                                                          |   | 20,380    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| June 19, 2000 -  stock issued for cash                                                         |   | 29,972    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| June 21, 2000 -  stock issued for cash                                                         |   | 41,958    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| June 30, 2000 -  adjust stock issued for cash                                                  |   | 33,183    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| June 30, 2000 -  adjust stock issued for cash                                                  |   | (92,370   | )      | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| July 1, 2000 - adjust  stock issued for cash (Driscoll)                                        |   | (10,000   | )      | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| July 1, 2000 -  adjust stock issued for cash (Wallet)                                          |   | (12,000   | )      | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| August 18, 2000 -  share exchange adjustment                                                   |   | 350       |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| August 18, 2000 -  stock issued as part of merger - Viola Group                                |   | (28,900   | )      | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| August 18, 2000 -  stock options granted and exercised for services at fair value - Clever     |   | 60,500    |   | (250     | )      | — |   | —  |   | — |   | — |   | — |   | — |   |
| August 18, 2000 -  stock options granted and exercised for subscription receivable - Benson    |   | 308,438   |   | (309,375 | )      | — |   | —  |   | — |   | — |   | — |   | — |   |
| August 18, 2000 -  stock options granted and exercised for subscription receivable, - Phillips |   | 308,438   |   | (309,375 | )      | — |   | —  |   | — |   | — |   | — |   | — |   |
| August 18, 2000 -  stock options granted and exercised for subscriptions receivable - Cairns   |   | 106,925   |   | (107,250 | )      | — |   | —  |   | — |   | — |   | — |   | — |   |
| August 22, 2000 -  stock options granted at fair value - Kaiser                                |   | —    |   | —   |   | — |   | 45,420  |   | — |   | — |   | — |   | — |   |
| October 1, 2000 -  payment of subscription receviable for services at fair value - Clever      |   | —    |   | 250      |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 1, 2000 -  payment of subscription receviable for services at fair value - Benson      |   | —    |   | 31,300   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 23, 2000  - stock options granted and exercised for services at fair value - Clever    |   | 56,000    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 30, 2000  - stock options granted and exercised for services at fair value - Benson    |   | 308,436   |   | -37638   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 30, 2000  - stock options granted and exercised for services at fair value - Phillips  |   | 308,438   |   | 121,885  |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 30, 2000  - stock options granted and exercised for services at fair value - Cairns    |   | 106,925   |   | (12,243  | )      | — |   | —  |   | — |   | — |   | — |   | — |   |
| November 14, 2000  - stock issued services at fair value - Infocall                            |   | 1,883,475 |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| November 28, 2000  - stock issued for services at fair value - Net Connection Corp             |   | 917,643   |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| November 28, 2000  - stock issued for services at fair value - Clever                          |   | 56,000    |   | —   |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| November 28, 2000  - stock issued for services at fair value - Dodrill                         |   | 102,080   |   | —   |   | — |   |    |   | — |   | — |   | — |   | — |   |
| November 28, 2000  - stock issued for services at fair value - Richfield                       |   | 51,040    |   | —   |   | — |   |    |   | — |   | — |   | — |   | — |   |
| November 28, 2000  - share exchange adjustment (Benson, Phillips, Cairns, miscellaneous)       |   | (1,186    | )      | —   |   | — |   |    |   | — |   | — |   | — |   | — |   |
| December 20, 2000  - stock options granted at fair value - Adams                               |   |      |   | —   |   | — |   | 255,246 |   | — |   | — |   | — |   | — |   |

 

42

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| December 21, 2000  - conversion of debentures                                          |   | 94,610 |      | — |   | —   |   | — |   | — |   | —  |   | — |   | —     |   |
|----------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|----------|--------|--------|--------|--------|--------|---------|--------|--------|--------|------------|--------|
| December 21, 2000  - stock options granted, exercised and issued (3rd Round Investors) |   | 15,713 |      | (2,255 | )      | —   |   | — |   | — |   | —  |   | — |   | —     |   |
| December 21, 2000  - stock options granted at fair value - Rivero                      |   | — |      | — |   | —   |   | 3,870  |   | — |   | —  |   | — |   | —     |   |
| December 31, 2000  - stock options granted at fair value - Jacobs                      |   | — |      | — |   | —   |   | 2,153  |   | — |   | —  |   | — |   | —     |   |
| December 31, 2000  - stock options granted at fair value - Royal                       |   |   |      |   |   |     |   | 6,413  |   |   |   |    |   |   |   |       |   |
| December 31, 2000  - stock options granted at fair value - Shewmaker                   |   |   |      |   |   |     |   | 13,496 |   |   |   |    |   |   |   |       |   |
| Net loss  (comprehensive net loss)                                                     |   | — |      | — |   | —   |   | — |   | — |   | —  |   | — |   | (6,957,807 | )      |
| **Balance,  December 31, 2000**                                                        |   | $      | 6,213,690 |   | $      | (656,251 | )      | $      | — |   | $      | 326,598 |   | $      | — |       | $      | — |   | $ | — |   | $ | (8,004,735 | ) |
|                                                                                        |        |        |           |        |        |          |        |        |        |        |        |         |        |        |        |            |        |  |  |  |  |  |  |  |  |

 

43

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| January 2, 2001 -  stock issued for services at fair value - Net Connection Corp.          |   | 963,016 |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
|--------------------------------------------------------------------------------------------|--------|---------|--------|---------|--------|--------|--------|--------|--------|----------|--------|--------|--------|--------|--------|--------|--------|
| January 29, 2001  - stock issued for services at fair value - Richfield                    |   | 89,700  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| January 29, 2001  - stock issued for services at fair value - Kolb                         |   | 563,164 |   | —  |   | — |   | — |   | (253,864 | )      | — |   | — |   | — |   |
| January 29, 2001  - stock issued for services at fair value - Silvasy                      |   | 12,760  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| January 29, 2001  - stock issued for services at fair value - Young                        |   | 6,380   |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| January 29, 2001  - stock issued for services at fair value - Adams                        |   | 12,760  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| January 29, 2001  - stock issued for services at fair value - Transmedia                   |   | 26,203  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| January 29, 2001  - stock options exercised and issued for cash - 3rd round investors      |   | 2,520   |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| January 29, 2001  - stock issued for cash                                                  |   | 92,092  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| January 29, 2001  - conversion of debentures                                               |   | 19,920  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| March 29, 2001 -  stock options exercised and issued for cash - 3rd round investors        |   | 3,115   |   | 2,198   |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| March 31, 2001 -  payment of subscription receivable for services at fair value - Benson   |   | —  |   | 347,014 |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| March 31, 2001 -  payment of subscription receivable for services at fair value - Phillips |   | —  |   | 119,493 |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| March 31, 2001 -  payment of subscription receivable for services at fair value - Cairns   |   | —  |   | 187,490 |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| March 31, 2001 -  adjust stock issued for cash                                             |   | —  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| April 4, 2001 -  stock issued for services at fair value - Kolb                            |   | 107,618 |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| April 4, 2001 -  stock issued for services at fair value - Annis                           |   | 5,458   |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| May 1, 2001 -  stock options granted at fair value - Kaiser                                |   |    |   |    |   |   |   | 30,974 |   |     |   |   |   |   |   |   |   |
| May 4, 2001 -  stock issued for services at fair value - Dove                              |   | 45,774  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| May 21, 2001 -  stock issued for services at fair value - Dove                             |   | 24,618  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| May 21, 2001 -  stock issued for services at fair value - Cairns                           |   | 39,456  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| June 5, 2001 -  stock issued for services at fair value - Young                            |   | 4,110   |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| June 5, 2001 -  stock issued for services at fair value - Silvasy                          |   | 5,460   |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| June 12, 2001 -  stock issued for services at fair value - Kolb                            |   | 41,328  |   | —  |   | — |   | — |   | 204,860  |   | — |   | — |   | — |   |
| June 12, 2001 -  stock issued for services at fair value - Dean-Dastvan                    |   | 11,889  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| June 12, 2001 -  adjust merger shares                                                      |   | (25     | )      | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| June 25, 2001 -  stock issued for services at fair value - Dove                            |   | 32,162  |   | —  |   | — |   | — |   | (6,653   | )      | — |   | — |   | — |   |
| July 5, 2001 -  stock issued for services at fair value - Young                            |   | 20,899  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| July 5, 2001 -  stock issued for services at fair value - Silvasy                          |   | 34,901  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| July 5, 2001 -  stock issued for services at fair value - McGrath                          |   | 6,780   |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| July 12, 2001 -  stock issued for services at fair value - Dean-Dastvan                    |   | 16,032  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| July 12, 2001 -  stock issued for services at fair value - Annis                           |   | 25,267  |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| July 25, 2001 -  stock issued for services at fair value - Dove                            |   | 20,569  |   | —  |   | — |   | — |   | 6,653    |   | — |   | — |   | — |   |
| July 25, 2001 -  stock issued for services at fair value - Kolb                            |   | 80,635  |   | —  |   | — |   | — |   | 49,004   |   | — |   | — |   | — |   |
| August 13, 2001 -  stock issued for services at fair value - Dodrill                       |   | 6,866   |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |
| August 13, 2001 -  stock issued for services at fair value - Silvasy                       |   | 2,660   |   | —  |   | — |   | — |   | —   |   | — |   | — |   | — |   |

 

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| August 13, 2001 -  stock issued for services at fair value - Young                         |   | 3,480  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|--------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| August 13, 2001 -  stock issued for services at fair value - McGrath                       |   | 4,165  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| August 20, 2001 -  stock issued for services at fair value - Net Connection Corp.          |   | 72,450 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| August 23, 2001 -  stock issued for services at fair value - Dodrill                       |   | 19,280 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| August 23, 2001 -  stock issued for services at fair value - Hester                        |   | 14,760 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| August 23, 2001 -  stock issued for services at fair value - DeVal                         |   | 15,355 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| August 23, 2001 -  stock issued for services at fair value - Noser                         |   | 15,371 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| August 23, 2001 -  stock issued for services at fair value - Aro                           |   | 15,374 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| August 23, 2001 -  stock issued for services at fair value - Holzworth                     |   | 15,412 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| August 23, 2001 -  stock issued for services at fair value - Silvasy                       |   | 1,585  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| August 23, 2001 -  stock issued for services at fair value - Young                         |   | 1,690  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| August 23, 2001 -  stock issued for services at fair value - McGrath                       |   | 3,060  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 1, 2001 -  stock issued for services at fair value - DeVal                         |   | 4,633  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 1, 2001 -  stock issued for services at fair value - Holzworth                     |   | 7,245  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 1, 2001 -  stock issued for services at fair value - Hester                        |   | 10,771 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 1, 2001 -  stock issued for services at fair value - Noser                         |   | 7,937  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 1, 2001 -  stock issued for services at fair value - Silvasy                       |   | 1,330  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 1, 2001 -  stock issued for services at fair value - Young                         |   | 1,440  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 1, 2001 -  stock issued for services at fair value - Dean-Dastvan                  |   | 3,480  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 1, 2001 -  stock issued for services at fair value - Dodrill                       |   | 10,160 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 1, 2001 -  stock issued for services at fair value - Kolb                          |   | 11,576 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 1, 2001 -  stock options granted at fair value - Dove                              |   | — |   | — |   | — |   | 58,278 |   | — |   | — |   | — |   | — |   |
| October 15, 2001  - stock issued for services at fair value - Hester                       |   | 62,007 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 15, 2001  - stock issued for services at fair value - Dean-Dastvan                 |   | 3,480  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 15, 2001  - stock issued for services at fair value - DeVal                        |   | 2,106  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 15, 2001  - stock issued for services at fair value - Noser                        |   | 4,004  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 15, 2001  - stock issued for services at fair value - Holzworth                    |   | 3,803  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| October 15, 2001  - stock issued for services at fair value - Dodrill                      |   | 16,525 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| November 5, 2001  - stock issued for services at fair value - Dove                         |   | 6,190  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| November 5, 2001  - stock issued for services at fair value - Adams                        |   | 2,880  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| November 5, 2001  - stock issued for services at fair value - Calver                       |   | 1,920  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| November 7, 2001  - stock issued for services at fair value - Hester                       |   | 37,248 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| November 7, 2001  - stock issued for services at fair value - Kolb                         |   | 3,912  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| December 6, 2001  - stock issued for services at fair value - Dodrill, Hester, Kolb, Dove) |   | 22,301 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |

 

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| December 6, 2001  - stock issued for services at fair value - Hester          |   | 55,655  |      | — |   | — |   | —  |   | — |   | —  |   | —   |   | —     |   |
|-------------------------------------------------------------------------------|--------|---------|-----------|--------|--------|--------|--------|---------|--------|--------|--------|---------|--------|----------|--------|------------|--------|
| December 6, 2001  - stock issued for services at fair value - Kolb            |   | 3,069   |      | — |   | — |   | —  |   | — |   | —  |   | —   |   | —     |   |
| December 6, 2001  - stock issued for services at fair value - Dove            |   | 4,500   |      | — |   | — |   | —  |   | — |   | —  |   | —   |   | —     |   |
| December 21, 2001  - stock issued for deferred financing at fair value        |   | 125,250 |      | — |   | — |   | —  |   | — |   | —  |   | (140,250 | )      | —     |   |
| December 21, 2001  - stock issued for services at fair value - Hester         |   | 50,655  |      | — |   | — |   | —  |   | — |   | —  |   | —   |   | —     |   |
| December 31, 2001  - stock options expired (Rivero, Jacobs, Royal, Shewmaker) |   | 25,932  |      | — |   | — |   | (25,932 | )      | — |   | —  |   | —   |   | —     |   |
| Net loss  (comprehensive net loss)                                            |   | —  |      | — |   | — |   | —  |   | — |   | —  |   | —   |   | (2,806,599 | )      |
| **Balance,  December 31, 2001**                                               |   | $       | 9,209,768 |   | $      | (56    | )      | $       | — |   | $      | 389,918 |   | $        | — |       | $      | — |   | $ | (140,250 | ) | $ | (10,811,334 | ) |
|                                                                               |        |         |           |        |        |        |        |         |        |        |        |         |        |          |        |            |        |  |  |  |  |  |  |  |  |

 

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| January 2, 2002 -  financing fees recognized                                                                  |   | —   |   | — |   | — |   | — |   | — |   | — |   | 93,500 |   | — |   |
|---------------------------------------------------------------------------------------------------------------|--------|----------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| January 7, 2002 -  stock issued towards purchase of subsidiary at fair value - North Electric  Company, Inc.  |   | 33,648   |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| January 9, 2002 -  stock issued towards purchase of subsidiary at fair value - North Electric  Company, Inc.  |   | 26,745   |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| February 1, 2002  - stock issued for services at fair value -Dodrill                                          |   | 4,100    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| February 1, 2002  - stock issued for services at fair value - Dove                                            |   | 2,000    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| February 1, 2002  - stock issued for services at fair value - Benson                                          |   | 20,000   |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| February 1, 2002  - stock issued towards purchase of subsidiary at fair value - North Electric  Company, Inc. |   | 3,964    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| February 8, 2002  - stock issued for services at fair value - Kristoff                                        |   | 2,000    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| February 14, 2002  - stock issued for cash                                                                    |   | 142,500  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| February 20, 2002  - stock issued for services at fair value - Dodrill                                        |   | 5,000    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| March 6, 2002 -  stock issued for services at fair value - Dean-Dastvan                                       |   | 1,069    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| March 31, 2002 -  stock options granted at fair value - Dove                                                  |   | —   |   | — |   | — |   | 21,192 |   | — |   | — |   | — |   | — |   |
| April 23, 2002 -  stock issued towards purchase of subsidiary at fair value - North Electric  Company, Inc.   |   | 8,792    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| May 1, 2002 -  stock issued for services at fair value - Dean-Dastvan                                         |   | 6,842    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| May 1, 2002 -  stock issued for services at fair value - Dodrill                                              |   | (1,000   | )      | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| May 1, 2002 -  stock issued for services at fair value - Kristoff                                             |   | 3,000    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| May 6, 2002 -  stock issued for services at fair value - Orr                                                  |   | 6,250    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| May 7, 2002 -  stock issued for service at fair value - Collins                                               |   | 206      |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| May 7, 2002 -  stock issued for service at fair value - DeVal                                                 |   | (240     | )      | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| May 7, 2002 -  stock issued for service at fair value - Holzworth                                             |   | 3,011    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| May 20, 2002 -  stock issued towards purchase of subsidiary at fair value - North Electric  Company, Inc.     |   | 255,000  |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| May 21, 2002 -  stock issued for services at fair value - Kristoff                                            |   | —   |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| May 21, 2002 -  stock issued for services at fair value - Kaiser                                              |   | 1,000    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| May 28, 2002 -  stock options granted at fair value - Gibson                                                  |   | —   |   | — |   | — |   | 1,276  |   | — |   | — |   | — |   | — |   |
| May 29, 2002 -  stock options granted at fair value - Bragg                                                   |   |     |   |   |   |   |   | 1,383  |   |   |   |   |   |   |   |   |   |
| June 6, 2002 -  stock issued for services at fair value - Ashley Associates                                   |   | 50,000   |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| June 12, 2002 -  stock options granted at fair value - Erickson                                               |   |     |   |   |   |   |   | 813    |   |   |   |   |   |   |   |   |   |
| June 13, 2002 -  stock options granted at fair value - Tate                                                   |   |     |   |   |   |   |   | 975    |   |   |   |   |   |   |   |   |   |
| June 21, 2002 -  stock options granted at fair value - Rugerro                                                |   |     |   |   |   |   |   | 1,170  |   |   |   |   |   |   |   |   |   |
| June 30, 2002 -  stock warrants granted at fair value - QAT                                                   |   |     |   |   |   |   |   | 8,900  |   |   |   |   |   |   |   |   |   |
| July 5, 2002 -  stock issued for services at fair value - Galpern                                             |   | 15,000   |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| July 5, 2002 -  stock issued for services at fair value - Sellars                                             |   | 3,500    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| July 5, 2002 -  stock issued for services at fair value - Cella                                               |   | 3,500    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| July 12, 2002 -  stock options granted at fair value - Tanzini                                                |   |     |   |   |   |   |   | 1,300  |   |   |   |   |   |   |   |   |   |
| July 12, 2002 -  stock options granted at fair value - Krishnan                                               |   |     |   |   |   |   |   | 2,925  |   |   |   |   |   |   |   |   |   |
| July 31, 2002 -  stock issued for services at fair value - Seymour                                            |   | 3,000    |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| August 18, 2002 -  adjust issuances to investor to satisfy litigation - La Jolla Cove Investors               |   | (142,388 | )      | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| August 19, 2002 -  stock issued to satisfy litigation with investor at fair value - La Jolla  Cove Investors  |   | (4,000   | )      | — |   | — |   | — |   | — |   | — |   | — |   | — |   |

 

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| August 19, 2002 -  stock issued to satisfy note payable litigation at fair value - North  Atlantic Partners |   | 52,469  |   | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
|-------------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| August 19, 2002 -  stock issued for services at fair value - Dean-Dastvan                                   |   | —  |   | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| August 19, 2002 -  stock issued for services at fair value - Dodrill                                        |   | —  |   | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| August 19, 2002 -  stock issued for cash                                                                    |   | —  |   | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| August 21, 2002 -  stock warrants granted to investor (La Jolla Cove Investors)                             |   | —  |   | — |   | 50,000 |   | —  |   | — |   | — |   | — |   | — |   |
| August 22, 2002 -  stock options expired - Kaiser                                                           |   | 76,394  |   | — |   | — |   | (76,394 | )      | — |   | — |   | — |   | — |   |
| August 22, 2002 -  stock options granted at fair value - Kaiser                                             |   |    |   |   |   |   |   | 8,784   |   |   |   |   |   |   |   |   |   |
| August 29, 2002 -  stock options granted at fair value - Erickson                                           |   |    |   |   |   |   |   | 1,300   |   |   |   |   |   |   |   |   |   |
| September 12,  2002 - stock issued for services at fair value - BJG Holdings                                |   | 12,000  |   | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| September 30,  2002 - stock warrants granted at fair value - QAT                                            |   |    |   |   |   |   |   | 8,900   |   |   |   |   |   |   |   |   |   |
| October 9, 2002 -  stock issued for services at fair value - Adam                                           |   | (4,000  | )      | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 9, 2002 -  stock issued for services at fair value - Mottayaw                                       |   | (4,000  | )      | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 9, 2002 -  stock issued for services at fair value - Ference                                        |   | (16,000 | )      | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 9, 2002 -  stock issued for services at fair value - Erickson                                       |   | (3,000  | )      | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 9, 2002 -  stock issued for services at fair value - Noser                                          |   | (3,000  | )      | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 9, 2002 -  stock issued for services at fair value - Hester                                         |   | (6,000  | )      | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 16, 2002  - stock issued for cash                                                                   |   | 1,606   |   | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 18, 2002  - stock issued for cash                                                                   |   | 10,029  |   | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 18, 2002  - adjust stock warrant grant to investor (La Jolla Cove Investors)                        |   | —  |   | — |   | 25,000 |   | —  |   | — |   | — |   | — |   | — |   |
| October 23, 2002  - stock issued for service at fair value - Kaiser                                         |   | (6,500  | )      | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 23, 2002  - stock warrants exercised and issued                                                     |   | (466    | )      | — |   | (1,876 | )      | —  |   | — |   | — |   | — |   | — |   |
| October 23, 2002  - stock issued for cash                                                                   |   | 10,783  |   | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |

 

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| October 25, 2002  - stock issued for services at fair value - Benson                                        |       | 21,000  |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
|-------------------------------------------------------------------------------------------------------------|------------|---------|----------------|------------|--------|---------|--------|----------|------------|------------|--------|-------------|------------|--------|-------------|------------|--------|
| October 30, 2002  - stock warrants exercised and issued                                                     |       | (2,794  | )              | —     |   | (11,250 | )      | —   |       | —     |   | —      |       | — |        | —     |   |
| November 5, 2002  - stock issued for cash                                                                   |       | (5,000  | )              | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| November 6, 2002  - stock issued for cash                                                                   |       | 950     |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| November 6, 2002  - stock warrants exercised and issued                                                     |       | (931    | )              | —     |   | (3,750  | )      | —   |       | —     |   | —      |       | — |        | —     |   |
| November 8, 2002  - stock issued for cash                                                                   |       | (1,329  | )              | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| November 12, 2002  - stock options granted at fair value - PMR                                              |       | —  |           | —     |   | —  |   | 38,100   |       | —     |   | —      |       | — |        | —     |   |
| November 18, 2002  - stock warrants exercised and issued                                                    |       | (2,921  | )              | —     |   | (11,761 | )      | —   |       | —     |   | —      |       | — |        | —     |   |
| November 19, 2002  - stock warrants exercised and issued                                                    |       | (931    | )              | —     |   | (3,750  | )      | —   |       | —     |   | —      |       | — |        | —     |   |
| November 21, 2002  - stock warrants exercised and issued                                                    |       | (3,725  | )              | —     |   | (15,000 | )      | —   |       | —     |   | —      |       | — |        | —     |   |
| November 25, 2002  - stock issued for services at fair value - PMR Group                                    |       | 56,000  |           | —     |   | —  |   | —   |       | (47,400    | )      | —      |       | — |        | —     |   |
| December 4, 2002  - stock warrants granted to investor (La Jolla Cove Investors)                            |       | —  |           | —     |   | 25,000  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| December 9, 2002  - stock issued for cash                                                                   |       | (5,000  | )              | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| December 11, 2002  - stock warrants exercised and issued                                                    |       | (3,725  | )              | —     |   | (15,000 | )      | —   |       | —     |   | —      |       | — |        | —     |   |
| December 17, 2002  - stock options granted at fair value - Noser                                            |       |    |           |       |   |    |   | 1,869    |       |       |   |        |       |   |        |       |   |
| December 17, 2002  - stock options granted at fair value - Adam                                             |       |    |           |       |   |    |   | 1,869    |       |       |   |        |       |   |        |       |   |
| December 17, 2002  - stock options granted at fair value - Mottayaw                                         |       |    |           |       |   |    |   | 1,869    |       |       |   |        |       |   |        |       |   |
| December 17, 2002  - stock options granted at fair value - Dickman                                          |       |    |           |       |   |    |   | 1,869    |       |       |   |        |       |   |        |       |   |
| December 17, 2002  - stock options granted at fair value - McVey                                            |       |    |           |       |   |    |   | 1,424    |       |       |   |        |       |   |        |       |   |
| December 19, 2002  - stock warrants exercised and issued                                                    |       | (3,131  | )              | —     |   | (12,606 | )      | —   |       | —     |   | —      |       | — |        | —     |   |
| December 31, 2002  - adjust stock warrants exercised                                                        |       | —  |           | —     |   | (7      | )      | —   |       | —     |   | —      |       | — |        | —     |   |
| December 31, 2002  - write-off deferred financing costs                                                     |       | —  |           | —     |   | —  |   | —   |       | —     |   | —      |       | 46,750 |        | —     |   |
| December 31, 2002  - stock warrants granted at fair value - QAT                                             |       |    |           |       |   |    |   | 8,900    |       |       |   |        |       |   |        |       |   |
| December 31, 2002  - stock options expired                                                                  |       | 255,246 |           | —     |   | —  |   | (255,246 | )          | —     |   | —      |       | — |        | —     |   |
| Net loss  (comprehensive net loss)                                                                          |       | —  |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | (2,907,352 | )      |
| **Balance,  December 31, 2002**                                                                             | ** ** | **$**   | **10,086,291** | ** ** | **$**  | **(56** | **)**  | **$**    | **25,000** | ** ** | **$**  | **173,096** | ** ** | **$**  | **(47,400** | **)**      | **$**  | **—** | ** ** | **$** | **—** | ** ** | **$** | **(13,718,686** | **)** |
|                                                                                                        |       |    |           |       |   |    |   |     |       |       |   |        |       |   |        |       |   |
| January 1, 2003 -  stock options granted at fair value - PTR Group                                          |       | —  |           | —     |   | —  |   | 12,000   |       | —     |   | —      |       | — |        | —     |   |
| January 6, 2003 -  stock issued for services at fair value - Benson                                         |       | 120,000 |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| January 1, 2003 -  stock issued for cash                                                                    |       | (1,705  | )              | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| January 7, 2003 -  stock issued in lieu of accounts payable at fair value - La Jolla Cove  Investore, Inc.  |       | —  |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| January 14, 2003  - stock issued in lieu of accounts payable at fair value - La Jolla Cove  Investore, Inc. |       | —  |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| January 31, 2003  - stock issued for services at fair value - Dodrill                                       |       | 15,000  |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| January 31, 2003  - stock issued for services at fair value - Dove                                          |       | 42,296  |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| January 31, 2003  - stock options exercised and issued                                                      |       | 46,100  |           | —     |   | —  |   | (38,100  | )          | —     |   | —      |       | — |        | —     |   |
| February 3, 2003  - stock issued for services at fair value - Dickman                                       |       | 1,000   |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| February 3, 2003  - stock issued for services at fair value - Adam                                          |       | 2,000   |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| February 3, 2003  - stock issued for services at fair value - Mottayaw                                      |       | 2,000   |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| February 3, 2003  - stock issued for cash                                                                   |       | (2,878  | )              | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| February 4, 2003  - stock options exercised and issued                                                      |       | 914     |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| February 4, 2003  - stock issued for cash                                                                   |       | (1,583  | )              | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| February 5, 2003  - Stock issued for services at fair value - VanSchaik                                     |       | 2,000   |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| February 5, 2003  - Stock issued for cash                                                                   |       | 2,214   |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| February 7, 2003  - stock issued for services at fair value - Brantley                                      |       | 30,000  |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| February 10, 2003  - stock issued for services at fair value - Collins                                      |       | 8,455   |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| February 10, 2003  - stock issued for services at fair value - McVey                                        |       | 2,000   |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| February 12, 2003  - stock issued for services at fair value - Yes, International                           |       | 2,000   |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| February 14, 2003  - stock issued for services at fair value - Silvasy                                      |       | 20,700  |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
| February 21, 2003  - stock issued for cash                                                                  |       | 2,500   |           | —     |   | —  |   | —   |       | —     |   | —      |       | — |        | —     |   |
|                                                                                                             |            |         |                |            |        |         |        |          |            |            |        |             |            |        |             |            |        |  |  |  |  |  |  |  |  |

 

49

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| February 26, 2003  - stock issued for services at fair value - Bevins                                     |   | 100,000  |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
|-----------------------------------------------------------------------------------------------------------|--------|----------|--------|---------|--------|---------|--------|----------|--------|---------|--------|---------|--------|--------|--------|--------|--------|
| March 7, 2003 -  stock options granted at fair value - QAT                                                |   | —   |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| March 12, 2003 -  Stock issued in partial satisfaction of note payable at fair value -  Coldwater Capital |   | 29,992   |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| March 12, 2003 -  stock issued for cash                                                                   |   | 1,270    |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| March 31, 2003 -  deferred stock compensation earned                                                      |   | —   |   | —  |   | —  |   | —   |   | 47,400  |   | —  |   | — |   | — |   |
| March 31, 2003 -  stock warrants granted at fair value - QAT                                              |   |     |   |    |   |    |   | 8,900    |   |    |   |    |   |   |   |   |   |
| April 1, 2003 -  consilidates subsidiary sale of additional shares                                        |   | (60,943  | )      | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| April 22, 2003 -  stock options granted for services at fair value - QAT                                  |   | —   |   | —  |   | —  |   | 266,000  |   | —  |   | —  |   | — |   | — |   |
| April 22. 2003 -  stock options granted for services at fair value - Gordon                               |   | —   |   | —  |   | —  |   | 85,000   |   | —  |   | —  |   | — |   | — |   |
| May 7, 2003 -  stock issued for cash                                                                      |   | (4,170   | )      | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| May 20, 2003 -  conversion of debentures                                                                  |   | 4,712    |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| May 30, 2003 -  stock options exercised                                                                   |   | 13,500   |   | —  |   | —  |   | (12,000  | )      | —  |   | —  |   | — |   | — |   |
| June 5, 2003 -  stock warrants exercised                                                                  |   | (25,000  | )      | —  |   | (25,000 | )      | —   |   | —  |   | —  |   | — |   | — |   |
| June 6, 2003 -10%  stock dividend issued                                                                  |   | (140,000 | )      | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| June 9, 2003 -  stock warrants granted for services at fair value - Brantley                              |   | —   |   | —  |   | —  |   | 330,200  |   | —  |   | —  |   | — |   | — |   |
| June 11, 2003 -  stock issued for cash                                                                    |   | 262,084  |   | —  |   | —  |   | —   |   | (42,917 | )      | —  |   | — |   | — |   |
| June 11, 2003 -  stock options exercised - Brantley                                                       |   | 25,333   |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| June 11, 2003 -  stock options exercised - Dickman                                                        |   | 6,069    |   | —  |   | —  |   | (1,869   | )      | —  |   | —  |   | — |   | — |   |
| June 11. 2003 -  stock options exercised - Gibson                                                         |   | 2,476    |   | —  |   | —  |   | (1,276   | )      | —  |   | —  |   | — |   | — |   |
| June 11. 2003 -  stock options exercised - McVey                                                          |   | 4,624    |   | —  |   | —  |   | (1,424   | )      | —  |   | —  |   | — |   | — |   |
| June 11. 2003 -  stock options exercised - Brantley                                                       |   | 115,000  |   | —  |   | —  |   | (85,000  | )      | —  |   | —  |   | — |   | — |   |
| June 11. 2003 -  stock options exercised - Noser                                                          |   | 6,069    |   | —  |   | —  |   | (1,869   | )      | —  |   | —  |   | — |   | — |   |
| June 11, 2003 -  stock options exercised - Ruggero                                                        |   | 8,370    |   | —  |   | —  |   | (1,170   | )      | —  |   | —  |   | — |   | — |   |
| June 11, 2003 -  stock options exercised - Tate                                                           |   | 6,975    |   | —  |   | —  |   | (975     | )      | —  |   | —  |   | — |   | — |   |
| June 11. 2003 -  stock issued for cash                                                                    |   | —   |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| June 11, 2003 -  stock issued for services at fair value - Noser                                          |   | 48,000   |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| June 13, 2003 -  purchase treasury stock                                                                  |   | —   |   | —  |   | —  |   |     |   |    |   | (50,000 | )      |   |   |   |   |
| June 20, 2003 -  stock issued for services at fair value - Yes, International                             |   | 240,000  |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| June 30, 2003 -  stock warrants granted at fair value - QAT                                               |   |     |   |    |   |    |   | 8,900    |   |    |   |    |   |   |   |   |   |
| June 30, 2003 -  adjust stock issued for cash                                                             |   | (64,096  | )      | —  |   | —  |   | —   |   |    |   |    |   |   |   |   |   |
| July 9, 2003 -  stock options exercised and stock issued for services                                     |   | 313,670  |   | —  |   | —  |   | (266,000 | )      | —  |   | —  |   | — |   | — |   |
| July 16, 2003 -  stock options exercised in lieu of cash for at fair value - Solnet  Technologies         |   | 20,925   |   | —  |   | —  |   | (2,925   | )      | —  |   | —  |   | — |   | — |   |
| July 16, 2003 -  stock options exercised - Adam                                                           |   | 6,069    |   | —  |   | —  |   | (1,869   | )      | —  |   | —  |   | — |   | — |   |
| July 16, 2003 -  stock options exercised - Mottayaw                                                       |   | 6,069    |   | —  |   | —  |   | (1,869   | )      | —  |   | —  |   | — |   | — |   |
| July 16, 2003 -  stock options exercised - Tanzini                                                        |   | 9,300    |   | —  |   | —  |   | (1,300   | )      | —  |   | —  |   | — |   | — |   |
| July 16, 2003 -  stock options exercised in lieu of cash for at fair value - Erickson                     |   | 15,113   |   | —  |   | —  |   | (2,113   | )      | —  |   | —  |   | — |   | — |   |
| July 16, 2003 -  stock issued for services at fair value - Mottayaw                                       |   | 44,000   |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| July 16, 2003 -  stock issued for services at fair value - Adam                                           |   | 44,000   |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| July 16, 2003 -  stock issued for services at fair value - Erickson                                       |   | 57,000   |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| July 23, 2003 -  stock issued for cash                                                                    |   | 78,000   |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| July 23, 2003 -  stock issued for cash                                                                    |   | 78,000   |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| July 23, 2003 -  stock issued for cash                                                                    |   | 208,340  |   | (80,000 | )      |    |   |     |   |    |   |    |   |   |   |   |   |
| August 15, 2003 -  stock options granted at fair value - Polk                                             |   |     |   |    |   |    |   | 232,250  |   |    |   |    |   |   |   |   |   |
| September 30,  2003 - stock warrants granted at fair value - QAT                                          |   |     |   |    |   |    |   | 8,900    |   |    |   |    |   |   |   |   |   |
| September 30,  2003 - adjust stock issued for cash                                                        |   | 59,201   |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| September 30,  2003 - stock options issued for services at fair value - Stroup                            |   | —   |   | —  |   | —  |   | 11,700   |   | —  |   | —  |   | — |   | — |   |
| October 1, 2003 -  stock options granted at fair value - Vuksich                                          |   |     |   |    |   |    |   | 5,960    |   |    |   |    |   |   |   |   |   |
| October 3, 2003 -  adjust stock issued for cash                                                           |   | 200,000  |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| November 30, 2003  - stock options granted for services at fair value - Ference                           |   | —   |   | —  |   | —  |   | 158,533  |   | —  |   | —  |   | — |   | — |   |
| December 1, 2003  - stock options granted for services at fair value - Stroup                             |   | —   |   | —  |   | —  |   | 54,175   |   | —  |   | —  |   | — |   | — |   |
| December 16, 2003  - stock issued for cash                                                                |   | 16,000   |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| December 16, 2003  - stock issued for cash                                                                |   | 14,400   |   | —  |   | —  |   | —   |   | —  |   | —  |   | — |   | — |   |
| December 16, 2003  - stock and stock options issued for cash                                              |   | 792,465  |   | (40,000 | )      | —  |   | 89,300   |   | —  |   | —  |   | — |   | — |   |

 

50

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| December 31, 2003  - treasury stock activities                                                                         |       | (47,500  | )              | —     |   | —       |   | —  |       | —     |   | (25,392       | )          | — |        | —     |   |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|----------------|------------|--------|--------------|--------|---------|------------|------------|--------|---------------|------------|--------|-------------|------------|--------|
| December 31, 2003  - adjust stock issued for cash                                                                      |       | 42,054   |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| Net Loss  (Comprehensive Net Loss)                                                                                     |       | —   |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | (4,448,410 | )      |
| **Balance  December 31, 2003**                                                                                         | ** ** | **$**    | **12,916,675** | ** ** | **$**  | **(120,056** | **)**  | **$**   | **—** | ** ** | **$**  | **1,025,155** | ** ** | **$**  | **(42,917** | **)**      | **$**  | **(75,392** | **)** | **$** | **—** | ** ** | **$** | **(18,167,096** | **)** |
|                                                                                                                   |       |     |           |       |   |         |   |    |       |       |   |          |       |   |        |       |   |
| January 1, 2004 -  stock options issued for services as fair value - Benson                                            |       | —   |           | —     |   | —       |   | 220,500 |       | —     |   | —        |       | — |        | —     |   |
| January 7, 2004 -  stock options issued for services at fair value - Polk                                              |       | —   |           | —     |   | —       |   | 35,600  |       | —     |   | —        |       | — |        | —     |   |
| January 15, 2004  - stock options issued for services at fair value - Mitsunaga                                        |       | —   |           | —     |   | —       |   | 346,871 |       | —     |   | —        |       | — |        | —     |   |
| January 27, 2004  - stock issued for services at fair value - AMT Management                                           |       | 37,500   |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| January 29, 2004  - stock subscription receivable payment received                                                     |       | —   |           | 40,000     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| February 2, 2004  - stock options issued for services at fair value - Giagtzis                                         |       | —   |           | —     |   | —       |   | 14,400  |       | —     |   | —        |       | — |        | —     |   |
| February 12, 2004  - stock options issued for services at fair value - Gilberg                                         |       | —   |           | —     |   | —       |   | 131,800 |       | —     |   | —        |       | — |        | —     |   |
| February 12, 2004  - stock options issued for services at fair value - Hershman                                        |       | —   |           | —     |   | —       |   | 65,900  |       | —     |   | —        |       | — |        | —     |   |
| February 17, 2004  - subscribed stock returned and cancelled - Brantley                                                |       | (105,068 | )              | 80,000     |   | —       |   | —  |       | 42,917     |   | —        |       | — |        | —     |   |
| March 31, 2004 -  stock options issued for services at fair value - Stroup                                             |       | —   |           | —     |   | —       |   | 35,100  |       | —     |   | —        |       | — |        | —     |   |
| March 31, 2004 -  stock options issued for services at fair value - Ference                                            |       | —   |           | —     |   | —       |   | 32,800  |       | —     |   | —        |       | — |        | —     |   |
| March 31, 2004 -  stock options issued for services at fair Value - Stroup                                             |       | —   |           | —     |   | —       |   | 57,225  |       | —     |   | —        |       | — |        | —     |   |
| April 1, 2004 -  stock issued for stock subscription receivable                                                        |       | 470,588  |           | (420,000   | )      |         |   |    |       |       |   |          |       |   |        |       |   |
| June 30, 2004 -  beneficial conversion for agreements to issue convertible promissory notes -  April through June 2004 |       | 343,093  |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| June 30, 2004 -  stock options issued for services at fair value - Giagtzis                                            |       | —   |           | —     |   | —       |   | 7,200   |       | —     |   | —        |       | — |        | —     |   |
| June 30, 2004 - stock  options issued for services at fair value - Stroup                                              |       | —   |           | —     |   | —       |   | 53,700  |       | —     |   | —        |       | — |        | —     |   |
| June 30, 2004 -  stock options issued for services at fair value - Ference                                             |       | —   |           | —     |   | —       |   | 32,799  |       | —     |   | —        |       | — |        | —     |   |
| July 23, 2004 -  stock options issued for services at fair value - Ference                                             |       | —   |           | —     |   | —       |   | 194,600 |       | —     |   | —        |       | — |        | —     |   |
| August 2, 2004 -  stock issued for services at fair value - Benson                                                     |       | 608,750  |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| August 5, 2004 -  stock issued for services at fair value - Ference                                                    |       | 300,000  |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| August 5, 2004 -  stock issued for services at fair value - Dove                                                       |       | 390,750  |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| August 6, 2004 -  stock issued for services at fair value - Murphy                                                     |       | 494,000  |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| August 13, 2004 -  stock issued for services at fair value - Noser                                                     |       | 10,050   |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| August 13, 2004 -  stock issued for services at fair value - Erickson                                                  |       | 10,050   |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| August 13, 2004 -  stock issued for services at fair value - Van Cooney                                                |       | 10,050   |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| August 13, 2004 -  stock issued for services at fair value - Fayette                                                   |       | 10,050   |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| August 13, 2004 -  stock issued for services at fair value - Schwartz                                                  |       | 10,050   |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| August 13, 2004 -  stock issued for services at fair value - Smith                                                     |       | 10,050   |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| August 13, 2004 -  stock issued for services at fair value - Adam                                                      |       | 10,050   |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| August 13, 2004 -  stock issued for services at fair value - Mottayaw                                                  |       | 10,050   |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| September 14,  2004 - stock issued for services at fair value - VanSchaik                                              |       | 10,050   |           | —     |   | —       |   | —  |       | —     |   | —        |       | — |        | —     |   |
| September 30,  2004 - stock options issued for services at fair value - Ference                                        |       | —   |           | —     |   | —       |   | 32,800  |       | —     |   | —        |       | — |        | —     |   |
|                                                                                                                        |            |          |                |            |        |              |        |         |            |            |        |               |            |        |             |            |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

51

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| September 30,  2004 - stock options issued for services at fair value - Adam                                                    |   | —    |   | — |   | — |   | 7,810   |   | — |   | — |   | — |   | — |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-----------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| September 30,  2004 - stock options issued for services at fair value - Erickson                                                |   | —    |   | — |   | — |   | 7,810   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Erickson                                                |   | —    |   | — |   | — |   | 2,868   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Fayette                                                 |   | —    |   | — |   | — |   | 6,453   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Fayette                                                 |   | —    |   | — |   | — |   | 7,170   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Holzworth                                               |   | —    |   | — |   | — |   | 10,397  |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Holzworth                                               |   | —    |   | — |   | — |   | 7,810   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value -Krishnan/Solnet                                          |   | —    |   | — |   | — |   | 15,620  |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Krishnan/Solnet                                         |   | —    |   | — |   | — |   | 6,453   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Mottayaw                                                |   | —    |   | — |   | — |   | 7,810   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Noser                                                   |   | —    |   | — |   | — |   | 6,453   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Noser                                                   |   | —    |   | — |   | — |   | 7,810   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Ruggero                                                 |   | —    |   | — |   | — |   | 3,155   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Ruggero                                                 |   | —    |   | — |   | — |   | 7,810   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Schwartz                                                |   | —    |   | — |   | — |   | 3,226   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Schwartz                                                |   | —    |   | — |   | — |   | 7,170   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Smith                                                   |   | —    |   | — |   | — |   | 2,151   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Smith                                                   |   | —    |   | — |   | — |   | 7,170   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Van Cooney/MRE                                          |   | —    |   | — |   | — |   | 3,585   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Van Cooney/MRE                                          |   | —    |   | — |   | — |   | 7,170   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Van Schaik/AT Soft                                      |   | —    |   | — |   | — |   | 7,170   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - stock options issued for services at fair value - Van Schaik/AT Soft                                      |   | —    |   | — |   | — |   | 6,453   |   | — |   | — |   | — |   | — |   |
| September 30,  2004 - beneficial conversion for agreements to issue convertible promissory  notes - July through September 2004 |   | 494,635   |   | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 29, 2004  - stock issued for services at fair value - Purohit                                                           |   | 63,100    |   | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| October 29, 2004  - stock issued for services at fair value - Hester                                                            |   | 1,005,250 |   | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| November 2, 2004  - stock issued upon conversion of convertible promissory note - Hughes                                        |   | 17,250    |   | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| November 17, 2004  - stock options issued for services at fair value - Purohit                                                  |   | —    |   | — |   | — |   | 158,000 |   | — |   | — |   | — |   | — |   |
| November 23, 2004  - stock options issued for services at fair value - McGrath                                                  |   | —    |   | — |   | — |   | 134,500 |   | — |   | — |   | — |   | — |   |
| December 31, 2004  - beneficial conversion of agreements to issue convertible promissory notes -  October through December 2004 |   | 17,600    |   | — |   | — |   | —  |   | — |   | — |   | — |   | — |   |
| December 31, 2004  - stock options issued for services at fair value value - Ference                                            |   | —    |   | — |   | — |   | 280,335 |   | — |   | — |   | — |   | — |   |
| December 31, 2004  - stock options issued for services at fair value value - Erickson                                           |   | —    |   | — |   | — |   | 1,134   |   | — |   | — |   | — |   | — |   |
| December 31, 2004  - stock options issued for services at fair value value - Fayette                                            |   | —    |   | — |   | — |   | 2,551   |   | — |   | — |   | — |   | — |   |
| December 31, 2004  - stock options issued for services at fair value value - Holzworth                                          |   | —    |   | — |   | — |   | 4,111   |   | — |   | — |   | — |   | — |   |

 

52

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| December 31, 2004  - stock options issued for services at fair value value - Krishnan/Solnet    |   | —     |   | —   |   | — |   | 2,551     |   | — |   | —  |   | — |   | —      |   |
|-------------------------------------------------------------------------------------------------|--------|------------|--------|----------|--------|--------|--------|-----------|--------|--------|--------|---------|--------|--------|--------|-------------|--------|
| December 31, 2004  - stock options issued for services at fair value value - Noser              |   | —     |   | —   |   | — |   | 2,551     |   | — |   | —  |   | — |   | —      |   |
| December 31, 2004  - stock options issued for services at fair value value - Ruggero            |   | —     |   | —   |   | — |   | 1,248     |   | — |   | —  |   | — |   | —      |   |
| December 31, 2004  - stock options issued for services at fair value value - Schwartz           |   | —     |   | —   |   | — |   | 1,276     |   | — |   | —  |   | — |   | —      |   |
| December 31, 2004  - stock options issued for services at fair value value - Smith              |   | —     |   | —   |   | — |   | 850       |   | — |   | —  |   | — |   | —      |   |
| December 31, 2004  - stock options issued for services at fair value value - Van Cooney/MRE     |   | —     |   | —   |   | — |   | 1,418     |   | — |   | —  |   | — |   | —      |   |
| December 31, 2004  - stock options issued for services at fair value value - Van Schaik/AT Soft |   | —     |   | —   |   | — |   | 2,551     |   | — |   | —  |   | — |   | —      |   |
|                                                                                            |   |       |   |     |   |   |   |      |   |   |   |    |   |   |   |        |   |
| Net Loss  (Comprehensive Net Loss)                                                              |   | —     |   | —   |   | — |   | —    |   | — |   | —  |   | — |   | (9,302,939  | )      |
| **Balance  December 31, 2004**                                                                  |   | 17,144,573 |   | (420,056 | )      | — |   | 3,029,050 |   | — |   | (75,392 | )      | — |   | (27,470,035 | )      |

 

53

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| ** **                                                                              | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                                              | ** ** | ** ** | ** ** |
| **Balance, January 13, 1999**                                                           |       | $          | —     |   |
|                                                                                    |       |       |       |
| January 13, 1999 - stock issued for  services at fair value to Benson, Phillips, Cairns |       | 63,700     |       |
| January 29, 1999 - stock issued for cash                                                |       | 48,000     |       |
| February 12, 1999 - stock issued for cash                                               |       | 66,000     |       |
| February 17, 1999 - stock issued for cash                                               |       | 15,000     |       |
| March 1, 1999 - stock issued for cash                                                   |       | 44,000     |       |
| March 2, 1999 - stock issued for cash                                                   |       | 10,000     |       |
| March 17, 1999 - stock issued for cash                                                  |       | 15,000     |       |
| March 19, 1999 - stock issued for cash                                                  |       | 15,000     |       |
| April 2, 1999 - stock issued for cash                                                   |       | 35,000     |       |
| April 9, 1999 - stock issued for cash                                                   |       | 14,600     |       |
| April 13, 1999 - stock issued for cash                                                  |       | 5,000      |       |
| April 14, 1999 - stock issued for cash                                                  |       | 3,250      |       |
| April 15, 1999 - stock issued for cash                                                  |       | 20,000     |       |
| April 16, 1999 - stock issued for cash                                                  |       | 10,000     |       |
| April 23, 1999 - stock issued for cash                                                  |       | 65,000     |       |
| April 26, 1999 - stock issued for services  at fair value -Driscoll                     |       | 10,000     |       |
| May 3, 1999 - stock issued for cash                                                     |       | 35,000     |       |
| July 19, 1999 - stock issued for cash                                                   |       | 35,000     |       |
| July 26, 1999 - stock issued for cash                                                   |       | 10,000     |       |
| July 30, 1999 - stock issued for services  at fair value - Barr-Haneau                  |       | 7,500      |       |
| July 30, 1999 - stock issued for services  at fair value - Titus                        |       | —     |       |
| August 2, 1999 - stock issued for cash                                                  |       | 10,000     |       |
| August 4, 1999 - stock issued for cash                                                  |       | 10,540     |       |
| August 10, 1999 - stock issued for cash                                                 |       | 13,300     |       |
| August 23, 1999 - stock issued for cash                                                 |       | 24,302     |       |
| August 24, 1999 - stock issued for cash                                                 |       | 20,151     |       |
| September 13, 1999 - stock issued for cash                                              |       | 26,600     |       |
| September 17, 1999 - stock issued for cash                                              |       | 109,405    |       |
| October 15, 1999 - stock issued for cash                                                |       | 7,980      |       |
| October 21, 1999 - stock issued for cash                                                |       | 40,000     |       |
| October 22, 1999 - stock issued for cash                                                |       | 51,300     |       |
| October 25, 1999 - stock issued for cash                                                |       | 55,054     |       |
| October 26, 1999 - stock issued for cash                                                |       | 16,625     |       |
| November 5, 1999 - stock issued for cash                                                |       | 20,000     |       |
| November 5, 1999 - stock issued for cash                                                |       | 1,000      |       |
| November 9, 1999 - stock issued for cash                                                |       | 10,000     |       |
| November 18, 1999 - stock issued for cash                                               |       | 10,000     |       |
| November 23, 1999 - stock issued for cash                                               |       | 114,800    |       |
| December 3, 1999 - stock issued for cash                                                |       | 12,000     |       |
| December 7, 1999 - stock issued for cash                                                |       | 25,000     |       |
| December 16, 1999 - stock issued for cash                                               |       | 4,000      |       |
| December 17, 1999 - stock issued for cash                                               |       | 10,000     |       |
| December 31, 1999 - stock issued for cash                                               |       | 10,000     |       |
| December 31, 1999 - adjust stock issued for  cash                                       |       | —     |       |
| Net loss (comprehensive net loss)                                                       |       | (1,046,928 | )          |
| **Balance, December 31, 1999**                                                          | ** ** | **$**      | **82,179** | ** ** |
|                                                                                    |       |       |       |
| January 3, 2000 - stock issued for cash                                                 |       | 20,000     |       |
| January 14, 2000 - stock issued for cash                                                |       | 25,000     |       |

 

54

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| January 14, 2000 - stock issued for  services at fair value - Infocall                         |   | 20,000    |   |
|------------------------------------------------------------------------------------------------|--------|-----------|--------|
| February 9, 2000 - stock issued for cash                                                       |   | 20,000    |   |
| February 10, 2000 - stock issued for cash                                                      |   | 15,000    |   |
| February 14, 2000 - stock issued for cash                                                      |   | 5,000     |   |
| February 15, 2000 - stock issued for cash                                                      |   | 10,000    |   |
| February 22, 2000 - stock issued for cash                                                      |   | 54,500    |   |
| February 25, 2000 - stock issued for cash                                                      |   | 13,000    |   |
| February 28, 2000 - stock issued for cash                                                      |   | 17,000    |   |
| February 29, 2000 - stock issued for cash                                                      |   | 20,000    |   |
| March 2, 2000 - stock issued for cash                                                          |   | 6,000     |   |
| March 7, 2000 - stock issued for cash                                                          |   | 2,000     |   |
| March 8, 2000 - stock issued for cash                                                          |   | 132,000   |   |
| March 10, 2000 - stock issued for cash                                                         |   | 10,000    |   |
| March 13, 2000 - stock issued for cash                                                         |   | 10,000    |   |
| March 16, 2000 - stock issued for cash                                                         |   | 10,000    |   |
| March 20, 2000 - stock issued for cash                                                         |   | 24,000    |   |
| March 23, 2000 - stock issued for cash                                                         |   | 2,000     |   |
| March 24, 2000 - stock issued for cash                                                         |   | 40,000    |   |
| March 29, 2000 - stock issued for cash                                                         |   | 10,000    |   |
| March 30, 2000 - stock issued for cash                                                         |   | 10,000    |   |
| April 19, 2000 - stock issued for cash                                                         |   | 10,000    |   |
| April 27, 2000 - stock issued for cash                                                         |   | 19,000    |   |
| May 10, 2000 - stock issued for cash                                                           |   | 10,000    |   |
| May 12, 2000 - stock issued for cash                                                           |   | 170,000   |   |
| May 19, 2000 - stock issued for cash                                                           |   | 20,400    |   |
| June 19, 2000 - stock issued for cash                                                          |   | 30,002    |   |
| June 21, 2000 - stock issued for cash                                                          |   | 42,000    |   |
| June 30, 2000 - adjust stock issued for  cash                                                  |   | 33,200    |   |
| June 30, 2000 - adjust stock issued for  cash                                                  |   | (92,401   | )      |
| July 1, 2000 - adjust stock issued for cash  (Driscoll)                                        |   | (10,000   | )      |
| July 1, 2000 - adjust stock issued for  cash(Wallet)                                           |   | (12,000   | )      |
| August 18, 2000 - share exchange adjustment                                                    |   | —    |   |
| August 18, 2000 - stock issued as part of  merger - Viola Group                                |   | 4,100     |   |
| August 18, 2000 - stock options granted and  exercised for services at fair value - Clever     |   | 60,500    |   |
| August 18, 2000 - stock options granted and  exercised for subscription receivable - Benson    |   | —    |   |
| August 18, 2000 - stock options granted and exercised for  subscription receivable, - Phillips |   | —    |   |
| August 18, 2000 - stock options granted and  exercised for subscriptions receivable - Cairns   |   | —    |   |
| August 22, 2000 - stock options granted at  fair value - Kaiser                                |   | 45,420    |   |
| October 1, 2000 - payment of subscription  receviable for services at fair value - Clever      |   | 250       |   |
| October 1, 2000 - payment of subscription  receviable for services at fair value - Benson      |   | 31,300    |   |
| October 23, 2000 - stock options granted and  exercised for services at fair value - Clever    |   | 56,250    |   |
| October 30, 2000 - stock options granted  and exercised for services at fair value - Benson    |   | 271,736   |   |
| October 30, 2000 - stock options granted  and exercised for services at fair value - Phillips  |   | 431,260   |   |
| October 30, 2000 - stock options granted  and exercised for services at fair value - Cairns    |   | 95,007    |   |
| November 14, 2000 - stock issued services  at fair value - Infocall                            |   | 1,893,375 |   |
| November 28, 2000 - stock issued for  services at fair value - Net Connection Corp             |   | 921,043   |   |
| November 28, 2000 - stock issued for  services at fair value - Clever                          |   | 56,250    |   |
| November 28, 2000 - stock issued for  services at fair value - Dodrill                         |   | 102,480   |   |
| November 28, 2000 - stock issued for  services at fair value - Richfield                       |   | 51,240    |   |
| November 28, 2000 - share exchange  adjustment (Benson, Phillips, Cairns, miscellaneous)       |   | —    |   |
| December 20, 2000 - stock options granted  at fair value - Adams                               |   | 255,246   |   |

 

55

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| December 21, 2000 - conversion of  debentures                                              |   | 94,990     |       |
|--------------------------------------------------------------------------------------------|--------|------------|------------|
| December 21, 2000 - stock options granted,  exercised and issued (3rd Round Investors)     |   | 15,204     |       |
| December 21, 2000 - stock options granted  at fair value - Rivero                          |   | 3,870      |       |
| December 31, 2000 - stock options granted  at fair value - Jacobs                          |   | 2,153      |       |
| December 31, 2000 - stock options granted  at fair value - Royal                           |   | 6,413      |       |
| December 31, 2000 - stock options granted  at fair value - Shewmaker                       |   | 13,496     |       |
| Net loss (comprehensive net loss)                                                          |   | (6,957,807 | )          |
| **Balance, December 31, 2000**                                                             |   | $          | (1,768,344 | ) |
| ** **                                                                                 |   |       |       |   |
| January 2, 2001 - stock issued for services at fair value -  Net Connection Corp.          |   | 966,416    |       |
| January 29, 2001 - stock issued for  services at fair value - Richfield                    |   | 90,000     |       |
| January 29, 2001 - stock issued for  services at fair value - Kolb                         |   | 311,300    |       |
| January 29, 2001 - stock issued for  services at fair value - Silvasy                      |   | 12,810     |       |
| January 29, 2001 - stock issued for  services at fair value - Young                        |   | 6,405      |       |
| January 29, 2001 - stock issued for  services at fair value - Adams                        |   | 12,810     |       |
| January 29, 2001 - stock issued for  services at fair value - Transmedia                   |   | 26,293     |       |
| January 29, 2001 - stock options exercised  and issued for cash - 3rd round investors      |   | 2,800      |       |
| January 29, 2001 - stock issued for cash                                                   |   | 92,400     |       |
| January 29, 2001 - conversion of debentures                                                |   | 20,000     |       |
| March 29, 2001 - stock options exercised  and issued for cash - 3rd round investors        |   | 5,659      |       |
| March 31, 2001 - payment of subscription  receivable for services at fair value - Benson   |   | 347,014    |       |
| March 31, 2001 - payment of subscription  receivable for services at fair value - Phillips |   | 119,493    |       |
| March 31, 2001 - payment of subscription  receivable for services at fair value - Cairns   |   | 187,490    |       |
| March 31, 2001 - adjust stock issued for  cash                                             |   | —     |       |
| April 4, 2001 - stock issued for services  at fair value - Kolb                            |   | 108,118    |       |
| April 4, 2001 - stock issued for services  at fair value - Annis                           |   | 5,508      |       |
| May 1, 2001 - stock options granted at fair  value - Kaiser                                |   | 30,974     |       |
| May 4, 2001 - stock issued for services at  fair value - Dove                              |   | 46,074     |       |
| May 21, 2001 - stock issued for services at  fair value - Dove                             |   | 24,918     |       |
| May 21, 2001 - stock issued for services at  fair value - Cairns                           |   | 39,781     |       |
| June 5, 2001 - stock issued for services at  fair value - Young                            |   | 4,160      |       |
| June 5, 2001 - stock issued for services at  fair value - Silvasy                          |   | 5,510      |       |
| June 12, 2001 - stock issued for services  at fair value - Kolb                            |   | 246,788    |       |
| June 12, 2001 - stock issued for services  at fair value - Dean-Dastvan                    |   | 12,089     |       |
| June 12, 2001 - adjust merger shares                                                       |   | —     |       |
| June 25, 2001 - stock issued for services  at fair value - Dove                            |   | 25,809     |       |
| July 5, 2001 - stock issued for services at  fair value - Young                            |   | 21,099     |       |
| July 5, 2001 - stock issued for services at  fair value - Silvasy                          |   | 35,201     |       |
| July 5, 2001 - stock issued for services at  fair value - McGrath                          |   | 6,880      |       |
| July 12, 2001 - stock issued for services  at fair value - Dean-Dastvan                    |   | 16,232     |       |
| July 12, 2001 - stock issued for services  at fair value - Annis                           |   | 25,367     |       |
| July 25, 2001 - stock issued for services  at fair value - Dove                            |   | 27,522     |       |
| July 25, 2001 - stock issued for services  at fair value - Kolb                            |   | 130,639    |       |
| August 13, 2001 - stock issued for services  at fair value - Dodrill                       |   | 6,971      |       |
| August 13, 2001 - stock issued for services  at fair value - Silvasy                       |   | 2,760      |       |

 

56

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| August 13, 2001 - stock issued for services  at fair value - Young                         |   | 3,580  |   |
|--------------------------------------------------------------------------------------------|--------|--------|--------|
| August 13, 2001 - stock issued for services  at fair value - McGrath                       |   | 4,315  |   |
| August 20, 2001 - stock issued for services  at fair value - Net Connection Corp.          |   | 73,950 |   |
| August 23, 2001 - stock issued for services  at fair value - Dodrill                       |   | 19,680 |   |
| August 23, 2001 - stock issued for services  at fair value - Hester                        |   | 15,160 |   |
| August 23, 2001 - stock issued for services  at fair value - DeVal                         |   | 15,755 |   |
| August 23, 2001 - stock issued for services  at fair value - Noser                         |   | 15,771 |   |
| August 23, 2001 - stock issued for services  at fair value - Aro                           |   | 15,774 |   |
| August 23, 2001 - stock issued for services  at fair value - Holzworth                     |   | 15,812 |   |
| August 23, 2001 - stock issued for services  at fair value - Silvasy                       |   | 1,635  |   |
| August 23, 2001 - stock issued for services  at fair value - Young                         |   | 1,740  |   |
| August 23, 2001 - stock issued for services  at fair value - McGrath                       |   | 3,160  |   |
| October 1, 2001 - stock issued for services  at fair value - DeVal                         |   | 4,933  |   |
| October 1, 2001 - stock issued for services  at fair value - Holzworth                     |   | 7,545  |   |
| October 1, 2001 - stock issued for services  at fair value - Hester                        |   | 11,071 |   |
| October 1, 2001 - stock issued for services  at fair value - Noser                         |   | 8,237  |   |
| October 1, 2001 - stock issued for services  at fair value - Silvasy                       |   | 1,380  |   |
| October 1, 2001 - stock issued for services  at fair value - Young                         |   | 1,490  |   |
| October 1, 2001 - stock issued for services at fair value -  Dean-Dastvan                  |   | 3,780  |   |
| October 1, 2001 - stock issued for services  at fair value - Dodrill                       |   | 10,560 |   |
| October 1, 2001 - stock issued for services  at fair value - Kolb                          |   | 11,876 |   |
| October 1, 2001 - stock options granted at  fair value - Dove                              |   | 58,278 |   |
| October 15, 2001 - stock issued for services  at fair value - Hester                       |   | 64,507 |   |
| October 15, 2001 - stock issued for  services at fair value - Dean-Dastvan                 |   | 3,780  |   |
| October 15, 2001 - stock issued for  services at fair value - DeVal                        |   | 2,376  |   |
| October 15, 2001 - stock issued for  services at fair value - Noser                        |   | 4,274  |   |
| October 15, 2001 - stock issued for  services at fair value - Holzworth                    |   | 4,073  |   |
| October 15, 2001 - stock issued for  services at fair value - Dodrill                      |   | 17,025 |   |
| November 5, 2001 - stock issued for  services at fair value - Dove                         |   | 6,740  |   |
| November 5, 2001 - stock issued for  services at fair value - Adams                        |   | 3,000  |   |
| November 5, 2001 - stock issued for  services at fair value - Calver                       |   | 2,000  |   |
| November 7, 2001 - stock issued for  services at fair value - Hester                       |   | 39,748 |   |
| November 7, 2001 - stock issued for  services at fair value - Kolb                         |   | 4,212  |   |
| December 6, 2001 - stock issued for  services at fair value - Dodrill, Hester, Kolb, Dove) |   | 24,301 |   |

 

57

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| December 6, 2001 - stock issued for services  at fair value - Hester          |   | 60,655     |     |
|-------------------------------------------------------------------------------|--------|------------|----------|
| December 6, 2001 - stock issued for  services at fair value - Kolb            |   | 3,469      |     |
| December 6, 2001 - stock issued for  services at fair value - Dove            |   | 4,800      |     |
| December 21, 2001 - stock issued for  deferred financing at fair value        |   | —     |     |
| December 21, 2001 - stock issued for  services at fair value - Hester         |   | 55,655     |     |
| December 31, 2001 - stock options expired  (Rivero, Jacobs, Royal, Shewmaker) |   | —     |     |
| Net loss (comprehensive net loss)                                             |   | (2,806,599 | )        |
| **Balance, December 31, 2001**                                                |   | $          | (945,556 | ) |
|                                                                               |        |            |          |  |

 

58

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| January 2, 2002 - financing fees recognized                                                                  |   | 93,500   |   |
|--------------------------------------------------------------------------------------------------------------|--------|----------|--------|
| January 7, 2002 - stock issued towards  purchase of subsidiary at fair value - North Electric Company, Inc.  |   | 38,648   |   |
| January 9, 2002 - stock issued towards  purchase of subsidiary at fair value - North Electric Company, Inc.  |   | 31,045   |   |
| February 1, 2002 - stock issued for  services at fair value -Dodrill                                         |   | 5,100    |   |
| February 1, 2002 - stock issued for  services at fair value - Dove                                           |   | 3,000    |   |
| February 1, 2002 - stock issued for  services at fair value - Benson                                         |   | 30,000   |   |
| February 1, 2002 - stock issued towards  purchase of subsidiary at fair value - North Electric Company, Inc. |   | 8,964    |   |
| February 8, 2002 - stock issued for  services at fair value - Kristoff                                       |   | 3,000    |   |
| February 14, 2002 - stock issued for cash                                                                    |   | 192,500  |   |
| February 20, 2002 - stock issued for  services at fair value - Dodrill                                       |   | 6,000    |   |
| March 6, 2002 - stock issued for services  at fair value - Dean-Dastvan                                      |   | 2,069    |   |
| March 31, 2002 - stock options granted at  fair value - Dove                                                 |   | 21,192   |   |
| April 23, 2002 - stock issued towards  purchase of subsidiary at fair value - North Electric Company, Inc.   |   | 18,792   |   |
| May 1, 2002 - stock issued for services at  fair value - Dean-Dastvan                                        |   | 16,842   |   |
| May 1, 2002 - stock issued for services at  fair value - Dodrill                                             |   | 3,000    |   |
| May 1, 2002 - stock issued for services at  fair value - Kristoff                                            |   | 6,000    |   |
| May 6, 2002 - stock issued for services at  fair value - Orr                                                 |   | 11,250   |   |
| May 7, 2002 - stock issued for service at  fair value - Collins                                              |   | 2,206    |   |
| May 7, 2002 - stock issued for service at  fair value - DeVal                                                |   | 1,760    |   |
| May 7, 2002 - stock issued for service at  fair value - Holzworth                                            |   | 5,011    |   |
| May 20, 2002 - stock issued towards  purchase of subsidiary at fair value - North Electric Company, Inc.     |   | 405,000  |   |
| May 21, 2002 - stock issued for services at  fair value - Kristoff                                           |   | 5,000    |   |
| May 21, 2002 - stock issued for services at  fair value - Kaiser                                             |   | 3,000    |   |
| May 28, 2002 - stock options granted at  fair value - Gibson                                                 |   | 1,276    |   |
| May 29, 2002 - stock options granted at  fair value - Bragg                                                  |   | 1,383    |   |
| June 6, 2002 - stock issued for services at  fair value - Ashley Associates                                  |   | 75,000   |   |
| June 12, 2002 - stock  options granted at fair value - Erickson                                              |   | 813      |   |
| June 13, 2002 - stock options granted at fair  value - Tate                                                  |   | 975      |   |
| June 21, 2002 - stock options granted at  fair value - Rugerro                                               |   | 1,170    |   |
| June 30, 2002 - stock warrants granted at  fair value - QAT                                                  |   | 8,900    |   |
| July 5, 2002 - stock issued for services at  fair value - Galpern                                            |   | 30,000   |   |
| July 5, 2002 - stock issued for services at  fair value - Sellars                                            |   | 7,000    |   |
| July 5, 2002 - stock issued for services at  fair value - Cella                                              |   | 7,000    |   |
| July 12, 2002 - stock options granted at  fair value - Tanzini                                               |   | 1,300    |   |
| July 12, 2002 - stock options granted at  fair value - Krishnan                                              |   | 2,925    |   |
| July 31, 2002 - stock issued for services  at fair value - Seymour                                           |   | 6,000    |   |
| August 18, 2002 - adjust issuances to  investor to satisfy litigation - La Jolla Cove Investors              |   | (142,388 | )      |
| August 19, 2002 - stock issued to satisfy  litigation with investor at fair value - La Jolla Cove Investors  |   | 46,000   |   |

 

59

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| August 19, 2002 - stock issued to satisfy  note payable litigation at fair value - North Atlantic Partners |   | 85,196 |   |
|------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| August 19, 2002 - stock issued for services  at fair value - Dean-Dastvan                                  |   | 10,000 |   |
| August 19, 2002 - stock issued for services  at fair value - Dodrill                                       |   | 10,000 |   |
| August 19, 2002 - stock issued for cash                                                                    |   | 55,000 |   |
| August 21, 2002 - stock warrants granted to  investor (La Jolla Cove Investors)                            |   | 50,000 |   |
| August 22, 2002 - stock options expired -  Kaiser                                                          |   | — |   |
| August 22, 2002 - stock options granted at  fair value - Kaiser                                            |   | 8,784  |   |
| August 29, 2002 - stock options granted at  fair value - Erickson                                          |   | 1,300  |   |
| September 12, 2002 - stock issued for  services at fair value - BJG Holdings                               |   | 18,000 |   |
| September 30, 2002 - stock warrants granted  at fair value - QAT                                           |   | 8,900  |   |
| October 9, 2002 - stock issued for services  at fair value - Adam                                          |   | — |   |
| October 9, 2002 - stock issued for services  at fair value - Mottayaw                                      |   | — |   |
| October 9, 2002 - stock issued for services  at fair value - Ference                                       |   | — |   |
| October 9, 2002 - stock issued for services  at fair value - Erickson                                      |   | — |   |
| October 9, 2002 - stock issued for services  at fair value - Noser                                         |   | — |   |
| October 9, 2002 - stock issued for services  at fair value - Hester                                        |   | — |   |
| October 16, 2002 - stock issued for cash                                                                   |   | 14,998 |   |
| October 18, 2002 - stock issued for cash                                                                   |   | 19,246 |   |
| October 18, 2002 - adjust stock warrant  grant to investor (La Jolla Cove Investors)                       |   | 25,000 |   |
| October 23, 2002 - stock issued for service  at fair value - Kaiser                                        |   | — |   |
| October 23, 2002 - stock warrants exercised  and issued                                                    |   | 158    |   |
| October 23, 2002 - stock issued for cash                                                                   |   | 20,000 |   |

 

60

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| October 25, 2002 - stock issued for  services at fair value - Benson                                       |   | 81,000     |   |
|------------------------------------------------------------------------------------------------------------|--------|------------|--------|
| October 30, 2002 - stock warrants exercised  and issued                                                    |   | 956        |   |
| November 5, 2002 - stock issued for cash                                                                   |   | 15,000     |   |
| November 6, 2002 - stock issued for cash                                                                   |   | 10,000     |   |
| November 6, 2002 - stock warrants exercised  and issued                                                    |   | 319        |   |
| November 8, 2002 - stock issued for cash                                                                   |   | —     |   |
| November 12, 2002 - stock options granted  at fair value - PMR                                             |   | 38,100     |   |
| November 18, 2002 - stock warrants  exercised and issued                                                   |   | 1,000      |   |
| November 19, 2002 - stock warrants  exercised and issued                                                   |   | 319        |   |
| November 21, 2002 - stock warrants  exercised and issued                                                   |   | 1,275      |   |
| November 25, 2002 - stock issued for  services at fair value - PMR Group                                   |   | 78,600     |   |
| December 4, 2002 - stock warrants granted  to investor (La Jolla Cove Investors)                           |   | 25,000     |   |
| December 9, 2002 - stock issued for cash                                                                   |   | 15,000     |   |
| December 11, 2002 - stock warrants  exercised and issued                                                   |   | 1,275      |   |
| December 17, 2002 - stock options granted  at fair value - Noser                                           |   | 1,869      |   |
| December 17, 2002 - stock options granted  at fair value - Adam                                            |   | 1,869      |   |
| December 17, 2002 - stock options granted  at fair value - Mottayaw                                        |   | 1,869      |   |
| December 17, 2002 - stock options granted  at fair value - Dickman                                         |   | 1,869      |   |
| December 17, 2002 - stock options granted  at fair value - McVey                                           |   | 1,424      |   |
| December 19, 2002 - stock warrants  exercised and issued                                                   |   | 1,071      |   |
| December 31, 2002 - adjust stock warrants  exercised                                                       |   | (7         | )      |
| December 31, 2002 - write-off deferred  financing costs                                                    |   | 46,750     |   |
| December 31, 2002 - stock warrants granted  at fair value - QAT                                            |   | 8,900      |   |
| December 31, 2002 - stock options expired                                                                  |   | —     |   |
| Net loss (comprehensive net loss)                                                                          |   | (2,907,352 | )      |
| **Balance, December 31, 2002**                                                                             |   | (2,232,635 | )      |
| ** **                                                                                                 |   |       |   |
| January 1, 2003 - stock options granted at  fair value - PTR Group                                         |   | 12,000     |   |
| January 6, 2003 - stock issued for services  at fair value - Benson                                        |   | 160,000    |   |
| January 1, 2003 - stock issued for cash                                                                    |   | 8,295      |   |
| January 7, 2003 - stock issued in lieu of  accounts payable at fair value - La Jolla Cove Investore, Inc.  |   | 50,000     |   |
| January 14, 2003 - stock issued in lieu of  accounts payable at fair value - La Jolla Cove Investore, Inc. |   | 50,000     |   |
| January 31, 2003 - stock issued for  services at fair value - Dodrill                                      |   | 45,000     |   |
| January 31, 2003 - stock issued for  services at fair value - Dove                                         |   | 72,296     |   |
| January 31, 2003 - stock options exercised  and issued                                                     |   | 38,000     |   |
| February 3, 2003 - stock issued for  services at fair value - Dickman                                      |   | 2,000      |   |
| February 3, 2003 - stock issued for  services at fair value - Adam                                         |   | 4,000      |   |
| February 3, 2003 - stock issued for  services at fair value - Mottayaw                                     |   | 4,000      |   |
| February 3, 2003 - stock issued for cash                                                                   |   | 14,002     |   |
| February 4, 2003 - stock options exercised  and issued                                                     |   | 10,200     |   |
| February 4, 2003 - stock issued for cash                                                                   |   | 7,703      |   |
| February 5, 2003 - Stock issued for  services at fair value - VanSchaik                                    |   | 4,000      |   |
| February 5, 2003 - Stock issued for cash                                                                   |   | 16,500     |   |
| February 7, 2003 - stock issued for  services at fair value - Brantley                                     |   | 60,000     |   |
| February 10, 2003 - stock issued for  services at fair value - Collins                                     |   | 16,205     |   |
| February 10, 2003 - stock issued for  services at fair value - McVey                                       |   | 4,000      |   |
| February 12, 2003 - stock issued for  services at fair value - Yes, International                          |   | 4,000      |   |
| February 14, 2003 - stock issued for  services at fair value - Silvasy                                     |   | 24,000     |   |
| February 21, 2003 - stock issued for cash                                                                  |   | 10,000     |   |

 

61

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| February 26, 2003 - stock issued for  services at fair value - Bevins                                    |   | 200,000 |   |
|----------------------------------------------------------------------------------------------------------|--------|---------|--------|
| March 7, 2003 - stock options granted at  fair value - QAT                                               |   | —  |   |
| March 12, 2003 - Stock issued in partial  satisfaction of note payable at fair value - Coldwater Capital |   | 62,719  |   |
| March 12, 2003 - stock issued for cash                                                                   |   | 5,500   |   |
| March 31, 2003 - deferred stock  compensation earned                                                     |   | 47,400  |   |
| March 31, 2003 - stock warrants granted at  fair value - QAT                                             |   | 8,900   |   |
| April 1, 2003 - consilidates subsidiary  sale of additional shares                                       |   | (60,943 | )      |
| April 22, 2003 - stock options granted for  services at fair value - QAT                                 |   | 266,000 |   |
| April 22. 2003 - stock options granted for  services at fair value - Gordon                              |   | 85,000  |   |
| May 7, 2003 - stock issued for cash                                                                      |   | 3,330   |   |
| May 20, 2003 - conversion of debentures                                                                  |   | 5,000   |   |
| May 30, 2003 - stock options exercised                                                                   |   | 9,000   |   |
| June 5, 2003 - stock warrants exercised                                                                  |   | —  |   |
| June 6, 2003 -10% stock dividend issued                                                                  |   | —  |   |
| June 9, 2003 - stock warrants granted for  services at fair value - Brantley                             |   | 330,200 |   |
| June 11, 2003 - stock issued for cash                                                                    |   | 250,000 |   |
| June 11, 2003 - stock options exercised -  Brantley                                                      |   | 38,000  |   |
| June 11, 2003 - stock options exercised -  Dickman                                                       |   | 5,250   |   |
| June 11. 2003 - stock options exercised -  Gibson                                                        |   | 1,500   |   |
| June 11. 2003 - stock options exercised -  McVey                                                         |   | 4,000   |   |
| June 11. 2003 - stock options exercised -  Brantley                                                      |   | 35,000  |   |
| June 11. 2003 - stock options exercised -  Noser                                                         |   | 5,250   |   |
| June 11, 2003 - stock options exercised -  Ruggero                                                       |   | 9,000   |   |
| June 11, 2003 - stock options exercised -  Tate                                                          |   | 7,500   |   |
| June 11. 2003 - stock issued for cash                                                                    |   | 8,000   |   |
| June 11, 2003 - stock issued for services  at fair value - Noser                                         |   | 51,000  |   |
| June 13, 2003 - purchase  treasury stock                                                                 |   | (50,000 | )      |
| June 20, 2003 - stock issued for services  at fair value - Yes, International                            |   | 265,000 |   |
| June 30, 2003 - stock warrants granted at  fair value - QAT                                              |   | 8,900   |   |
| June 30, 2003 - adjust stock issued for  cash                                                            |   | (64,096 | )      |
| July 9, 2003 - stock options exercised and  stock issued for services                                    |   | 76,670  |   |
| July 16, 2003 - stock options exercised in  lieu of cash for at fair value - Solnet Technologies         |   | 22,500  |   |
| July 16, 2003 - stock options exercised -  Adam                                                          |   | 5,250   |   |
| July 16, 2003 - stock options exercised -  Mottayaw                                                      |   | 5,250   |   |
| July 16, 2003 - stock options exercised -  Tanzini                                                       |   | 10,000  |   |
| July 16, 2003 - stock options exercised in  lieu of cash for at fair value - Erickson                    |   | 16,250  |   |
| July 16, 2003 - stock issued for services  at fair value - Mottayaw                                      |   | 48,000  |   |
| July 16, 2003 - stock issued for services  at fair value - Adam                                          |   | 48,000  |   |
| July 16, 2003 - stock issued for services  at fair value - Erickson                                      |   | 60,000  |   |
| July 23, 2003 - stock issued for cash                                                                    |   | 85,500  |   |
| July 23, 2003 - stock issued for cash                                                                    |   | 88,000  |   |
| July 23, 2003 - stock issued for cash                                                                    |   | 170,000 |   |
| August 15, 2003 - stock options granted at  fair value - Polk                                            |   | 232,250 |   |
| September 30, 2003 - stock warrants granted  at fair value - QAT                                         |   | 8,900   |   |
| September 30, 2003 - adjust stock issued  for cash                                                       |   | 59,201  |   |
| September 30, 2003 - stock options issued  for services at fair value - Stroup                           |   | 11,700  |   |
| October 1, 2003 - stock options granted at  fair value - Vuksich                                         |   | 5,960   |   |
| October 3, 2003 - adjust stock issued for  cash                                                          |   | 200,000 |   |
| November 30, 2003 - stock options granted  for services at fair value - Ference                          |   | 158,533 |   |
| December 1, 2003 - stock options granted  for services at fair value - Stroup                            |   | 54,175  |   |
| December 16, 2003 - stock issued for cash                                                                |   | 17,000  |   |
| December 16, 2003 - stock issued for cash                                                                |   | 15,300  |   |
| December 16, 2003 - stock and stock options  issued for cash                                             |   | 960,000 |   |

 

62

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| December 31, 2003 - treasury stock  activities                                                                        |   | (75,392    | )      |
|-----------------------------------------------------------------------------------------------------------------------|--------|------------|--------|
| December 31, 2003 - adjust stock issued for  cash                                                                     |   | 42,054     |   |
| Net Loss (Comprehensive Net Loss)                                                                                     |   | (4,448,410 | )      |
| **Balance December 31, 2003**                                                                                         |   | (2,203,333 | )      |
| ** **                                                                                                            |   |       |   |
| January 1, 2004 - stock options issued for services as fair value  - Benson                                           |   | 220,500    |   |
| January 7, 2004 - stock options issued for  services at fair value - Polk                                             |   | 35,600     |   |
| January 15, 2004 - stock options issued for  services at fair value - Mitsunaga                                       |   | 346,871    |   |
| January 27, 2004 - stock issued for  services at fair value - AMT Management                                          |   | 40,000     |   |
| January 29, 2004 - stock subscription  receivable payment received                                                    |   | 40,000     |   |
| February 2, 2004 - stock options issued for  services at fair value - Giagtzis                                        |   | 14,400     |   |
| February 12, 2004 - stock options issued  for services at fair value - Gilberg                                        |   | 131,800    |   |
| February 12, 2004 - stock options issued  for services at fair value - Hershman                                       |   | 65,900     |   |
| February 17, 2004 - subscribed stock  returned and cancelled - Brantley                                               |   | —     |   |
| March 31, 2004 - stock options issued for  services at fair value - Stroup                                            |   | 35,100     |   |
| March 31, 2004 - stock options issued for  services at fair value - Ference                                           |   | 32,800     |   |
| March 31, 2004 - stock options issued for  services at fair Value - Stroup                                            |   | 57,225     |   |
| April 1, 2004 - stock issued for stock  subscription receivable                                                       |   | 80,000     |   |
| June 30, 2004 - beneficial conversion for  agreements to issue convertible promissory notes - April through June 2004 |   | 343,093    |   |
| June 30, 2004 - stock options issued for  services at fair value - Giagtzis                                           |   | 7,200      |   |
| June 30, 2004 - stock options issued for  services at fair value - Stroup                                             |   | 53,700     |   |
| June 30, 2004 - stock options issued for  services at fair value - Ference                                            |   | 32,799     |   |
| July 23, 2004 - stock options issued for  services at fair value - Ference                                            |   | 194,600    |   |
| August 2, 2004 - stock issued for services  at fair value - Benson                                                    |   | 658,750    |   |
| August 5, 2004 - stock issued for services  at fair value - Ference                                                   |   | 320,000    |   |
| August 5, 2004 - stock issued for services  at fair value - Dove                                                      |   | 420,750    |   |
| August 6, 2004 - stock issued for services  at fair value - Murphy                                                    |   | 544,000    |   |
| August 13, 2004 - stock issued for services  at fair value - Noser                                                    |   | 11,050     |   |
| August 13, 2004 - stock issued for services  at fair value - Erickson                                                 |   | 11,050     |   |
| August 13, 2004 - stock issued for services  at fair value - Van Cooney                                               |   | 11,050     |   |
| August 13, 2004 - stock issued for services  at fair value - Fayette                                                  |   | 11,050     |   |
| August 13, 2004 - stock issued for services  at fair value - Schwartz                                                 |   | 11,050     |   |
| August 13, 2004 - stock issued for services  at fair value - Smith                                                    |   | 11,050     |   |
| August 13, 2004 - stock issued for services  at fair value - Adam                                                     |   | 11,050     |   |
| August 13, 2004 - stock issued for services  at fair value - Mottayaw                                                 |   | 11,050     |   |
| September 14, 2004 - stock issued for  services at fair value - VanSchaik                                             |   | 11,050     |   |
| September 30, 2004 - stock options issued  for services at fair value - Ference                                       |   | 32,800     |   |

 

63

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| September 30, 2004 - stock options issued  for services at fair value - Adam                                                    |   | 7,810      |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|
| September 30, 2004 - stock options issued  for services at fair value - Erickson                                                |   | 7,810      |   |
| September 30, 2004 - stock options issued  for services at fair value - Erickson                                                |   | 2,868      |   |
| September 30, 2004 - stock options issued  for services at fair value - Fayette                                                 |   | 6,453      |   |
| September 30, 2004 - stock options issued  for services at fair value - Fayette                                                 |   | 7,170      |   |
| September 30, 2004 - stock options issued  for services at fair value - Holzworth                                               |   | 10,397     |   |
| September 30, 2004 - stock options issued  for services at fair value - Holzworth                                               |   | 7,810      |   |
| September 30, 2004 - stock options issued  for services at fair value -Krishnan/Solnet                                          |   | 15,620     |   |
| September 30, 2004 - stock options issued  for services at fair value - Krishnan/Solnet                                         |   | 6,453      |   |
| September 30, 2004 - stock options issued  for services at fair value - Mottayaw                                                |   | 7,810      |   |
| September 30, 2004 - stock options issued  for services at fair value - Noser                                                   |   | 6,453      |   |
| September 30, 2004 - stock options issued  for services at fair value - Noser                                                   |   | 7,810      |   |
| September 30, 2004 - stock options issued for services at fair value  - Ruggero                                                 |   | 3,155      |   |
| September 30, 2004 - stock options issued  for services at fair value - Ruggero                                                 |   | 7,810      |   |
| September 30, 2004 - stock options issued  for services at fair value - Schwartz                                                |   | 3,226      |   |
| September 30, 2004 - stock options issued  for services at fair value - Schwartz                                                |   | 7,170      |   |
| September 30, 2004 - stock options issued  for services at fair value - Smith                                                   |   | 2,151      |   |
| September 30, 2004 - stock options issued  for services at fair value - Smith                                                   |   | 7,170      |   |
| September 30, 2004 - stock options issued  for services at fair value - Van Cooney/MRE                                          |   | 3,585      |   |
| September 30, 2004 - stock options issued  for services at fair value - Van Cooney/MRE                                          |   | 7,170      |   |
| September 30, 2004 - stock options issued for services at fair value  - Van Schaik/AT Soft                                      |   | 7,170      |   |
| September 30, 2004 - stock options issued  for services at fair value - Van Schaik/AT Soft                                      |   | 6,453      |   |
| September 30, 2004 - beneficial conversion  for agreements to issue convertible promissory notes - July through September  2004 |   | 494,635    |   |
| October 29, 2004 - stock issued for  services at fair value - Purohit                                                           |   | 73,100     |   |
| October 29, 2004 - stock issued for  services at fair value - Hester                                                            |   | 1,075,250  |   |
| November 2, 2004 - stock issued upon  conversion of convertible promissory note - Hughes                                        |   | 24,750     |   |
| November 17, 2004 - stock options issued  for services at fair value - Purohit                                                  |   | 158,000    |   |
| November 23, 2004 - stock options issued  for services at fair value - McGrath                                                  |   | 134,500    |   |
| December 31, 2004 - beneficial conversion  of agreements to issue convertible promissory notes - October through  December 2004 |   | 17,600     |   |
| December 31, 2004 - stock options issued  for services at fair value value - Ference                                            |   | 280,335    |   |
| December 31, 2004 - stock options issued  for services at fair value value - Erickson                                           |   | 1,134      |   |
| December 31, 2004 - stock options issued  for services at fair value value - Fayette                                            |   | 2,551      |   |
| December 31, 2004 - stock options issued  for services at fair value value - Holzworth                                          |   | 4,111      |   |
| December 31, 2004 - stock options issued  for services at fair value value - Krishnan/Solnet                                    |   | 2,551      |   |
| December 31, 2004 - stock options issued  for services at fair value value - Noser                                              |   | 2,551      |   |
| December 31, 2004 - stock options issued for services at fair value value  - Ruggero                                            |   | 1,248      |   |
| December 31, 2004 - stock options issued  for services at fair value value - Schwartz                                           |   | 1,276      |   |
| December 31, 2004 - stock options issued for services at fair value value  - Smith                                              |   | 850        |   |
| December 31, 2004 - stock options issued for services at fair value value  - Van Cooney/MRE                                     |   | 1,418      |   |
| December 31, 2004 - stock options issued  for services at fair value value - Van Schaik/AT Soft                                 |   | 2,551      |   |
|                                                                                                                            |   |       |   |
| Net Loss (Comprehensive  Net Loss)                                                                                              |   | (9,302,939 | )      |
| **Balance December 31, 2004**                                                                                                   |   | (5,270,999 | )      |

 

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**DataMEG Corp.and Subsidiaries(A Development Stage Enterprise)****Consolidated Statements ofCash Flows**
| ** **                                                                                                      | ** ** | ** **       | ** ** | ** **       | ** ** | **Cumulative**            | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                      | ** ** | **For the**      | ** ** | **For the**      | ** ** | **from inception**        | ** ** |
| ** **                                                                                                      | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** | **(January 13, 1999) to** | ** ** |
| ** **                                                                                                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31, 2004**     | ** ** |
| ** **                                                                                                      | ** ** | **2003**         | ** ** | **2004**         | ** ** | **2004**                  | ** ** |
| ** **                                                                                                      | ** ** | **(restated)**   | ** ** | ** **       | ** ** | **(unaudited)**           | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                           | ** ** | ** **       | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net loss                                                                                                        |       | $                | (4,448,410 | )                | $          | (9,302,939                | )          | $ | (27,470,035 | ) |
| Adjustments to reconcile net loss to net cash  used in operating activities:                                    |       |             |       |             |       |                      |       |
| Depreciation and amortization                                                                                   |       | 9,112            |       | 14,806           |       | 90,416                    |       |
| Stock issued for purchase of in-process  research and development                                               |       | —           |       | —           |       | 870,600                   |       |
| Stock issued, or to be issued, in lieu of cash  for professional services                                       |       | 904,401          |       | 1,121,200        |       | 8,306,999                 |       |
| Stock issued or to be issued to officers  and employees for reimbursement of corporate expenses or compensation |       | 160,000          |       | 1,034,850        |       | 2,797,631                 |       |
| Stock options and warrants issued in lieu  of cash for professional services and compensation                   |       | 1,155,819        |       | 1,783,395        |       | 3,441,201                 |       |
| Property and equipment given in lieu of  cash for professional services                                         |       | —           |       | —           |       | 15,475                    |       |
| Realized gains on sales of investments                                                                          |       | —           |       | —           |       | (8,530                    | )          |
| Gain on sale of property and equipment                                                                          |       | —           |       | 25               |       | 25                        |       |
| Loss on acquisition fee                                                                                         |       | 50,000           |       | —           |       | 123,950                   |       |
| Loss on disposal of property and equipment                                                                      |       | 401              |       | —           |       | 1,459                     |       |
| Loss on impairment of patent                                                                                    |       | —           |       | —           |       | 127,274                   |       |
| Loss on litigation                                                                                              |       | 132,540          |       | —           |       | 159,240                   |       |
| Minority interest                                                                                               |       | (141,538         | )          | —           |       | (154,550                  | )          |
| Stock issued in lieu of financing costs                                                                         |       | —           |       | —           |       | 140,250                   |       |
| Changes in assets and liabilities affecting  operations:                                                        |       |             |       |             |       |                      |       |
| Accounts receivable (net)                                                                                       |       | —           |       | (50              | )          | (50                       | )          |
| Inventory                                                                                                       |       | —           |       | (116,407         | )          | (116,407                  | )          |
| Prepaid expenses                                                                                                |       | (4,767           | )          | (1,983           | )          | (6,750                    | )          |
| Deposits                                                                                                        |       | —           |       | 4,766            |       | 24,752                    |       |
| Promissory notes                                                                                                |       | 127,146          |       | 138,242          |       | 967,131                   |       |
| Accounts payable and accrued expenses                                                                           |       | 17,189           |       | 511,695          |       | 1,390,330                 |       |
| Accrued compensation                                                                                            |       | 208,643          |       | 942,622          |       | 1,300,696                 |       |
| Deferred revenue                                                                                                |       | —           |       | 9,456            |       | 9,456                     |       |
| Due to stockholders and officers                                                                                |       | 201,500          |       | 39,946           |       | 275,548                   |       |
| Liability for stock to be isssued                                                                               |       | 16,813           |       | 1,478,150        |       | 1,518,963                 |       |
| Convertible notes, net amortization                                                                             |       | —           |       | 854,165          |       | 854,165                   |       |
| Convertible subordinated debentures                                                                             |       | —           |       | —           |       | —                    |       |
| Short-term note payable                                                                                         |       | —           |       | —           |       | 10,909                    |       |
| Net cash used in operating activities                                                                           |       | (1,611,151       | )          | (1,488,061       | )          | (5,329,852                | )          |
|                                                                                                            |       |             |       |             |       |                      |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                           |       |             |       |             |       |                      |       |
| Purchases of property and equipment                                                                             |       | (32,510          | )          | (23,654          | )          | (95,618                   | )          |
| Payments for intangible assets                                                                                  |       | —           |       | —           |       | (127,274                  | )          |
| Payments for security deposits                                                                                  |       | (69,445          | )          | (9,601           | )          | (91,532                   | )          |
| Investment in subsidiary                                                                                        |       | —           |       | —           |       | (149,312                  | )          |
| Purchases of investments                                                                                        |       | —           |       | —           |       | (20,000                   | )          |
| Sales of investments                                                                                            |       | —           |       | —           |       | 28,530                    |       |
| Net cash used in investing activities                                                                           |       | (101,955         | )          | (33,255          | )          | (455,206                  | )          |
|                                                                                                            |       |             |       |             |       |                      |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                           |       |             |       |             |       |                      |       |
| Proceeds from loan from shareholder                                                                             |       | —           |       | —           |       | 26,000                    |       |
| Repayment of loan from shareholder                                                                              |       | —           |       | —           |       | (26,000                   | )          |
| Proceeds from short-term loan                                                                                   |       | —           |       | —           |       | 120,000                   |       |
| Repayment of capital lease obligations                                                                          |       | —           |       | —           |       | (32,002                   | )          |
| Net proceeds from issuance of stock                                                                             |       | 1,956,000        |       | 120,000          |       | 4,337,967                 |       |
| Net proceeds from stock to be issued                                                                            |       | 161,000          |       | 122,500          |       | 328,500                   |       |
| Proceeds from investments in subsidiary                                                                         |       | 25,000           |       | —           |       | 25,000                    |       |
| Proceeds from issuance of warrants                                                                              |       | —           |       | —           |       | 25,000                    |       |
| Repayment of promissory note                                                                                    |       | (500             | )          | —           |       | (500                      | )          |
| Payment for treasury stock                                                                                      |       | (125,392         | )          | —           |       | (125,392                  | )          |
| Proceeds from issuance of debentures and  promissory notes                                                      |       | —           |       | 966,495          |       | 1,106,485                 |       |
| Net cash provided by financing activities                                                                       |       | 2,016,108        |       | 1,208,995        |       | 5,785,058                 |       |
|                                                                                                            |       |             |       |             |       |                      |       |
| NET CHANGE IN CASH                                                                                              |       | 303,002          |       | (312,321         | )          | —                    |       |
|                                                                                                            |       |             |       |             |       |                      |       |
| CASH, BEGINNING OF PERIOD                                                                                       |       | 9,319            |       | 312,321          |       | —                    |       |
|                                                                                                            |       |             |       |             |       |                      |       |
| CASH, END OF PERIOD                                                                                             |       | $                | 312,321    |             | $          | —                    |       | $ | — |   |
|                                                                                                            |       |             |       |             |       |                      |       |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH  INVESTING AND FINANCING ACTIVITIES:                                        |       |             |       |             |       |                      |       |
| Financing of property and equipment with  capital lease                                                         |       | $                | —     |             | $          | —                    |       | $ | 42,540 |   |
|                                                                                                            |       |             |       |             |       |                      |       |
| Issuance of stock in exchange for notes receivable                                                              |       | $                | —     |             | $          | —                    |       | $ | 656,251 |   |
|                                                                                                            |       |             |       |             |       |                      |       |
| Issuance of stock in exchange for notes  payable                                                                |       | $                | 79,219     |             | $          | —                    |       | $ | 279,405 |   |
|                                                                                                            |       |             |       |             |       |                      |       |
| Issuance of stock in exchange for  promissory note                                                              |       | $                | —     |             | $          | 24,750                    |       | $ | 24,750 |   |
|                                                                                                            |       |             |       |             |       |                      |       |
| Stock issued as a reduction of the  liability for stock to be issued                                            |       | $                | 467,138    |             | $          | 1,032,750                 |       | $ | 2,707,984 |   |
|                                                                                                            |       |             |       |             |       |                      |       |
| Stock issued in lieu of deferred financing  costs                                                               |       | $                | —     |             | $          | —                    |       | $ | 140,250 |   |
|                                                                                                            |       |             |       |             |       |                      |       |
| Stock issued in lieu of deferred  compensation                                                                  |       | $                | —     |             | $          | —                    |       | $ | 47,400 |   |
|                                                                                                            |       |             |       |             |       |                      |       |
| Stock issued in purchase of subsidiary                                                                          |       | $                | —     |             | $          | —                    |       | $ | 483,658 |   |
|                                                                                                            |       |             |       |             |       |                      |       |
| Stock options issued as a reduction of amounts  due to stockholders and officers                                |       | $                | —     |             | $          | 220,500                   |       | $ | 220,500 |   |
|                                                                                                            |       |             |       |             |       |                      |       |
| SUPPLEMENTAL DISCLOSURE OF CASHFLOW INFORMATION:                                                                |       |             |       |             |       |                      |       |
| Interest paid                                                                                                   |       | $                | —     |             | $          | —                    |       | $ | 6,612 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

A.                                   BASIS OF PRESENTATION AND ORGANIZATION

 

DataMEG Corp. is a technology holding companyfocused through the Company’s subsidiaries on developing new technologies,software applications, and products primarily serving the telecommunicationssector.

 

DataMEG Corp. is a New York corporation and wasincorporated in October, 1982 as The Viola Group, Inc. In August 2000the Company exchanged 90% of our common stock for 100% of the stock of DataMEGCorp., a Virginia corporation that was incorporated in January 1999. TheCompany subsequently changed its name to DataMEG Corp. and is the successor inbusiness operations of the Virginia DataMEG.

 

DataMEG Corp. has two subsidiaries:CASCommunications, Inc., a Florida corporation, of which the Company owns40%, and North Electric Company, Inc., a North Carolina corporation, whichthe Company wholly owns. DataMEG Corp. and its subsidiaries individually andcollectively are a development stage enterprise.

 

CASCommunications focused on developing devicesrelated to high-speed broadband access in the past. CASCommunications’ initialfocus was in developing a device that will accelerate the speed of informationover the part of the cable fiber between the neighborhood network hub to thehome of each end user; this part is often called the last mile. CASCommunications’device was based on a communication technology called MPTC - Multi Phase PolyTone Communication. MPTC delivers new advantages to the cable operator comparedto existing last mile high-speed communication technologies. In 2004, it wasdetermined that CASCommunications would need substantial capital to practicallycontinue the development of its existing technology and the Company was notable to raise the necessary funds. As a result, CASCommunication was requiredto halt the development of its technology until such time as funds can beraised.

 

North Electric focuses on becoming a provider ofnetwork assurance products and services. North Electric network assurance productsare designed to enable communications network operators and service providersto quickly and automatically determine if their network is meeting its qualityand service expectations, while lowering network operating costs. NorthElectric has developed their NAS-6131 Network Assurance System thatcovers the existing traditional telephone networks, networks that use the samecommunication technology as the Internet, and converged networks comprised ofboth of these network types. Communications networks that deploy advancedtechnologies will receive additional fault isolation and related benefits. Inthe latter half of 2004, North Electric began to deploy equipment to customersites under three purchase on approval agreements. In October 2004, NorthElectric obtained its first approved purchase and recorded approximately$41,000 in revenues in 2004. North Electric is actively pursuing additionalnear-term sales opportunities with its existing customer and others for its NAS-6131Network Assurance System and anticipates realization of these opportunities inthe near-term.

 

These consolidated financial statements reflectthose of DataMEG Corp., CASCommunications, Inc. and North Electric Company, Inc.In accordance with the Financial Accounting Standards Board (“FASB”)interpretation (“FIN”) 46 “Consolidation of Variable Interest Entities andinterpretation of ARB No. 51”, the Company continues to consolidateCASCommunications, Inc. as it expects to continue to absorb a majority ofCASCommunication Inc.’s losses. Collectively, DataMEG Corp., CASCommunications, Inc.and North Electric Company, Inc. are referred to as the “Company”.

 

CASCommunications had no recorded assets as of December 31,2004 and had a loss before minority interest of $0 (zero) for the year ended December 31,2004 due to the lack of activity in 2004. No consolidated assets are collateralfor liabilities of CASCommunications. DataMEG has provided $270,000 of thetotal capital of $388,000 provided to CASCommunications as of December 31,2004.

 

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The Company operates under the name of DataMEG Corp.and trades under the symbol DTMG on the OTC-BB.

 

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B.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of consolidation:

• Theaccompanying consolidated financial statements present the consolidation of thefinancial statements of DataMEG Corp., its partially owned subsidiary,CASCommunications, Inc. and its wholly owned subsidiary, North ElectricCompany, Inc. Material inter-company transactions and balances have beeneliminated in the consolidation.

 

Consolidation of Variable Interest Entities:

• In January 2003and revised December 2003, the FASB issued FIN No. 46, “Consolidationof Variable Interest Entities.”  Thisinterpretation of Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements”, requires consolidation by business enterprises ofvariable interest entities, as defined, when certain conditions are met. Pursuantto FIN No. 46, the Company continues to consolidate CASCommunications, Inc.

 

Basis of accounting:

• Theaccounts of the Company are maintained on the accrual basis of accountingwhereby revenue is recognized when earned, and costs and expenses arerecognized when incurred.

 

Use of estimates:

• Managementuses estimates and assumptions in preparing financial statements in accordancewith generally accepted accounting principles. Those estimates and assumptionsaffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities, and the reported revenues and expenses.Actual results could vary from those estimates.

 

Inventory:

• TheCompany’s inventory is stated at the lower of cost or market value. Cost isdetermined using the first-in, first-out method. Unusual losses resulting fromlower of cost or market adjustments or losses on firm purchase commitments, ifany, are disclosed, and if material, separately stated from cost of goods soldin the statement of operations.

 

Property and equipment:

• Propertyand equipment are stated at cost. Depreciation and amortization is determinedusing the straight-line method over estimated

useful lives ranging from three to seven years.

 

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Intangible assets:

•Intangible assets as of December 31, 2003 and 2004 consisted of goodwillrelated to the North Electric Company, Inc. merger in April 2002. EffectiveJanuary 2002, the company adopted Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets,” (SFAS 142).SFAS 142 addresses accounting and reporting for acquired goodwill. Iteliminates the previous requirement to amortize goodwill and establishes newrequirements with respect to evaluating goodwill and impairment. The annualgoodwill impairment assessment involves estimating the fair value of areporting unit and comparing it with its carrying amount. If the carryingamount of the reporting unit exceeds its fair value, additional steps arefollowed to recognize a potential impairment loss. The Company ascertained thefair value of its only reporting unit, North Electric Company, Inc. anddetermined that there was no impairment of goodwill as of December 31,2003 and 2004. The fair value of the reporting unit was determined primarilythrough an income based valuation approach. Valuation methods based on theincome approach utilize the expected economic earnings capacity of thereporting unit to estimate value. The expected future cash flows for thereporting unit were discounted at an appropriate risk adjusted discount rate. Amarket based valuation approach based on the Company’s quoted stock price wasalso considered but not heavily relied on because the Company’s stock is thinlytraded at small dollar volumes. Additionally, there were no publicly tradedguideline companies similar to the reporting unit for comparison.

 

Accounting for Convertible Notes

• TheCompany issues convertible debt securities with non-detachable and automaticconversion features. The note holders have the right to have the notesconverted into a number of shares of the Company’s Common Stock at conversionprices ranging $0.033 to $0.10 per share. The conversion prices on all the convertible notes are “in the money” onthe date of the agreement resulting in a beneficial conversion feature. TheCompany computes the fair value of the beneficial conversion feature based onthe intrinsic method that computes the difference between the conversion priceand the fair market price of the Company’s stock on the date of the agreement.The Company records the fair value of the beneficial conversion feature as anincrease to paid in capital and a debt discount. The debt discount is amortizedover the period between the date of the agreement and the automatic conversiondate. The amortized debt discount is recorded as interest expense.

 

In eight agreements, due to a typographical error, the automaticconversion date occurred before the date of the agreement. The agreements werenot amended. In these eight agreements only, the transactions are recorded as asale of securities and no beneficial conversion feature is recognized.

 

Fair value of financial instruments:

• Thecarrying value of cash, notes receivable, accounts payable and accrued expensesand notes payable approximate fair value because of the relatively shortmaturity of these instruments.

 

Capital Structure:

• SFAS No. 129,“Disclosure of Information about Capital Structure,” requires a summarypresentation of the pertinent rights and privileges of the various securitiesoutstanding. The Company’s outstanding stock is comprised of 252,086,074 sharesof voting common stock as of December 31, 2004. In April 2003, theCompany amended its certificate of incorporation with the state of New York toincrease the number of authorized shares of stock to 340,000,000 of commonstock. As of December 31, 2004, the Company owns 760,000 shares of itstreasury stock that it purchased at a total cost of $75,392 in November andDecember 2003. In January 2003, the Company announced a ten percentstock dividend that was payable to shareholders of record as of Wednesday, January 8,2003 and was paid in June 2003. The number of shares issued andoutstanding on January 8, 2003 was approximately 139,999,000 resulting ina stock dividend issuance of 13,999,900 shares in June 2003. As a resultof the stock dividend, common stock increased and paid in capital decreased inthe amount of $139,999 and there was no impact on the statement of operations.However, all earnings per share calculations were retroactively restated toinclude the stock dividend.

 

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Revenue Recognition:

The Company derives revenuefrom three primary sources: (1) system hardware component sales revenue, (2) softwarelicense revenue and (3) services and maintenance and right to use revenue,which include support, maintenance, right to use fees and consulting.  Revenue on system hardware component sales isrecognized upon delivery to, and acceptance by the customer.  Software license revenue recognition issubstantially governed by the provisions of Statement of Position No. 97-2,“Software Revenue Recognition,” (“SOP 97-2”) issued by the AmericanInstitute of Certified Public Accountants. The Company exercises judgment and uses estimates in connection with thedetermination of the amount of software license and services revenue to berecognized in each accounting period. For software license arrangements that do not require significantmodification or customization of the underlying software, the Companyrecognizes revenue when: (1) it enters into a legally binding arrangementwith a customer for the license of software; (2) it delivers the productsor perform the services; (3) customer payment is deemed fixed ordeterminable and free of contingencies or significant uncertainties and (4) collectionis probable and (5) vendor-specific objective evidence (“VSOE”) of fairvalue exists to allocate the total fee among all delivered and undeliveredelements in the arrangement.

 

MultipleElement Arrangements

 

TheCompany typically enters into arrangements with customers that includeperpetual software licenses, system hardware, maintenance and right to usefees. Software licenses are sold on a per copy basis. Per copy licenses givecustomers the right to use a single copy of licensed software for exclusive useon the Company’s system hardware. Assuming all other revenue recognitioncriteria are met, license revenue is recognized upon delivery using theresidual method in accordance with SOP No. 98-9. Under the residualmethod, the Company allocates and defers revenue for the undelivered elements,based on VSOE of fair value, and recognizes the difference between the totalarrangement fee and the amount deferred for the undelivered elements asrevenue. The determination of fair value of each undelivered element inmultiple element arrangements is based on the price charged when the sameelement is sold separately. If sufficient evidence of fair value cannot bedetermined for any undelivered item, all revenue from the arrangement isdeferred until VSOE of fair value can be established or until all elements ofthe arrangement have been delivered. If the only undelivered element ismaintenance and technical support for which the Company cannot establish VSOE,the Company will recognize the entire arrangement fees ratably over themaintenance and support term.

 

Systemhardware is hardware that is installed at a customer site for the purpose ofthe utilizing the licensed software and as such, does not qualify as aseparately deliverable element. The timing of revenue recognition from the saleof system hardware is therefore dependent upon the recognition of revenue forthe related software licenses.

 

Maintenanceand right to use fees includes updates (unspecified product upgrades andenhancements) on a when-and-if-available basis, telephone support and bug fixesor patches and maintenance of  thesystems hardware, which would include repairs or replacement as necessary. VSOEof fair value for maintenance and right to use fees is based upon stated annualrenewal rates. Maintenance and right to use fees revenue is recognized ratablyover the maintenance and right to use term.

 

*Revenue Recognition Criteria*

 

The Company defines revenue recognition criteria asfollows:

 

•      *Persuasive Evidence of an Arrangement Exists.*It is the Company’s customary practice to have a  purchase order prior to recognizing revenueon an arrangement.

 

•      *Delivery has Occurred.* The Company’ssoftware and systems hardware are physically delivered and installed at itscustomers site. The Company considers delivery complete when the software andsystem hardware products have been installed and the testing phase completed.The Company defers  all the revenue untilthe testing phase had been completed and the Company receives customeracceptance.

 

•      *The Vendor’s Fee is Fixed or Determinable.*The Company’s customary payment terms are generally within 30 days afterthe invoice date.

 

•      *Collection is Probable.* Due to a lack ofcustomer history upon which a judgment could be made as to the collectibilty ofa particular receivable, revenue is currently recognized upon receipt ofpayment assuming all other conditions of the sale have been met.

 

***Cost of Revenue***

 

Cost of revenue includescosts related to user license, systems hardware and maintenance and right touse fees revenue. Cost of user license revenue includes material, packaging,shipping and other production costs and third-party royalties. Cost of systemshardware includes the cost of goods sold and installation costs. Cost ofmaintenance and right to use fees and consulting fees include related personnelcosts, and hardware repair costs. Third-party consultant fees are also includedin cost of services.

 

Inventory:

The Company’s inventory is stated at the lower of cost or market value.Cost is determined using the first-in, first-out method.  Unusual losses resulting from lower of costor market adjustments or losses on firm purchase commitments, if any, aredisclosed, and if material, separately stated from cost of goods sold in thestatement of operations.

 

Advertising:

•Advertising costs are charged to operations as incurred. For the years ended December 31,2003 and 2004, there were no advertising costs charged to operations.

 

Research and development:

• TheCompany expenses research and development costs as incurred.

 

Software development costs:

• Statementof Financial Accounting Standard (“SFAS”)

 

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No. 86, “Accounting for the Costs of Computer Software to be Sold,Leased or Otherwise Marketed”, requires capitalization of certain softwaredevelopment costs subsequent to the establishment of technological feasibilityand readiness of general release. As of December 31, 2003, there have beenno costs incurred by the Company between the completion of technologicalfeasibility and general release and therefore no such expenses have beencapitalized in the accompanying consolidated financial statements. In 2004,certain costs were incurred subsequent to the establishment of technologicalfeasibility and prior to the readiness of general release. These expenses wereimmaterial in nature and amount and therefore not capitalized.

 

Income Taxes:

• TheCompany, a C-corporation, accounts for income taxes under Statement ofFinancial Accounting Standards No. 109, “Accounting for Income Taxes.”Under this method, deferred tax assets and liabilities are determined based ondifferences between the financial reporting and tax basis of assets andliabilities and are measured using the enacted tax rates and laws that will bein effect when the differences are expected to reverse. Valuation allowancesare established when necessary to reduce deferred tax assets to the amountexpected to be realized. The principal differences are net operating losses,start-up costs and the use of accelerated depreciation methods to calculatedepreciation expense for income tax purposes.

 

Stock-based compensation:

• TheCompany follows guidance provided in SFAS No. 123, “Accounting forStock-Based Compensation”, which encourages companies to recognize expense forstock-based awards based on their estimated fair value on the grant date. SFAS No. 123permits companies to account for stock-based compensation based on provisionsprescribed in SFAS No. 123 or based on the authoritative guidance inAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees”. The Company uses the fair value method of SFAS No. 123 toaccount for all stock options including those issued to employees.

 

Comprehensive Income:

• SFAS No. 130,“Reporting Comprehensive Income,” establishes standards for reportingcomprehensive income and its components. Comprehensive income is defined as thechange in equity during a period from transactions and other events fromnon-owner sources. Entities that do not have items of other comprehensiveincome in any period presented are not required to report comprehensive income.Accordingly the Company has not made any such disclosure in the statementspresented herein.

 

Net loss per common share:

• TheCompany reports basic and diluted earnings per share (“EPS”) according to theprovisions of SFAS No. 128, “Earnings Per Share.” SFAS No. 128requires the presentation of basic EPS and, for companies with complex capitalstructures, diluted EPS. Basic EPS excludes dilution and is

 

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computed by dividing net income (loss) available to common stockholdersby the weighted average number of common shares outstanding during the period.Diluted EPS is computed by dividing net income (loss) available to commonstockholders, adjusted by any convertible preferred dividends; the after-taxamount of interest recognized in the period associated with any convertibledebt; and any other changes in income or loss that would result from theassumed conversion of those potential common shares, by the weighted number ofcommon shares and common share equivalents (unless their effect isanti-dilutive) outstanding.

 

Segment Information:

• SFAS No. 131,“Disclosure about Segments of an Enterprise and Related Information.” requirespublic enterprises to report certain information about operating segments,including products and services, geographic areas of operations, and majorcustomers. The Company has determined that it does not have any separatelyreportable business segments for the years ended December 31, 2003 and2004.

 

ACCOUNTING CHANGES

 

Modification of Stock Option Values

 

In connection with the preparation of our March 31, 2004 financialstatements we determined that our calculations of the fair value of optionsgranted to employees and consultants were computed using erroneously calculatedvalues for volatility. These mathematical errors were due to mechanical errorsin the use of computer software designed to calculate the Black-Scholesanalyses and caused the volatility values to be generally understated. Forexample, for options granted on August 15, 2003, we used a volatilityvalue of 2.323% instead of 232.3%. Furthermore, upon a thorough review of allour stock option valuations, it was determined that the use of adjustedhistorical values was more appropriate given the market history of the Companyas compared to similar organizations. For example, in the case mentioned aboveit was determined that a volatility value of 63% was more appropriate than eventhe historical value of 232.3%. All option values in these financial statementshave been recalculated using more appropriate volatility values. Accordingly,the fair value of the options granted to employees and consultants for priorperiods has been modified. None of these modifications, which are solely foraccounting purposes, has any impact on our cash, cash equivalents, or cashflows. We have restated our previously reported 2003 financial statements as aresult of these mathematical errors and internal reviews of appropriateadjusted historical volatility values.

 

No Preferred Stock Issued

 

Beginning with our quarterly report on Form 10-QSB for thequarter ended June 30, 2002, we reported that we issued preferred sharesto one investor, Quantum Advanced Technologies, Inc. Specifically, wereported that we sold a total of 4,000,000 shares of Class A preferredstock on June 10, 2002 for $40,000 and 150,000 shares of Class Bpreferred stock On August 2, 2002 for $15,000.

 

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Although we planned to issue preferred shares to the investor, we didnot. Instead, we actually issued common shares. In lieu of issuing 4,000,000shares of Class A preferred stock that would convert into a total of4,000,000 shares of common stock, we issued 4,000,000 shares of common stock.In lieu of issuing 150,000 shares of Class B preferred stock that wouldconvert into a total of 1,500,000 shares of common stock, we issued 1,500,000shares of common stock.

 

The total number of common shares, outstanding during the periodscovered by the restated financial statements, was correct as initially reportedin our Forms 10-KSB and 10-QSB in that the total number of commonshares outstanding included these 5,500,000 shares of common stock.

 

We also reported conversions of preferred shares to common shares. Wewill remove this disclosure from the restated financial statements because theshares in question were originally issued as common shares.

 

The following table represents the effects of all of the aforementionedadjustments on a consolidated basis for our restated 2003 financial statements:

 
| **Beginning Balances January 1,  2003: as reported in the  Company’s consolidated audited  financial statements included on  its report Form 10-KSB/A dated  April 29, 2003** | ** ** | **Amount  previously  reported for the  beginning  balances  January 1, 2003** | ** **  | **As adjusted for the  beginning balances  January 1, 2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|-------------|-------------------------------------------------------------------|------------|
| Accumulated  deficit during development stage                                                                                                                                                     |       | $                                                                                   | (13,444,265 | )                                                                 | $          | (13,718,686 | ) |
| Total  stockholder’s equity (deficit)                                                                                                                                                        |       | $                                                                                   | (2,232,635  | )                                                                 | $          | (2,232,635 | ) |

 
| **Year Ended December 31,  2003: As Reported in the  Company’s consolidated  audited financial  statements included on its  report on Form 10-KSB/A  dated April 20, 2004** | ** ** | **Amount  previously  reported for  the year ended  December 31,  2003** | ** **  | **As adjusted  for the year  ended  December 31,  2003** | ** ** | **Amount  Previously  Reported for  Cumulative Since  Inception (January  13, 1999) through  December 31,  2003** | ** ** | **As Adjusted for  Cumulative Since  Inception (January  13, 1999) through  December 31,  2003** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|-------------|---------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|-------------|
| ** **                                                                                                                                                                                      | ** ** | ** **                                                                    | ** **  | ** **                                                    | ** ** | **(unaudited)**                                                                                                        | ** ** | **(unaudited)**                                                                                       | ** **  |
| Loss before  minority interest                                                                                                                                                                  |       | $                                                                             | (3,908,361  | )                                                             | $          | (4,681,612                                                                                                             | )          | $                                                                                                     | (17,365,638 | ) | $ | (18,413,310 | ) |
| Minority  interest                                                                                                                                                                              |       | $                                                                             | 233,084     |                                                          | $          | 233,202                                                                                                                |       | $                                                                                                     | 246,096     |   | $ | 246,214 |   |
| Net Loss                                                                                                                                                                                        |       | $                                                                             | (3,675,277  | )                                                             | $          | (4,448,410                                                                                                             | )          | $                                                                                                     | (17,119,542 | ) | $ | (18,167,096 | ) |
| Total  Liabilities                                                                                                                                                                              |       | $                                                                             | 2,642,098   |                                                          | $          | 2,843,587                                                                                                              |       |                                                                                                  |        |   |   |
| Preferred  Stock-Series A                                                                                                                                                                  |       | $                                                                             | 20,000      |                                                          | $          | —                                                                                                                 |       |                                                                                                  |        |   |   |
| Preferred  Stock-Series B                                                                                                                                                                  |       | $                                                                             | 7,500       |                                                          | $          | —                                                                                                                 |       |                                                                                                  |        |   |   |
| Additional  Paid-In Capital                                                                                                                                                                     |       | $                                                                             | 12,889,175  |                                                          | $          | 12,916,675                                                                                                             |       |                                                                                                  |        |   |   |
| Accumulated  deficit during development stage                                                                                                                                                   |       | $                                                                             | (17,119,542 | )                                                             | $          | (18,167,096                                                                                                            | )          |                                                                                                  |        |   |   |
| Total  stockholder’s equity (deficit)                                                                                                                                                      |       | $                                                                             | (2,001,963  | )                                                             | $          | (2,203,333                                                                                                             | )          |                                                                                                  |        |   |   |
| Net loss per  common share                                                                                                                                                                      |       | $                                                                             | (0.02       | )                                                             | $          | (0.02                                                                                                                  | )          |                                                                                                  |        |   |   |

 

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RECENT ACCOUNTING PRONOUNCEMENTS:

 

Statement No. 153 - Exchanges ofNonmonetary Assets—an amendment of APB Opinion No. 29 The guidance in APBOpinion No. 29, Accounting for Nonmonetary Transactions, is based on theprinciple that exchanges of nonmonetary assets should be measured based on thefair value of the assets exchanged. The guidance in that Opinion, however,included certain exceptions to that principle. This Statement amends Opinion 29to eliminate the exception for nonmonetary exchanges of similar productiveassets and replaces it with a general exception for exchanges of nonmonetaryassets that do not have commercial substance. A nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. The provisions of this Statement areeffective for nonmonetary asset exchanges occurring in fiscal periods beginningafter June 15, 2005. Earlier application is permitted for nonmonetaryasset exchanges occurring in fiscal periods beginning after December 16,2004. The provisions of this Statement should be applied prospectively. TheCompany had no such transactions in the years ended December 31, 2003 and2004. Management intends to adopt this standard upon the effective date notedabove.

 

Statement No. 123 (revised 2004) - Share-BasedPayment

ThisStatement establishes standards for the accounting for transactions in which anentity exchanges its equity instruments for goods or services. It alsoaddresses transactions in which an entity incurs liabilities in exchange forgoods or services that are based on the fair value of the entity’s equityinstruments or that may be settled by the issuance of those equity instruments.This Statement focuses primarily on accounting for transactions in which anentity obtains employee services in share-based payment transactions. ThisStatement does not change the accounting guidance for share-based paymenttransactions with parties other than employees provided in Statement 123 asoriginally issued and EITF Issue No. 96-18, “Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services.” This Statement does not addressthe accounting for employee share ownership plans, which are subject to AICPAStatement of Position 93-6, Employers’ Accounting for Employee StockOwnership Plans. This revision is effective for public entities that file assmall business issuers—as of the beginning of the first interim or annualreporting period that begins after December 15, 2005. Management does notbelieve that the adoption of this standard on the effective date will have amaterial effect on the Company’s financial position or results of operations asthey had previously adopted the fair value methods under Statement No. 123.

 

Statement No. 151 - Inventory Costs—anamendment of ARB No. 43, Chapter 4

ThisStatement amends the guidance in ARB No. 43, Chapter 4, “InventoryPricing,” to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material (spoilage). Paragraph 5of ARB 43, Chapter 4, previously stated that “. . . under some circumstances,items

 

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suchas idle facility expense, excessive spoilage, double freight, and rehandlingcosts may be so abnormal as to require treatment as current period charges. . ...” This Statement requires that those items be recognized as current-periodcharges regardless of whether they meet the criterion of “so abnormal.” Inaddition, this Statement requires that allocation of fixed production overheadsto the costs of conversion be based on the normal capacity of the productionfacilities. This Statement is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. Earlier application ispermitted for inventory costs incurred during fiscal years beginning after November 24,2004. The provisions of this Statement should be applied prospectively.Management does not believe that the adoption of this standard on the effectivedate will have a material effect on the Company’s financial position or resultsof operations.

 

C.                                               INVENTORY

 

There was no inventory at December 31, 2003.Inventory at December 31, 2004 was $116,407 and all inventory wascomprised of either raw materials and or finished goods.

 
| ** **              | ** ** | **December 31,  2003** | ** ** | **December 31,  2004** | ** ** |
|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Raw Materials Inventory |       | $                           | 0          |                        | $          | 78,047 |   |
| Finished Goods          |       | $                           | 0          |                        | $          | 38,360 |   |
| Total Inventory         |       | $                           | 0          |                        | $          | 116,407 |   |

 

The Company assembles finished goods for specificsale on approval contracts. At December 31, 2004, all finished goods hadbeen deployed at multiple sites for three divisions of one customer and theCompany was awaiting customer acceptance.

 

D.                                    PROPERTYAND EQUIPMENT

 

Property and equipment consisted of the following as of December 31:

 
| ** **                      | ** ** | **2003** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Equipment                       |       | $        | 42,648     |     | $          | 45,418 |   |
| Furniture                       |       | 2,087    |       | 9,420    |       |
| Software                        |       | 0        |       | 15,884   |       |
| Capital  Leases                 |       | 35,100   |       | $        | 35,100     |   |
|                            |       | $        | 79,835     |     | $          | 105,822 |   |
|                            |       |     |       |     |       |
| Less:  accumulated depreciation |       | (50,799  | )          | (65,580  | )          |
| Property and  equipment, net    |       | $        | 29,036     |     | $          | 40,242 |   |

 

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Depreciation expense totaled $9,112 and $14,806 for the years ended December 31,2003 and 2004, respectively.

 

E.                                      CONVERTIBLE SUBORDINATED DEBENTURES

 

In July 2000, the Company issued convertiblesubordinated debentures totaling approximately $140,000. The terms of thedebentures require interest payable at twelve percent per annum payablequarterly with a maturity date of one year from the date of advance unlessmutually extended. The debentures are subordinate and junior to existingliabilities of the Company and any subsequent borrowings from banks orinsurance companies. The debentures were able to be converted to common stockat a price of $2.50 per share at any time prior to maturity. During 2000 and2003, approximately $120,000 of the convertible subordinated debentures wereconverted resulting in the issuance of 71,033 shares of restricted common stock.The remaining convertible subordinated debentures totaled $20,000 at December 31,2003 and 2004, respectively. Interest accrued related to the unconvertedsubordinated debentures was $15,963 and $18,403 at December 31, 2003 and2004, respectively. The Company is in default related to payments of interestand principal at December 31, 2004.

 

F.                                      CONVERTIBLE NOTES

 

In the period April through December 2004,the Company entered into agreements to issue convertible notes withapproximately fifty (50) investors in the amount of $1,088,995. The convertiblenotes accrue simple interest at an annual rate of 1.47% and convert any timebetween issuance and six months of the original issuance date of the notes intoan aggregate of approximately 23,392,000 shares. The notes automaticallyconverted to shares on the respective conversion dates reducing the convertiblepromissory note balance to a net of $13,660 at December 31, 2004 andincreasing the liability to issue stock account by $1,042,245. A beneficialconversion value was recognized as debt discount and paid in capital was addedin the amount of $855,328. For the year ended December 31, 2004, thediscount amortized to interest expense was approximately $847,000.

 

Three investors had requested that their principalin the total amount of $260,000 be returned before the conversion date. TheCompany agreed to repay these amounts with accrued interest no later than October 31,2004. Due to limited cash flows these amounts were not repaid and subsequentlythe investors agreed to accept the convertible shares. In January and February 2005,all but 373,485 of the shares due to all conversions had been issued.

 

G.                                     DUE TO STOCKHOLDERS AND OFFICERS

 

As of December 31, 2003 and December 31,2004, the Company was indebted to officers and stockholders in the amount of$265,180 and $84,626, respectively, for expenses incurred on behalf of theCompany. This is exclusive of amounts included in accrued compensation.

 

H.                                    PROMISSORY NOTES

 

On October 29, 2001, the Company signed aconfessed judgment promissory note with a law firm acknowledging monies owedamounting to $568,382, which had been previously accrued. The balance of thepromissory note accrued interest at a rate of 9% and matured on December 31,2001. On January 7, 2002 the Company received a notice of default relatingto the Promissory Note and as of January 1, 2002 the outstanding balancewas increased five percent (5%) and began to accrue interest at an annual rateof

 

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15%. The balance including accrued interest andlegal fees was approximately $806,000 and $878,000 as of December 31, 2003and 2004, respectively.

 

In July 2003, the Company signed a promissorynote with a professional for fees and the interest on unpaid fees due thatprofessional through June 30, 2003 in the amount of $247,507. The note isguaranteed personally by the Company’s Chairman. The promissory note accruedinterest at a rate of 18% per annum and was due and payable on August 15,2003. No significant payments have been made to date and the Company is indefault with respect to this note and since default, interest of 2% per thirtycalendar day period accrues as liquidated damages. The balance includingaccrued interest was approximately $270,000 and $336,000 as of December 31,2003 and 2004, respectively.

 

I.                                         LIABILITY FOR STOCK TO BE ISSUED

 

The balance of the liability for stock to be issuedat December 31, 2004 is based on the following agreements to issue stockthat had not been issued as of that date:

 

In 2001 the Company entered into agreements with twoinvestors to issue 8,085 shares of its common stock at a strike price of $0.10per share for a total purchase price of $808. The payment for the stock wasreceived but never deposited and the stock has never been issued.

 

In 2002, among other transactions, an investorexercised warrants to issue 10,000,000 shares of the Company’s common stock, ofwhich, 975 shares have yet to be issued. The value of the unissued shares,based upon the original warrant agreement, is approximately $10.

 

In November 2003, the Company entered into anagreement with the President of North Electric Company to issue 500,000 sharesof its common stock upon meeting certain performance benchmarks. Theseperformance benchmarks were met in 2004. The value of the stock to be issuedwas based on the fair value of the stock on the date that the performancebenchmarks were met and a liability was recorded for a total of $76,500.

 

In July 2004, the Company entered into anagreement with a consultant to provide services in exchange for the commonstock of the Company (see Note M). At December 31, 2004, the Company wasrequired to issue 5,000,000 shares of its common stock to the consultant. Thestock was valued based on the fair value of the stock on the dates that theshares were earned and a liability was recorded for a total of $368,900.

 

In 2004, the Company entered into agreements toissue convertible promissory notes with approximately 50 investors (see Note F).Upon the conversion of these agreements, the debt was reclassified on theCompany’s balance sheet as a liability to issue stock in the amount of$1,042,245.

 

J.                                        OTHER LIABILITIES

 

On December 18, 2001 the Company entered into ashort-term loan agreement with an investor for $120,000. Principal and intereston the loan were due April 15, 2002. The loan was secured by approximately3.4 million shares of the Company’s stock owned and pledged by the Company’sChairman. On May 17, 2002, the investor filed suit against the Company andthe Company’s Chairman for the principal, accrued interest, legal fees andrelated damages. A liability in the amount of the principal, interest and legalfees was recorded in the balance sheet of the Company. The Company issued theCompany’s Chairman 3,272,727 shares of common stock in August 2002 toreplace the pledged stock lost. The reimbursed shares were treated as a cost ofcapital and approximately $52,000 was applied against the paid-in-capitalaccount in the equity section of the Company’s balance sheet. Thisliability was reduced by the receipt of the pledged shares and has a currentbalance of approximately $56,000 at December 31, 2003 and 2004 and isrecorded in accounts payable and accrued expenses.

 

During 2002, the Company entered into several stockpurchase agreements with Hickey Hill Partners LLC and Miami AssociatesInvestors, LLC (“Investors”) to purchase shares of the Company’s common stock.

 

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The Company discounted the purchase price based uponmarket conditions at the time of issuance of the stock and the immediatelyfollowing several days. The Company held advances in the amount of $35,000 forwhich stock was not issued. The Company believed that the investors defaultedon the stock purchase agreements and the investors believed that the Companydefaulted on the stock purchase agreements. Hickey Hill Partners LLC filed alawsuit against the Company and the Company’s Chairman in the Circuit Court ofthe 15th Judicial Circuit in and for Palm Beach County, Florida. On April 3,2003, the court issued a default judgment against the Company and our Presidentin the amount of $64,352 that bears interest at the rate of 6% a year andprejudgment interest of $1,716. The Company has recorded a liability for thejudgment and additional accrued interest at December 31, 2003 in theamount of $68,945 that is included in accounts payable and accrued expenses.Funds were transferred in March 2004 and the balance, including accruedinterest, at December 31, 2004 was approximately $67,000. In March 2005,the Company entered into an agreement to pay Hickey Hill Partners, LLC $45,000by May 15, 2005 in full satisfaction of all outstanding, current andpending claims regarding this judgment.

 

Miami Associates Investors, LLC also filed a lawsuitagainst the Company and the Company’s Chairman in the Circuit Court of the 17thJudicial Circuit in and for Broward County, Florida for damages in the amountof $54,850 together with the awarding of treble damages, attorneys fees andinterest. On April 24, 2003, the court determined that the Company and ourChairman defaulted. A final judgment was ordered and finalized on December 3,2003. The Company has recorded a liability for the judgment and accruedinterest at December 31, 2003 in the amount of $118,350 that is recordedin accounts payable and accrued expenses. The balance, including accruedinterest, at December 31, 2004 was approximately $125,000. In March 2005,the Company entered into an agreement to pay Miami Associates Investors, LLC$55,000 by April 15, 2005 in full satisfaction of all outstanding, currentand pending claims regarding this litigation.

 

K.                                    RELATED PARTY TRANSACTIONS

 

As of December 31, 2003 and December 31,2004 the Company had amounts payable to various officers and stockholders (SeeNote G).

 

During 2003, the Company’s Chairman assumed personalliability and pledged personal assets as part of several financing agreements.

 

L.                                      CONCENTRATION OF CREDIT RISK

 

Financial instruments which potentially subject theCompany to concentrations of credit risk consist primarily of cash. The Companymaintains its cash accounts with several commercial banks. Cash balances areinsured by the Federal Deposit Insurance Corporation, up to $100,000 perfinancial institution. At December 31, 2003, the Company’s uninsured cashbalances were approximately $157,000. At December 31, 2004, the Companyhad no uninsured cash balances.

 

M.                                 COMMITMENTS AND CONTINGENCIES

 

Commitments:

 

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In November 2003, the Company entered into aninformal agreement with an ex-employee of North Electric Company to issue1,750,000 shares of the Company’s common stock as part of a settlementagreement and release related to prior claims against the company for unpaidand additional compensation earned under certain verbal agreements. Thecommitment to issue stock was valued based upon the average market value of thestock during the month of November 2003. As a result the Company increasedthe existing liability to the employee and recorded additional consultingexpense of approximately $115,000 at that time for a balance due the employeeof $315,000 at December 31, 2003. The agreement was formalized and signedon February 12, 2004. The shares were subsequently issued in January 2005.

 

In November 2003, the Company entered into aninformal agreement with the President of North Electric Company related topast, present and future compensation. Under the terms of the agreement theCompany committed to issue 1,770,000 shares of the Company’s common stock assatisfaction for amounts owed to the President of North Electric Company inunpaid compensation through the year ended December 31, 2003. The Companycommitted to issue the president of North Electric Company stock options for5,500,000 shares of the company’s common stock at a strike price of $0.15 pershare. Share options to acquire 1,500,000 vested on November 30, 2003 andthe balance will vest over the following 36 months or will fully vest upon theCompany’s first sale of the NAS-6131 system and will expire three yearsafter the date of vesting. During the year ended December 31, 2004,options to acquire 4,000,000 shares vested under this commitment, were valuedunder SFAS No. 123 using a Black-Scholes model and the Company recorded anexpense in the amount of $378,734 which was charged to officer’s compensation. Asof December 31, 2004, none of the vested stock options were exercised. Noneof the 1,770,000 committed shares and none of the 500,000 bonus shares had beenissued as of December 31, 2004.

 

In November 2003, the Company entered into anexclusive distribution agreement for the sale of North Electric Companyproducts in the Pacific Rim. The agreement has an effective date of January 1,2004 and a term of four years, ending December 31, 2007. Under thedistribution agreement, North Electric Company is required to provide training,marketing and technical support during the term of the agreement and provideproduct warranty and carry product liability insurance for any sold products.As of December 31, 2004, no products have been sold under this agreement.

 

In July 2004, the Company and its subsidiaryentered into an agreement that was made effective as of May 1, 2004, witha consultant, to provide marketing support and sales representation servicesfor its subsidiary, North Electric Company. Under the terms of the agreement,North Electric Company is to pay a monthly fee of $5,000 per month from May throughDecember 2004 unless the contract is terminated earlier. In addition, theconsultant is to be compensated with up to 12,000,000 shares of unregisteredDataMEG Corp. common stock for achieving certain milestones. The stock can beexchanged for cash payments at a rate of $10,000 per one million shares ofcommon stock. If stock is issued as payment for compensation then the stockmust be registered within 120 days of the issuance of the stock certificate. Afailure to register the stock in the period noted will result in a 5% penalty,payable in stock, on a monthly basis until the stock is registered. Cashpayments are due within 30 days of the date of achievement. A penalty for latecash payments of $100 per day will be deemed payable. As of December 31,2004, the Company recorded marketing support expenses, under this agreement, inthe amount of $1,531,250 of which $87,100 relates to cash transactions and$1,444,150 relates to the value of 12,000,000 shares of DataMEG common stock tobe issued. In October 2004, 7,000,000 shares of the Company’s common stockwere issued and in January 2005, the remaining 5,000,000 shares of theCompany’s common stock were issued to the consultant.

 

In August 2004, the Company negotiated to hirea consultant as its CEO. As part of the employment contract, the consultantrequired that the Company obtain directors and officers insurance prior to hisofficial status as CEO for the Company. The Company did not obtain thiscoverage and the consultant did not obtain official status as their CEO but hasagreed to continue in his capacity as a management consultant. In November 2004,as compensation for his services, the Company issued the consultant one million(1,000,000) shares of its unregistered common stock and granted stock optionsfor 2,500,000 shares of its common stock as a sign of good faith regarding itscontinued intent to formally employ this consultant. The stock options werefully vested at the time of the grant and expire in January 2013. The

 

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stock options were valued under SFAS No. 123using a Black-Scholes model and the Company recorded an expense in the amountof $158,000 which was charged to consulting expenses.

 

In August 2004, the Company entered into anagreement with a consultant to provide general legal counsel services for theCompany. Under the terms of the agreement the Company is required to makemonthly payments of approximately $2,400 and reimburse the consultant for travelexpenses as incurred.

 

Lease commitments:

 

In October 2004, the Company signed a lease agreement for officespace in Raleigh, North Carolina. The term of the lease is for 37 monthsbeginning December 2004 and ending in January 2008. The terms of thelease call for monthly payments of approximately $5,000.

 

The Company leases communications equipment and owes $8,302 undercapital lease agreements, which expired in 2001. These capital leases are indefault. The assets and liabilities under capital leases are recorded at thelower of the present value of the minimum lease payments or the fair value ofthe asset. The assets are amortized over their estimated useful lives. Amortizationof assets under capital leases is included in depreciation and amortization expense.

 

The minimum lease payments due under terms of non-cancelable operatingleases that have initial or remaining terms in excess of one year as of December 31,2004 are as follows:

 
| **For the years ending December 31st** | ** ** | **Operating  Leases** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| 2005                                        |       | $                     | 52,806     |   |
| 2006                                        |       | $                     | 59,718     |   |
| 2007                                        |       | $                     | 62,120     |   |
| 2008                                        |       | $                     | 5,193      |   |
| Total                                       |       | $                     | 179,837    |   |

 

Total rent expense for all operating leases was $63,673 and $26,617 forthe years ending December 31, 2003 and 2004, respectively.

 

Contingencies:

 

During 1999, the Company entered into an agreementwith a consulting firm for services rendered over the period October 1999through June 2000. The agreement with the consultant may call foradditional consideration totaling 4% of outstanding stock in warrants orwarrants for 1,320,000 shares of the Company’s common stock at a strike priceof $2.30 per share, contingent upon the consummation of the share exchange. TheCompany performed an analysis of the value of the warrants to determine theamount of a possible expense under SFAS No. 123. Using the Black-Scholesmodel, if the warrants had been issued, when the agreement was signed, theywould have been valued at approximately $704,000. The Company believes that nosuch additional compensation is due to the consultant under the terms of theagreement. No amount has been recorded related to the possible requirements toissue warrants.

 

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As of December 31, 2002, the Company owed$142,388 to an investor pursuant to a judgment received related to a stock saleagreement. Pursuant to agreements with the investor, during 2003 the Companyissued 10 million shares of the Company’s common stock to the investor andreceived and additional $200,000 from the investor. The investor released thejudgment and there were no remaining amounts due to the investor related tothis transaction at December 31, 2003. If the investor sells the 10million shares of common stock for an amount in excess of $2,400,000, then theCompany is entitled to receive 90% of the excess as additional proceeds. Noamounts have been recorded related to the additional proceeds.

 

During 2002, the Company received a $25,000 premiumin exchange for a warrant to purchase 5 million shares of the Company’s commonstock. The holder exercised the warrant during 2003 in exchange for acontingent exercise price. Due to certain conditions, no amounts had to be paidagainst the contingent exercise price. Pursuant to the warrant agreement, theCompany may be required to refund 110% of the warrant premium. No amount hasbeen recorded against this contingent liability.

 

On May 7, 2004, La Jolla Cove Investors, Inc.,a shareholder, filed a complaint against the Company and the Company’sChairman, for breach of contract in the Superior Court of San Diego County,California for damages in the amount of $450,000, attorneys fees, and interestfor failure to register their shares in its SB-2/A filed in February 2004as amended in June 2004. A judgment has not been received related to thislitigation. On July 28, 2004, the plaintiff entered into an agreement withthe Company to withdraw the suit if its shares were included in the futurefiling of the SB-2/A. It is the intent of the Company to include thoseshares in that registration statement.

 

N.                                    STOCKSUBSCRIPTION RECEIVABLE

 

On March 5, 2004, the Company entered into twostock subscription agreements with a foreign investor to purchase 5,882,352shares of the Company’s common stock at a purchase price of $0.17 per share. Asof December 31, 2004, the investor paid $80,000 towards the purchase ofthe shares. On April 1, 2004, the Company issued 2,941,176 shares ofrestricted Common Stock to the investor with the understanding that theinvestor was sending the Company $500,000 and a stock subscription receivablewas recorded in the amount of $420,000. On April 14, 2004, the investornotified the Company of the investor’s intent not to invest further in theCompany. The Company has offered to issue 470,588 shares to accommodate the$80,000 investment that was made upon return of the certificate issued in April 2004.

 

O.                                    INCOMETAXES

 

The benefit for income taxes for the years ended December 31 areas follows:

 
| ** **                      | ** ** | **2003** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Current                         |       | $        | —     |     | $          | — |   |
| Deferred                        |       | —   |       | —   |       |
|                            |       |     |       |     |       |
| Total  benefit for income taxes |       | $        | —     |     | $          | — |   |

 

A reconciliation of income tax at the statutory rate to the Company’seffective rate is as follows for 2003 and 2004:

 

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| ** **                                | ** ** | **2003**  | ** ** | **2004**  | ** ** |
|-------------------------------------------|------------|-----------|------------|-----------|------------|
| Computed at  the expected statutory rate  |       | $         | (1,592,000 | )         | $          | (3,163,000 | ) |
| State income  tax-net federal tax benefit |       | (281,000  | )          | (558,000  | )          |
| Add:                                      |       |      |       |      |       |
| Other differences                         |       | 37,000    |       | (39,000   | )          |
| Less:  valuation allowance change         |       | 1,836,000 |       | 3,760,000 |       |
| Total  benefit for income taxes           |       | $         | —     |      | $          | — |   |

 

Deferred tax assets and liabilities at December 31, 2003 and 2004were as follows:

 
| ** **                         | ** ** | **2003**   | ** ** | **2004**    | ** ** |
|------------------------------------|------------|------------|------------|-------------|------------|
| Deferred tax  assets:              |       |       |       |        |       |
| Net  operating loss carry forwards |       | $          | 1,446,000  |        | $          | 1,881,000 |   |
| Start-up  costs                    |       | 5,412,000  |       | 6,306,000   |       |
| Depreciation  and amortization     |       | 12,000     |       | (19,000     | )          |
| Stock option  compensation         |       | —     |       | 2,462,000   |       |
| Gross  deferred tax assets         |       | 6,870,000  |       | 10,630,000  |       |
| Valuation  allowance               |       | (6,870,000 | )          | (10,630,000 | )          |
| Net deferred  tax assets           |       | $          | —     |        | $          | — |   |
|                                    |            |            |            |             |            |  |  |  |

 

The net increase in the valuation allowance for the years ended December 31,2003 and 2004 was $1,836,000 and $3,760,000, respectively. The Company hasavailable at December 31, 2004 approximately $3,106,000 for the parent, $1,254,000for North Electric Company, Inc. and $344,000 for CASCommunications, Inc.of unused operating loss carry forwards that may be applied against futuretaxable income that expire in 2019 through 2024. Since a consolidated taxreturn is not filed, any net operating loss carryforwards can only be used tooffset future taxable income of the specific company. Due to stock ownershipchanges, the ability to benefit from the net operating loss carryforwards maybe significantly restricted.

 

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P.                                      STOCKOPTIONS AND WARRANTS

 

In July 2000, the Company adopted a stock incentive plan foremployees. The maximum number of shares which may be awarded under the plan is3,000,000. Any person deemed eligible by the Stock Incentive Committee mayreceive shares or options under the plan; option awards may be in the form ofan incentive option or a non qualified stock option. Stock options issued underthe plan vest over several years, unless accelerated by the Stock IncentiveCommittee. All the shares authorized to be awarded under this stock option planwere granted in 2000 and 2001.

 

In addition, during the years ended December 31, 2003 and 2004,the Company granted options and warrants to consultants to purchase 28,099,019and 29,002,352 shares of common stock, respectively, at prices ranging from$0.01 to $0.25 per share. The fair value of the stock options and warrantsgranted to employees and consultants has been recorded as an expense in theamount of $1,155,818 and $2,007,828 for the years ended December 31, 2003and 2004, respectively and $89,300 has been recorded as a cost of capital forthe year ended December 31, 2003. Of the options and warrants grantedsince inception, options and warrants for 54,849,704 shares are unexercised andunexercised options expire between August 2005 and January 2013.

 

A summary of option and warrant activity, for both employees andconsultants, for the two years ended December 31, is as follows:

 
| ** **                           | ** ** | ** ** | ** ** | ** **       | ** ** | **Weighted**  | ** ** |
|--------------------------------------|------------|------------|------------|------------------|------------|---------------|------------|
| ** **                           | ** ** | **Number** | ** ** | **Price**        | ** ** | **Average**   | ** ** |
| ** **                           | ** ** | **of**     | ** ** | **Per Share**    | ** ** | **Price Per** | ** ** |
| ** **                           | ** ** | **Shares** | ** ** | **Range**        | ** ** | **Share**     | ** ** |
| Outstanding,  January 1, 2003   |       | 7,700,000  |       | $0.0126 -  $0.24 |       | $             | 0.04       |   |
| Options and  warrants granted        |       | 28,099,019 |       | $0.012 -  $0.25  |       | $             | 0.14       |   |
| Options and  warrants exercised      |       | (9,680,238 | )          | $0.012 -  $0.07  |       | $             | 0.07       |   |
| Options and  warrants expired        |       | (271,429   | )          | $0.032           |       | $             | 0.032      |   |
| Outstanding,  December 31, 2003 |       | 25,847,352 |       | $0.05 -  $0.25   |       | $             | 0.14       |   |
| Options and  warrants granted        |       | 29,002,352 |       | $0.012 -  $0.25  |       | $             | 0.14       |   |
| Options and  warrants exercised      |       | —     |       | —           |       | —        |       |
| Options and  warrants expired        |       | —     |       | —           |       | —        |       |
| Outstanding, December 31, 2004  |       | 54,849,704 |       | $0.01 -  $0.25   |       | $             | 0.15       |   |

 

At December 31, 2004 the weighted average remaining life ofoutstanding stock options and warrants was approximately 37 months.

 

The Company accounted for the fair value of its options granted toemployees in

 

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2001 in accordance with APB 25.There were no options granted toemployees in 2001. During 2002, the Company changed its method of accounting tofollow the fair value method of SFAS No. 123.

 

The fair value of options and warrants granted in 2003 and 2004 areestimated on the date of the grant using a type of Black-Scholes option-pricingmodel. During the year ended December 31, 2003 the following assumptionswere used to value grants: dividend yield of 0%, volatilities ranging from 1.43to .63, terms varied based on the negotiated term of the options agreement, andrisk-free interest rates varied based on the Treasury bond yield with a termcomparable to the length of the term listed in the options agreement. Duringthe year ended December 31, 2004 the following assumptions were used tovalue grants: dividend yield of 0%, volatilities ranging from .60 to 1.08, termsvaried based on the negotiated term of the options agreement, and risk-freeinterest rates varied based on the Treasury bond yield with a term comparableto the length of the term listed in the options agreement.

 

Q.                                    NETLOSS PER COMMON SHARE

 

As required by SFAS No. 128, the following is areconciliation of the basic and diluted EPS calculations for the periods presented:

 
| ** **                                   | ** ** | **For the  Year Ended December 31,  2003** | ** ** | **For the  Year Ended  December 31,  2004** | ** ** | **Cumulative  from  Inception  (January 13,  1999) to  December  31,  2004** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **(restated)**                                  | ** ** | ** **                                       | ** ** | **(unaudited)**                                                                   | ** ** |
|                                         |       |                                            |       |                                             |       |                                                                              |       |
| Net Loss  (numerator)                        |       | $                                               | (4,448,410 | )                                                | $          | (9,302,939                                                                        | )          | $ | (27,470,035 | ) |
| Weighted  Average Shares (denominator)       |       | 197,536,041                                     |       | 234,978,056                                      |       | 104,088,795                                                                       |       |
| Basic and  diluted net loss per common share |       | $                                               | (0.02      | )                                                | $          | (0.04                                                                             | )          | $ | (0.26 | ) |

 

As required by the Securities and ExchangeCommission (SEC) Staff Accounting Bulletin No. 98, the above calculationof EPS is based on SFAS No. 128, “Earnings Per Share.” Thus, options andwarrants granted as of December 31, 2003 and 2004 are not included in thecalculation of diluted EPS as their inclusion would be anti-dilutive.

 

R.                                     OPERATING LOSSES

 

The accompanying consolidated financial statementshave been prepared in conformity with generally accepted accounting principles,which contemplate continuation of the Company as a going concern. The Companyhas sustained substantial costs in implementing its action plan. In addition,the Company used substantial amounts of working capital in funding these costs.At December 31, 2004, current liabilities exceed current assets by$5,610,011. The Company is seeking to raise additional capital and developpartnerships and cooperative agreements. In view of these matters, the abilityof the Company to continue as a going concern is dependent upon the Company’sability to achieve its business objectives and the success of its futureoperations.

 

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S.                                      SUBSEQUENT EVENTS

 

In January 2005, the Company grantedimmediately vested stock options for 2,500,000 shares of the Company’s commonstock to a consultant for services performed in January 2005. The stock strikeprice is $0.10 per share and the options expire in three years.

 

In March 2005, the Company entered into anagreement with a consulting firm to provide certain management services to theCompany over the next thirty-six months. The terms of the agreement provide forsuccess fees to be earned based on attaining certain performance benchmarks.The success fees are to be paid in the Company’s common stock and require theestablishment of a performance pool of common stock equivalent to 25% of theCompany’s issued stock at the date of the agreement. The maximum number ofshares that can be earned under the terms of the agreement are approximately73,000,000 shares of the Company’s common stock.

 

In the first quarter of 2005, the Company enteredinto agreements to issue convertible promissory notes with twelve (12)investors for a total investment of $300,000. The convertible notes accruesimple interest at an annual rate of 1.47% and automatically convert, if notconverted earlier, at either April 15, 2005 or May 15, 2005. At theexercise of the investors, the notes converted at the end of March 2005and 9,325,000 shares of the Company’s common stock were issued to satisfy theagreements.

 

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ITEM 8.                             CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Duringthe past two fiscal years, neither our principal independent accountant nor anyof our significant subsidiaries’ accountants have resigned or been dismissed.During the past two fiscal years, neither we nor our significant subsidiarieshave engaged a new principal accountant.

 

ITEM 8A.                   CONTROLS ANDPROCEDURES

 

(a)  Disclosure Controls and Procedures

 

The Company does not maintain aformal or written set of disclosure controls and procedures designed to ensurethat information required to be disclosed by the Company in reports that itfiles or submits under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in Securitiesand Exchange Commission rules and forms.  Later in 2005, the Company plans to hire a financial executive to designdisclosure controls and procedures in advance of the effectiveness of Section404 of the Sarbanes Oxley Act as to small business issuers.  The Company’s current informal disclosurecontrols and procedures would not constitute effective internal control overfinancial reporting as of December 31, 2004. 

 

(b)  Internal Control Over Financial Reporting

 

During the course of theCompany’s preparation of its 2004 financial statements, including the audit ofthose financial statements by the Company’s independent registered publicaccounting firm, five material weaknesses in the Company’s internal controlover financial reporting were identified. These material weakness were (1) the lack of an independent auditcommittee, (2) the delay in recording financial transactions, which couldresult in inadvertent errors or omissions, (3) the lack of an organized systemof document review, signing, retaining copies, and orderly filing, (4) the lackof a significant segregation of duties or review of financial transactions and(5) the lack of documentation of controls and accounting procedures.

 

In connection with theeffectiveness of Section 404 of the Sarbanes Oxley Act as to small businessissuers in 2006, the Company plans to hire a financial executive to designeffective disclosure controls and procedures. The Company also plans to expand its Board of Directors, recruitindependent directors, form an audit committee comprised solely of independentdirectors and otherwise remedy the material weaknesses and significantdeficiencies in internal control over financial reporting that currently exist.

 

(c)  Changes in Internal Control Over Financial Reporting

 

There were no changes in theCompany’s disclosure controls and procedures that occurred during the mostrecent fiscal year that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.  Subsequent to the date of the evaluation,there have been no significant changes in the Company’s disclosure controls andprocedures that could significantly affect the Company’s internal control overfinancial reporting, other than the planned corrective actions discussed above.

 

ITEM 9.                             DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

 

Directorsand Executive Officers

 

1)Our director, executive officers, significant employees, significant consultantsand control persons as of March 31, 2005 were as follows: 

 
| **NAME**       | ** ** | **AGE** | ** ** | **POSITION**                                    | ** ** | **POSITION SINCE** |
|----------------|------------|---------|------------|-------------------------------------------------|------------|--------------------|
|           |       |    |       |                                            |       |               |
| Andrew  Benson |       | 48      |       | Chairman  and Sole Director                     |       | 1999               |
|           |       |    |       |                                            |       |               |
| Dan  Ference   |       | 54      |       | President  and Director, North Electric Company |       | 2003               |

 

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Eachperson will hold his position until the next annual meeting of the shareholdersor until his successor is duly elected and qualified.

 

AndrewBenson, Chairman and Sole Director

 

Mr. Bensonhas served as our president and sole director since January 1999. Mr. Bensonwas formerly the president and chief executive officer of Video Sentry Corporation,a business that developed and manufactured the SentryVision CCTV System. VideoSentry Corporation was founded and incorporated in 1990, introduced its line ofSentryVision systems into the marketplace in 1992 and ultimately launched aninitial public offering in October 1994.

 

VideoSentryCorporation was merged with Knogo North America in February 1997, forminga new corporation named Sentry Technology Corporation. Mr. Benson worked withSentry Technology Corporation as a consultant from February 1997 to December 1998.In 1998, Mr. Benson joined Georgetown Ventures LLC, which funded ourformation in January 1999.

 

DanFerence, President and Director, North Electric Company

 

Mr. Ferencewas appointed director of North Electric Company, effective March 2003. Hehas served as the president of North Electric Company from September 2001through the present. Mr. Ference has over 27 years experience in the communicationsindustry with various voice and data products and technologies, includingalmost 20 years of managing research and development programs and centers. FromMay 1994 to June 2001, Mr. Ference was vice president of FujitsuNetwork Communications’ Raleigh, North Carolina Development Center, where hewas responsible for overall Development Center Operations and the NetworkManagement and related Network Element development programs. Prior to this, hiscareer included serving at Bell Laboratories, ITT Network Systems, CIT -Alcatel, and Nortel, Inc. Mr. Ference holds a B.S. degree from PennState University and an M.S. degree from Ohio State University both inElectrical Engineering.

 

AuditCommittee and Audit Committee Financial Expert

 

Wedo not have a standing audit committee. Our sole director performs the functionsusually designated to an audit committee. Accordingly, we do not have an auditcommittee financial expert. As we generate revenue in the future, we intend toidentify and appoint a financial expert to serve on our audit committee.

 

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Codeof Ethics

 

Dueto a lack of adequate resources, we have not yet adopted a code of ethics. Priorto the adoption of a code of ethics, our management intends to promote honestand ethical conduct, full and fair disclosure in our reports to the SEC, andcompliance with applicable governmental laws and regulations.

 

ITEM 10.                       EXECUTIVECOMPENSATION

 

SummaryCompensation Table

 

Thefollowing table sets forth the total compensation paid to or accrued for the yearsended December 31, 2004, 2003 and 2002 to our chief executive officer and ourother most highly compensated executive officers who were serving as executiveofficers at the end of our last fiscal year. None of our other executiveofficers earned more than $100,000 in total annual salary and bonus in the mostrecently completed fiscal year. 

 
| **Name**      | ** ** | ** ** | ** ** | ** **       | ** ** | ** **                 | ** ** | ** **       | ** ** | ** **     | ** ** | ** **     | ** ** |
|---------------|------------|------------|------------|------------------|------------|----------------------------|------------|------------------|------------|----------------|------------|----------------|------------|
| **and**       | ** ** | ** ** | ** ** | ** **       | ** ** | ** **                 | ** ** | ** **       | ** ** | ** **     | ** ** | ** **     | ** ** |
| **Principal** | ** ** | ** ** | ** ** | **Annual**       | ** ** | ** **                 | ** ** | ** **       | ** ** | ** **     | ** ** |
| **Position**  | ** ** | **Year**   | ** ** | **Compensation** | ** ** | **Long-Term Compensation** | ** ** |
| ** **    | ** ** | ** ** | ** ** | ** **       | ** ** | ** **                 | ** ** | **Other**        | ** ** | ** **     | ** ** | ** **     | ** ** |
| ** **    | ** ** | ** ** | ** ** | ** **       | ** ** | ** **                 | ** ** | **Annual**       | ** ** | ** **     | ** ** | ** **     | ** ** |
| ** **    | ** ** | ** ** | ** ** | **Salary**       | ** ** | **Bonus**                  | ** ** | **Compensation** | ** ** | ** **     | ** ** | ** **     | ** ** |
| ** **    | ** ** | ** ** | ** ** | **($)**          | ** ** | **($)**                    | ** ** | **($)**          | ** ** | **Awards**     | ** ** |
| ** **    | ** ** | ** ** | ** ** | ** **       | ** ** | ** **                 | ** ** | ** **       | ** ** | **Restricted** | ** ** | **Underlying** | ** ** |
| ** **    | ** ** | ** ** | ** ** | ** **       | ** ** | ** **                 | ** ** | ** **       | ** ** | **Stock**      | ** ** | **Options/**   | ** ** |
| ** **    | ** ** | ** ** | ** ** | ** **       | ** ** | ** **                 | ** ** | ** **       | ** ** | **Award(s)**   | ** ** | **SARs**       | ** ** |
| ** **    | ** ** | ** ** | ** ** | ** **       | ** ** | ** **                 | ** ** | ** **       | ** ** | **($)**        | ** ** | **(#)**        | ** ** |
| Andrew        |       | 2004       |       | $                | 392,954(1  | )                          | $          | 0                |       | $              | 0          |           | $          | 658,750 | (1) | 0 |   |
| Benson,       |       | 2003       |       | $                | 342,794(1  | )                          | $          | 0                |       | $              | 0          |           | $          | 160,000 | (1) | 5,000,000 | (1) |
| Chairman      |       | 2002       |       | $                | 229,358(1  | )                          | $          | 0                |       | $              | 111,000    | (1)            | 0          |   | 0 |   |
| and Sole      |       |       |       |             |       |                       |       |             |       |           |       |           |       |
| Director      |       |       |       |             |       |                       |       |             | $          | 0              |       |           |       |   |   |
|          |       |       |       |             |       |                       |       |             |       |           |       |           |       |
| Dan Ference,  |       | 2004       |       | $                | 18,618(3   | )                          | $          | 0                |       | $              | 0          |           | $          | 396,500 | (2) | 2,000,000 | (2) |
| President     |       | 2003       |       | $                | 46,691(3   | )                          | $          | 0                |       | $              | 0          |           | $          | 158,533 | (2) | 5,500,000 | (2) |
| of North      |       | 2002       |       | $                | 19,000(3   | )                          | $          | 0                |       | $              | 0          |           | $          | 0 |   | 1,600,000 | (2) |
| Electric      |       |       |       |             |       |                       |       |             |       |           |       |           |       |
| Company       |       |       |       |             |       |                       |       |             |       |           |       |           |       |

 

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(1)                                  During theyear ending December 31, 2002, Mr. Benson received cash and stock

 

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ascompensation. He was granted 6,000,000 freely trading shares of our common stock,with a fair value of $111,000 based on the market value of the stock on thedate of the commitment to issue the unrestricted stock. The value of those sharesis represented in Other Annual Compensation.

 

During the year ended December 31, 2003, Mr. Bensonreceived cash, stock and stock options as compensation. He was issued 4,000,000unregistered shares of our common stock, with a fair value of $160,000 based onthe market value of the stock on the date of the commitment to issue the unregisteredstock. In addition, at December 31, 2003, the Company committed to issue Mr. Bensona stock option grant for 5,000,000 shares of our common stock with a strikeprice of $.20 per share as additional 2003 compensation. The options were fullyvested at the time of the grant and expire three years from the date of thegrant. The options were valued under a Black-Scholes model and were determinedto have a fair value of $220,500 and the value was recorded as additionalcompensation in 2003.

 

During the year ended December 31, 2004, Mr. Bensonreceived cash and stock as compensation. He was issued 5,000,000 restrictedshares of our common stock, with a fair value of $658,750 based on the marketvalue of the stock on the date of the commitment to issue the unregisteredstock less a 15% discount for lack of marketability.

 

(2)                                  During theyear ended December 31, 2002, Mr. Ference had an approved annual salaryof $130,000 and received an incentive bonus in the form of 1,600,000 shares ofthe Company’s restricted common stock. The unregistered common stock was valuedbased on a discounted market value of the stock at time of receipt, which was$0(zero). The stock was trading at $.01 per share at the time and there wasserious doubt about the ability of the Company to continue as a going concern.

 

During the year ended December 31, 2003, Mr. Ferencereceived cash, stock and stock options as compensation. On November 30,2003, the Company entered into an informal agreement with Mr. Ferencerelated to past, present and future compensation. Under the terms of theagreement the Company committed to issue 1,770,000 shares of the Company’scommon stock as satisfaction for amounts owed to Mr. Ference in unpaidcompensation through the year ended December 31, 2003. The Company committedto issue Mr. Ference stock options for 5,500,000 shares of the Company’scommon stock at a strike price of $0.15 per share. 1,500,000 vested on November 30,2003 and the balance to vest over the following 36 months or until such time asthe Company receives it first customer revenue at which time all unvested optionswill immediately vest and will expire three years after the date of vesting.During the year ended December 31, 2003 1,611,111 shares vested under thiscommitment, were valued under SFAS No. 123 using a Black-Scholes model andthe Company recorded an expense in the amount of $157,889 which was charged toofficer’s compensation. During the year ended December 31, 2003, none ofthe vested stock options were exercised. The Company also increased Mr. Ference’sannual compensation and committed to issue 500,000 shares of the Company’scommon stock as bonus compensation for achieving future performance benchmarks.

 

During the year ended December 31, 2004, Mr. Ferencereceived cash, stock and stock options as compensation. In March 2004, Mr. Ferencemet his first performance benchmark and the Company recognized a liability toissue him 250,000 shares of the Company’s unregistered common stock andrecorded additional compensation of $42,500. The value of the liability toissue stock was based upon the market value of the stock on the date theperformance benchmark was achieved less a 15% discount for lack ofmarketability. In July, Mr. Ference was granted 2,000,000 shares of the

 

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Company’sunregistered common stock as a bonus for his continued diligent efforts on theCompany’s behalf. The stock was valued based upon the market value of the stockon the date the performance benchmark was achieved less a 15% discount for lackof marketability and additional compensation was recorded in the amount of$320,000. In August 2004, Mr. Ference met his second performancebenchmark and the Company recognized a liability to issue him 250,000 shares ofthe Company’s unregistered common stock and recorded additional compensation of$34,000. The value of the liability to issue stock was based upon the marketvalue of the stock on the date the performance benchmark was achieved less a15% discount for lack of marketability. In August 2004, Mr. Ferencewas granted stock options for 2,000,000 shares of the Company’s unregisteredcommon stock at a strike price of $0.18 per share. The options were fullyvested at the time of the grant and expire three years from the date of thegrant. The options were valued under a Black-Scholes model and were determinedto have a fair value of $194,600 and the value was recorded as additionalcompensation in 2003. In addition, during 2004 the stock option grant from November 2003,continued to vest and upon receipt of the Company’s first customer revenue in December 2004all the previously unvested stock options vested in full and during the year fora total charge to officer’s expense of $383,311 in additional compensation.

 

(3)                                  Fromthe inception of North Electric Company, Inc., significant portions ofMr. Ference’s authorized annual salary were accrued but not paid.  For the years ending December 31, 2002, 2003and 2004 his authorized annual salary was $130,000, $136,000 and $144,000,respectively.

 

Duringthe 2004 fiscal year our executive officers had the following outstandingoptions: 

 
| ** **     | ** ** | ** **               | ** ** | **Percent of total**     | ** ** | ** **           | ** ** | ** **             |
|----------------|------------|--------------------------|------------|--------------------------|------------|----------------------|------------|------------------------|
| ** **     | ** ** | **Number of Securities** | ** ** | **Options/SARs**         | ** ** | ** **           | ** ** | ** **             |
| ** **     | ** ** | **Underlying Options/**  | ** ** | **Granted to Employees** | ** ** | **Exercise or base** | ** ** | ** **             |
| **Name**       | ** ** | **SARs Granted (#)**     | ** ** | **In fiscal year**       | ** ** | **Price ($/sh)**     | ** ** | **Expiration Date(s)** |
| Andrew  Benson |       | 5,000,000                | (1)        | 40.0                     | %          | $0.20 per share      |       | January 1,  2007  |
|           |       |                     |       |                     |       |                 |       |                   |
| Dan  Ference   |       | 5,500,000                | (2)        | 44.0                     | %          | $0.15 per share      |       | November 2006     |
|           |       |                     |       |                     |       |                 |       | through                |
|           |       |                     |       |                     |       |                 |       | December 2007     |
|           |       |                     |       |                     |       |                 |       |                   |
| Dan  Ference   |       | 2,000,000                | (3)        | 16.0                     | %          | $0.18 per share      |       | July 23,  2007    |
|           |       | 12,500,000               |       | 100.0                    | %          |                 |       |                   |

 

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(1) Theoptions were granted January 1, 2004 and are fully vested.

 

(2) Theoptions were granted November 30, 2003 with 1,500,000 immediately vestingand the remainder to vest on a monthly basis over the next three years or untilsuch time as the Company receives its first customer revenue that occurred in December 2004.As of December 31, 2004 all the options were fully vested. Options expirethree years from date of vesting or November 2006 through December 2007.

 

(3) Theoptions were granted July 23, 2004 and are fully vested.

 

Employmentcontracts

 

Wedo not have any employment agreements with our executive officers.

 

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Directors’Remuneration

 

Wedo not currently compensate our sole director for serving on the board of directors.

 

ITEM 11.                       SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

 

Thefollowing table sets forth the following information about the beneficial ownershipof our common stock as of March 31, 2005 by (i) each person who we knowis the beneficial owner of more than 5% of the outstanding shares of common stock,(ii) each of our directors and executive officers, and (iii) all ofour directors and executive officers as a group. We are not aware of anybeneficial owner of more than 5% of the outstanding common stock other than asset forth in the following table. Unless otherwise indicated, the address ofeach named beneficial owner or executive officer is c/o DataMEG Corp., 9 WestBroadway, Suite #214, Boston, MA 02127

 
| **NAME AND ADDRESS OF  BENEFICIAL OWNER**               | ** ** | **AMOUNT AND NATURE OF  BENEFICIAL OWNERSHIP** | ** ** | **PERCENT OF CLASS(3)** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------|------------|
| Andrew  Benson                                          |       | 22,506,646                                     | (2)        |                    | 8.92       | % |   |
|                                                    |       |                                           |       |                    |       |   |   |
| Dan  Ference                                            |       | 13,530,000                                     | (4)        |                    | 5.37       | % |   |
|                                                    |       |                                           |       |                    |       |   |   |
|                                                    |       |                                           |       |                    |       |   |   |
|                                                    |       |                                           |       |                    |       |   |   |
| Rex  Hester                                             |       | 13,750,000                                     |       |                    | 5.45       | % |   |
|                                                    |       |                                           |       |                    |       |   |   |
| **NAME  AND ADDRESS OF DIRECTOR  OR EXECUTIVE OFFICER** | ** ** | ** **                                     | ** ** | ** **              | ** ** | ** ** | ** ** |
|                                                    |       |                                           |       |                    |       |   |   |
| Andrew  Benson                                          |       | 22,506,646                                     | (2)        |                    | 8.92       | % |   |
|                                                    |       |                                           |       |                    |       |   |   |
| Dan  Ference                                            |       | 13,530,000                                     | (4)        |                    | 5.37       | % |   |
|                                                    |       |                                           |       |                    |       |   |   |
| Directors  and Officers as a Group                      |       | 36,036,646                                     |       |                    | 14.29      | % |   |

 

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(1)                                  Unlessotherwise noted below, we believe that all persons named in the table have solevoting and investment power with respect to all shares of common stockbeneficially owned by them. For purposes of this chart, a person is consideredto be the beneficial owner of securities that can be acquired by such personwithin 60 days after March 31, 2005 through the exercise of warrants oroptions or the conversion of convertible securities.

 

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(2)                                  Including5,000,000 shares of our common stock that Mr. Benson has the right toacquire through the exercise of fully vested stock options.

 

(3)                                  Eachbeneficial owner’s, director’s or executive officer’s percentage ownership isdetermined by assuming that any warrants, options or convertible securitiesthat are held by such person (but not those held by any other person) and whichare exercisable within 60 days after March 31, 2005 have been exercised.

 

(4)                                  Including acommitment to issue 2,270,000 shares of our common stock in lieu of cash ascompensation for prior services rendered to North Electric Company, Inc.and fully vested stock options for the purchase of 7,500,000 shares of common stock.

 

ITEM 12.                       CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

During2002, the Company entered into several stock purchase agreements with HickeyHill Partners LLC and Miami Associates Investors, LLC (“Investors”) to purchaseshares of the Company’s common stock. The Company discounted the purchase pricebased upon market conditions at the time of issuance of the stock and theimmediately following several days. The Company held advances in the amount of$35,000 for which stock was not issued. The Company believed that the investorsdefaulted on the stock purchase agreements and the investors believed that theCompany defaulted on the stock purchase agreements. Hickey Hill Partners LLCfiled a lawsuit against the Company and the Company’s Chairman in the CircuitCourt of the 15th Judicial Circuit in and for Palm Beach County, Florida. On April 3,2003, the court issued a default judgment against the Company and our Presidentin the amount of $64,352 that bears interest at the rate of 6% a year andprejudgment interest of $1,716. The Company has recorded a liability for thejudgment and additional accrued interest at December 31, 2003 in theamount of $68,945 that is included in accounts payable and accrued expenses.Funds were transferred in March 2004 and the balance, including accruedinterest, at December 31, 2004 was approximately $67,000. In March 2005,the Company entered into an agreement to pay Hickey Hill Partners, LLC $45,000by May 15, 2005 in full satisfaction of all outstanding, current andpending claims regarding this judgment.

 

MiamiAssociates Investors, LLC also filed a lawsuit against the Company and theCompany’s Chairman in the Circuit Court of the 17th Judicial Circuit in and forBroward County, Florida for damages in the amount of $54,850 together with theawarding of treble damages, attorneys fees and interest. On April 24,2003, the court determined that the Company and our Chairman defaulted. A finaljudgment was ordered and finalized on December 3, 2003. The Company hasrecorded a liability for the judgment and accrued interest at December 31,2003 in the amount of $118,350 that is recorded in accounts payable and accruedexpenses. The balance, including accrued interest, at December 31, 2004was approximately $125,000. In March 2005, the Company entered into anagreement to pay Miami Associates Investors, LLC $55,000 by April 15, 2005in full satisfaction of all outstanding, current and pending claims regardingthis litigation.

 

OnJuly 9, 2003, we executed a promissory note in favor of James G. DodrillII in the amount of $247,507.27 at an interest rate of 18%. Our president also signedthe promissory note as a guarantor. The full amount of the note was due on August 15,2003.

 

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ITEM13.  EXHIBITS AND REPORTS ON FORM 8-K

 

3.1.1                        Restated Certificateof Incorporation, as filed with the New York Department of State on August 4,2000 filed as exhibit 3.1.1 to the Form SB-2 dated August 6,2003 and incorporated herein by reference.

 

3.2                                 By-Lawsfiled as exhibit 3.2 to the Form SB-2 dated August 6, 2003 and incorporatedherein by reference.

 

10.1                           SettlementAgreement And Mutual Release, dated as of February 12, 2004, by and amongDataMEG and Rex Hestor filed as exhibit 10.6 to the Form SB-2/A datedFebruary 27, 2004 and incorporated herein by reference.

 

10.2                           Rex HesterStock Lock-up Agreement, dated as of January 2004 filed as exhibit 10.7 tothe Form SB-2/A dated February 27, 2004 and incorporated hereinby reference.

 

10.3                           DataMEGCorp. Option Agreement, dated January 1, 2004, by and among DataMEG andAndrew Benson filed as exhibit 10.8 to the Form SB-2/A dated February 27,2004 and incorporated herein by reference.

 

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10.4                           ExclusiveDistribution Agreement, dated January 1, 2004 by and among North ElectricCompany, Inc. and International Network Technology, Ltd. filed as Exhibit10.12 to the Form 10-KSB dated April 14, 2004 and incorporated herein byreference.

 

10.5                           Form of Convertible Promissory Notes issued in May through December 2004 filed as exhibit 10.12 to the Form SB-2/A dated June 14, 2004 and incorporated herein by reference.

 

10.6         Subscription Agreement, dated March 5, 2004, by and between DataMEG and Mei Chung Tang Lee filed as exhibit 10.14 to the Form SB-2/A dated June 14, 2004 and incorporated herein by reference.

 

10.7       Joint Sales and Marketing Agreement, dated asof July 16, 2004, by and among North Electric Company andTekno Telecom LLC  filed as exhibit10.1 to the Form 10-QSB/A on November 26, 2004 and incorporatedherein by reference.

 

10.8       Consulting Agreement, dated as of July 1,2004, by and among DataMeg and James Murphy and filed as exhibit 10.2 on Form 10-QSB/Aon November 26, 2004 and incorporated herein by reference.

 

10.9       Consulting Agreement, dated as of August 6, 2004, by and amongDataMeg and Mark McGrath  and filed asexhibit 10.3 on Form 10-QSB/A on November 26, 2004 andincorporated herein by reference.

 

10.10      Agreementand Settlement, dated as of March 22, 2005, by and among DataMEG and KantiPurohit and incorporated herein by reference.

 

10.11      Agreementdated as of March 22, 2005, by and among DataMEG and Kanti Purohit andincorporated herein by reference.

 

10.13      Releasedated as of  April 1, 2005, by anamong DataMEG and Hickey Hill Partners, LLC and incorporated herein byreference.

 

10.14      Termsheet dated as of March 31, 2005, by and among DataMEG and 350 Group, LLCand incorporated herein by reference.

 

21.1                           Subsidiariesof the registrant

 

31.1                           Certificationof the Principal Executive Officer and the Principal Financial Officer pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1                           Certificationof the Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

Reportson 8-K

 

OnNovember 18, 2004, we filed a report on Form 8-K announcingthat we had issued a press release, dated November 17, 2004 entitled-”NorthElectric Company, Inc. Product Assists Time Warner Cable Division inProviding Superior Quality of Service to Its VoIP Customers”.

 

ITEM 14.                       PRINCIPALACCOUNTANT FEES AND SERVICES 

 
| **Fiscal Year**       | ** ** | ** **   | ** ** | **Audit**    | ** ** | ** **   | ** ** | **All**      | ** ** | ** ** | ** ** |
|-----------------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|------------|------------|
| **Ended**             | ** ** | **Audit**    | ** ** | **Related**  | ** ** | **Tax**      | ** ** | **Other**    | ** ** | **Total**  | ** ** |
| **December 31,** | ** ** | **Fees (1)** | ** ** | **Fees (2)** | ** ** | **Fees (3)** | ** ** | **Fees (4)** | ** ** | **Fees**   | ** ** |
| ** **            | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** |
| 2003                  |       | $            | 92,000     |         | $          | 0            |       | $            | 2,000      |       | $          | 0 |   | $ | 94,000 |   |
|                  |       |         |       |         |       |         |       |         |       |       |       |
| 2004                  |       | $            | 105,000    |         | $          | 0            |       | $            | 13,500     |       | $          | 0 |   | $ | 118,500 |   |
|                  |       |         |       |         |       |         |       |         |       |       |       |
| Total                 |       | $            | 197,000    |         | $          | 0            |       | $            | 15,500     |       | $          | 0 |   | $ | 212,500 |   |

 

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(1)          Theaggregate fees billed for each of the last two fiscal years for professionalservices rendered by the principal accountant for the audit of the registrant’sannual financial statements and review of the registrant’s financial statementsincluded in the registrant’s Form 10-Q (17 CFR 249.308a) or 10-QSB(17 CFR 249.308b) or services that are normally provided by the accountant inconnection with statutory and regulatory filings or engagements for thosefiscal years.

(2)          Theaggregate fees billed in each of the last two fiscal years for assurance andrelated services by the principal accountant that are

 

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reasonably related tothe performance of the audit or review of the registrant’s financial statementsand are not reported under Item 9(e)1 of Schedule 14A.

 

(3)          Theaggregate fees billed in the last two fiscal years for professional servicesrendered by the principal accountant for tax compliance, tax advice, and taxplanning. All the fees billed under this item in 2002 and 2003 were for taxcompliance services.

(4)          Theaggregate fees billed in each of the last two fiscal years for products andservices provided by the principal accountant, other than the services reportedin Items 9(e)1 through 9(e)3 of Schedule 14A (See (1), (2), and (3) above).

 

AuditCommittees Pre-Approval Policies and Procedures

 

Our president and sole director pre-approves allprofessional services and fees provided by our principal accountants. During2003 and 2004, our sole director approved only professional services renderedby our principal accountants for the audit of our annual financial statementsand review of our financial statements included in our Forms 10-QSB orservices that are normally provided by the accountant in connection withstatutory and regulatory filings or engagements for those fiscal years and taxcompliance.

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) ofthe Exchange Act, the registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 

 
|   | DataMEG, Corp. |
|--------|----------------|
|   | (Registrant)   |
|   |           |
|   | By             | /s/ Andrew Benson, |
|   |           | Andrew Benson,  Chairman, Sole |
|   |           | Director and Principal  Financial |
|   |           | Officer |
|   |           |   |
|   | Date:          | April 15, 2005 |

 

In accordance with the Exchange Act, this reporthas been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated.

 
|   | By     | /s/ Andrew Benson                         |
|--------|--------|-------------------------------------------|
|   |   | Andrew Benson,  Chairman, Sole            |
|   |   | Director and Principal  Financial Officer |
|   |   |                                      |
|   | Date   | April 15, 2005                       |

 

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