Edgar Filing: NIGHTHAWK SYSTEMS INC

FILED PURSUANT TO RULE 424(b)(5)
FILE NO. 333-120179

PROSPECTUS
NIGHTHAWK SYSTEMS, INC.
OFFERING UP TO 52,864,500 COMMON SHARES

This prospectus relates to the resale of up to 2,614,500 shares of our common
stock pursuant to a Special Warrant sale to individual accredited investors, the
resale of up to 48,250,000 shares of our common stock by Dutchess Private
Equities Fund, II, LP pursuant to a Debenture Agreement, a warrant and an
Investment Agreement, and the resale of up to 2,000,000 shares of our common
stock by U.S. Euro Securities, Inc. pursuant to the Investment Agreement. We
have received cash proceeds from the sale of the Special Warrants and the
issuance of the convertible debentures under the Debenture Agreement with
Dutchess, and expect to receive cash proceeds from any "puts" pursuant to the
Investment Agreement we have entered into with Dutchess. All costs associated
with this registration will be borne by us.

Dutchess, First Associates and U.S. Euro Securities are "underwriters" within
the meaning of the Securities Act of 1933, as amended, in connection with the
resale of our common stock under the Investment Agreements. In connection with
the Debenture Agreement, U.S. Euro Securities received a cash commission of 5%
and 100,000 shares of our restricted common stock. In connection with the
Investment Agreement, U.S. Euro Securities will receive a cash commission of 5%
of cash provided under the agreement and 2,000,000 shares of common stock, which
are being registered under this prospectus. In connection with the Special
Warrants, First Associates received a cash commission of 8%, or $18,592, of the
gross proceeds from the sale of the Special Warrants and 12.5% of the amount of
Special Warrants sold for a total number of Special Warrants for First
Associates of 145,250.

The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board or in
negotiated transactions during the term of this offering. Our common stock is
quoted on the Over-the-Counter Bulletin Board under the symbol NIHK.OB. On
September 21, 2005, the last reported closing sale price of our common stock was
$0.09 per share.

THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
YOU SHOULD PURCHASE SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.

You should rely only on the information provided in this prospectus or any
supplement to this prospectus and information incorporated by reference. We have
not authorized anyone else to provide you with different information. Neither
the delivery of this prospectus nor any distribution of the shares of common
stock pursuant to this prospectus shall, under any circumstances, create any
implication that there has been no change in our affairs since the date of this
prospectus.

Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. It is a criminal offense to make any
representation to the contrary.

The date of this prospectus is September 23, 2005.

TABLE OF CONTENTS

PROSPECTUS SUMMARY 1
RISK FACTORS 5
USE OF PROCEEDS 8
DETERMINATION OF OFFERING PRICE 9
DILUTION 9
SELLING SECURITY HOLDERS 10
PLAN OF DISTRIBUTION 11
LEGAL PROCEEDINGS 13
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 13
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 14
INTEREST OF NAMED EXPERTS AND COUNSEL 16
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS 17
DESCRIPTION OF BUSINESS 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 20
DESCRIPTION OF PROPERTY 29
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 30
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 30
EXECUTIVE COMPENSATION 30
FINANCIAL STATEMENTS F-1 - F-25

PROSPECTUS SUMMARY

The following information is a summary of the prospectus and it does not contain
all of the information you should consider before making an investment decision.
You should read the entire prospectus carefully, including the financial
statements and the notes relating to the financial statements.

OUR COMPANY

We design and manufacture intelligent remote monitoring and power control
products that are easy to use, inexpensive and can remotely control virtually
any device from any location. Our products save consumers and businesses time,
effort and expense by eliminating the need for a person to be present when and
where an action needs to be taken. Currently, most commercial control
applications utilize telephone lines, which tether the system to a single
location and have associated installation and monthly charges. Our wireless
products eliminate installation costs and monthly charges for telephone lines.
This wireless application also allows businesses and consumers to remotely
control unmanned or remote locations that may operate on traditional electrical
power, or solar or battery generated power. By utilizing existing wireless
technology, we give our users the flexibility to move their application from
place to place, without re-engineering their network.

Active applications for our intelligent products include, but are not limited
to:

- Rebooting unmanned computer stations;
- Remote switching of residential power;
- Managing power on an electrical grid;
- Activation/deactivation of alarm and warning devices;
- Displaying or changing a digital or printed message or warning signs;
- Turning pumps on or off; and
- Turn on heating or cooling equipment.

Our proprietary, wireless products are easily integrated into third-party
products, systems and processes. They allow for intelligent control by
interpreting instructions sent via paging and satellite media, and executing the
instructions by 'switching' the electrical current that powers the device,
system or process. Our intelligent products can be activated individually or in
pre-defined groups for specified time periods with a simple click of a mouse or
by dialing a telephone number.

We are a publicly traded company, which trades on the Over-the-Counter bulletin
Board of the National Quotation Service under the ticker symbol "NIHK.OB"

HOW TO CONTACT US

Our executive offices are located at 10715 Gulfdale, Suite 200, San Antonio,
Texas 78216. Our phone number is 210-341-4811. Our manufacturing facility is
located at 8300 East Pacific Place, Suite 204, Denver, Colorado 80231. Our
website address is www.nighthawksystems.com. Information contained on our
website does not constitute part of this report and our website address should
not be used as a hyperlink to our website.

SALES BY OUR SELLING STOCKHOLDERS

The table below sets forth the shares that we are registering pursuant to the
Registration Statement to which this prospectus is a part:

Stockholder Number of Shares
--------------------------------------------- ------------------

Dutchess Private Equities Fund II, LP 48,250,000 shares (1)
U.S. Euro Securities 2,000,000 shares
Christopher Vorberg 1,100,000 shares
Rod Saville 600,000 shares
Douglas Hunter 500,000 shares
Fraser Hindson 124,000 shares
First Associates 290,500 shares (2)

Total common stock being registered 52,864,500 shares

(1) For the purpose of determining the number of shares subject to registration
with the Securities and Exchange Commission, we have assumed that we will issue
not more than 40,000,000 shares pursuant to the exercise of our put right under
the Investment Agreement, although the number of shares that we will actually
issue pursuant to that put right may be more than or less than 40,000,000,
depending on the trading price of our common stock. We currently have no intent
to exercise the put right in a manner that would result in our issuance of more
than 40,000,000 shares, but if we were to exercise the put right in that manner,
we would be required to file a subsequent registration statement with the
Securities and Exchange Commission and for that registration statement to be
deemed effective prior to the issuance of any such additional shares. Under our
Debenture Agreement with Dutchess, we are also required to register for resale
four times the number of shares (2,000,000) that the $250,000 in convertible
debentures would be convertible into based upon the conversion price when we
signed the Debenture Agreement of $0.125 per share. Therefore, we are
registering 8,000,000 shares of our common stock for resale in connection with
the future conversion of the convertible debentures with Dutchess. We are also
registering 250,000 shares of our common stock pursuant to a warrant issued to
Dutchess which gives them the right to purchase 250,000 shares of our common
stock for $0.125 per share for a period of five years.

(2) Our Special Warrant offering included an option for First Associates to
purchase an additional 12.5%, or 145,250, of the total number of Special
Warrants sold. Each Special Warrant is convertible into one share of our common
stock and one common stock purchase warrant to purchase a share of our common
stock for $0.30 per share. We sold 1,162,000 Special Warrants and First
Associates has not exercised its right to purchase any Special Warrants.

THE OFFERING

Common stock offered 52,864,500 shares

Use of proceeds We will not receive any proceeds from the
sale by the selling stockholders of our
common stock. We expect to receive cash
proceeds from any "puts" pursuant to
the Investment Agreement we have entered
into with Dutchess. The proceeds from
our exercise of the put right pursuant to
the Investment Agreement will be used
for working capital and general corporate
expenses, expansion of internal operations,
and potential acquisition costs. See "Use
of Proceeds."

Symbol for our common stock Our common stock trades on the
OTCBB Market under the symbol "NIHK.OB"

OUR CAPITAL STRUCTURE AND SHARES ELIGIBLE FOR FUTURE SALE

Shares of common stock outstanding as of November 18, 2004 30,622,518(1)

Shares of common stock potentially issuable upon
exercise of the put right to Dutchess Private Equities Fund II 40,000,000

Shares of common stock issuable upon conversion of Convertible Debentures 8,000,000
by Dutchess Private Equities Fund II

Shares of common stock issuable upon exercise of a warrant
By Dutchess Private Equities Fund II 250,000

Shares of common stock issuable upon exercise of Special Warrants 2,614,500
----------

Total 81,487,018

(1) Assumes no:

-Exercise of vested options to purchase 1,280,534 shares of common stock
outstanding as of November 18, 2004 under the Nighthawk Systems, Inc. 2003
Stock Option Plan.

- Conversion of $150,000 convertible note into 750,000 shares as of November
18, 2004.

- Exercise of outstanding vested warrants to purchase common stock at
November 18, 2004, as follows:

Holder Shares of Common Stock Exercise Price Expiration Date
----------------- ---------------------- -------------- ---------------
Private Placement 75,000 .20 11/05/2004
----------------- ---------------------- -------------- ---------------
Private Placement 150,000 .20 11/06/2004
----------------- ---------------------- -------------- ---------------
Private Placement 2,857,143 .07 03/31/2005
----------------- ---------------------- -------------- ---------------
Private Placement 150,000 .25 04/01/2005
----------------- ---------------------- -------------- ---------------
Private Placement 25,000 .25 06/06/2005
----------------- ---------------------- -------------- ---------------
Private Placement 300,000 .25 11/07/2005
----------------- ---------------------- -------------- ---------------
Private Placement 600,000 .25 12/01/2005
----------------- ---------------------- -------------- ---------------
Private Placement 333,333 .25 01/16/2006
----------------- ---------------------- -------------- ---------------
Private Placement 40,000 .25 01/18/2006
----------------- ---------------------- -------------- ---------------
Private Placement 100,000 .25 01/19/2006
----------------- ---------------------- -------------- ---------------
Private Placement 40,000 .25 01/22/2006
----------------- ---------------------- -------------- ---------------
Private Placement 60,000 .25 02/18/2006
----------------- ---------------------- -------------- ---------------
Private Placement 200,000 .25 02/23/2006
----------------- ---------------------- -------------- ---------------
Private Placement 55,000 .25 03/04/2006
----------------- ---------------------- -------------- ---------------
Private Placement 30,000 .25 03/25/2006
----------------- ---------------------- -------------- ---------------
Note Conversion 375,000 .25 06/30/2006
----------------- ---------------------- -------------- ---------------
Note Conversion 739,423 .25 08/23/2006
----------------- ---------------------- -------------- ---------------
Total 6,129,899
----------------- ----------------------

THE SPECIAL WARRANT OFFERING
-------------------------------

We completed our Special Warrant Offering on June 30, 2004. This prospectus
relates to the resale of up to 2,614,500 shares of our common stock by selling
shareholders who may acquire the shares pursuant to the sale of Common Stock
Units. Under the terms of those sales, we sold Special Warrants for $0.20. Each
Special Warrant is convertible into a single share of our common stock and a
purchase warrant entitling the holder to purchase an additional share of our
common stock for $0.30. The Special Warrants may be exercised at any time before
the expiration date, which is defined as the earlier of:

(a) five business days following the date on which we receive the last of
(i) the SEC declares this registration statement effective, and (ii) the final
prospectus is filed with the SEC and

(b) August 10, 2005

THE DEBENTURE OFFERING
------------------------

This prospectus also relates to the resale of up to 8,250,000 shares of our
common stock by Dutchess, who will become a stockholder pursuant to our
Debenture Agreement. Under the Debenture Agreement, Dutchess paid us $250,000.
Dutchess also received a common stock purchase warrant entitling them to
purchase up to 250,000 shares of common stock at a price of $0.125 per share.
The warrant expires on August 10, 2009.

We will pay an 8%annual coupon on the unpaid principal amount of the debentures.
Prior to the SEC declaring the registration statement effective for the shares
underlying the debentures, we will make mandatory prepaid payments, in advance,
on the coupon in the amount of one-twelfth of the annual payment, per month,
pursuant to each tranche. These coupon payments began on August 15th, 2004, and
all subsequent coupon payments are due on the fifteenth calendar day of each
month thereafter.

When the SEC has declared the Registration Statement effective, we must pay the
coupon at the time of each conversion until the principal amount hereof is paid
in full or has been converted into shares of our registered common stock. The
interest paid in common stock, shall be delivered to Dutchess, or per Dutchess'
instructions, within three business days of the date of conversion. The
debentures are subject to automatic conversion at the end of three years from
the date of issuance at which time all debentures outstanding will be
automatically converted.

THE INVESTMENT AGREEMENT
--------------------------

This prospectus also relates to the resale of up to 40,000,000 shares of our
common stock by Dutchess, who will become a stockholder pursuant to our
Investment Agreement. Under the Investment Agreement, we are allowed to "put" to
Dutchess up to $10,000,000. We shall not be entitled to submit a put notice
until after the previous put has been completed. The purchase price for the
common stock identified in the put notice shall be equal to 95% of the lowest
closing best bid price of the common stock during the five consecutive trading
day period immediately following the date of our notice to them of our election
to put shares.

As part of the Investment Agreement with Dutchess, we paid a commission to U.S.
Euro Securities, of 2,000,000 shares of our common stock. These shares are also
being registered under this prospectus.

We can only put shares to Dutchess under the Investment Agreement when we meet
the following conditions:

- A registration statement has been declared effective and remains effective for
the resale of the common stock subject to the Equity Line of Credit;

- Our common stock has not been suspended from trading for a period of five
consecutive trading days and we have not have been notified of any pending or
threatened proceeding or other action to delist or suspend our common stock;

- We have complied with our obligations under the Investment Agreement and the
Registration Rights Agreement;

- No injunction has been issued and remains in force, or action commenced by a
governmental authority which has not been stayed or abandoned, prohibiting the
purchase or the issuance of our common stock; or

- The issuance of the common stock will not violate any shareholder approval
requirements of any exchange or market where our securities are traded.

The Investment Agreement will terminate when any of the following events occur:

- Dutchess Private Equities Fund has purchased an aggregate of $10,000,000 of
our common stock; or

- 36 months after the SEC declares this registration statement effective.

RISK FACTORS

An investment in our common stock involves a high degree of risk. You should
carefully consider the following risk factors, other information included in
this prospectus and information in our periodic reports filed with the SEC. If
any of the following risks actually occur, our business, financial condition or
results of operations could be materially and adversely affected, and you may
lose some or all of your investment.

RISKS RELATED TO OUR BUSINESS

WE HAVE A HISTORY OF LOSSES SINCE INCEPTION AND IF WE CONTINUE TO INCUR LOSSES,
THE PRICE OF OUR SHARES CAN BE EXPECTED TO FALL.

We expect to continue to incur losses in the foreseeable future as we expend
substantial resources on sales, marketing and research and development of our
products. From the effective date of our reverse merger in February 2002 up to
the end of the second quarter of fiscal year 2005, we have incurred losses. If
we continue to incur losses, the price of our shares can be expected to fall. We
may continue to incur substantial and continuing net losses beyond the next six
months. We may never generate substantial revenues or reach profitability.

OUR INDEPENDENT ACCOUNTANTS HAVE ISSUED A GOING CONCERN OPINION AND IF WE CANNOT
OBTAIN ADDITIONAL FINANCING, WE MAY HAVE TO CURTAIL OPERATIONS AND MAY
ULTIMATELY CEASE TO EXIST.

Our auditors, GHP Horwath, PC, included an explanatory paragraph in their Report
of Independent Registered Public Accounting Firm on our December 31, 2004
consolidated financial statements indicating that there is substantial doubt
about our ability to continue as a going concern. We will require additional
funds in the future, and any independent auditors report on our future financial
statements may include a similar explanatory paragraph if we are unable to raise
sufficient funds or generate sufficient cash from operations to cover the cost
of our operations. The existence of the explanatory paragraph may adversely
affect our relationship with prospective customers, suppliers and potential
investors, and therefore could have a material adverse effect on our business,
financial condition and results of operations.

OUR CONTINUED EXISTENCE IS DEPENDENT UPON OUR ABILITY TO RAISE ADDITIONAL
CAPITAL, WHICH MAY NOT BE READILY AVAILABLE.

There is currently limited experience upon which to assume that our business
will prove financially profitable or generate more than nominal revenues. From
inception, we have generated funds primarily through the sale of securities. We
may not be able to continue to sell additional securities. We expect to raise
funds in the future through sales of our debt or equity securities until a time,
if ever, that we are able to operate profitably. We may not be able to obtain
funds in this manner or on terms that are beneficial to us. Our inability to
obtain needed funding can be expected to have a material adverse effect on our
operations and our ability to achieve profitability. If we fail to generate
increased revenues or fail to sell additional securities you may lose all or a
substantial portion of your investment.

WE DEPEND ON CERTAIN CUSTOMERS AND IF WE LOSE ONE OF OUR SIGNIFICANT CUSTOMERS,
OUR REVENUES MAY SUBSTANTIALLY DECREASE AND OUR BUSINESS MAY FAIL.

During 2004, three customers accounted for approximately 26%, 20% and 12% of
sales, respectively. During 2003, two customers accounted for approximately 47%
and 31% of sales, respectively. The same customers represented the largest
percentage of sales in both 2004 and 2003. If either of these two customers stop
generating orders for us altogether, and we are unable to obtain comparable
orders from other customers, our revenues would decrease and our business could
fail.

OUR DEPENDENCE ON PROPRIETARY TECHNOLOGY AND A LIMITED ABILITY TO PROTECT OUR
INTELLECTUAL PROPERTY MAY ADVERSELY AFFECT OUR ABILITY TO COMPETE IN THE MARKET.

We currently have two patent applications pending. We plan to file additional
patent applications for future products or services, although we may not do so,
or they might not be approved. Our success is dependent in part on our ability
to obtain and maintain patent protection for our products, maintain trade secret
protections and operate without infringing the patent or proprietary rights of
others. A successful challenge to our ownership of our technology could
materially damage our business prospects. Our patent pending applications may
not be granted to us. We may not be able to develop additional products that are
patentable. Any patents issued to us may not provide us with any commercial
advantage. Any of our products may infringe on the patent rights of others. If
any of our products are found to infringe on any other patents, we may not be
able to obtain licenses to continue and manufacture and license these products
or we may have to pay damages as a result of an infringement. Even if our patent
applications are approved, the commercial application of the product may not
result in any profits to us.

WE DEPEND ON KEY PERSONNEL AND OUR BUSINESS COULD BE ADVERSELY AFFECTED IF THEY
WERE TO DEPART.

Our success depends to a significant degree upon the continued contributions of
our key management, marketing, service and related product development and
operational personnel. Our business requires a highly skilled management team.
The technical nature of our products requires an engineer proficient in the
provision of wireless systems and controlling electrical switches. Additionally,
we require a person with the understanding of the potential applications for our
products to a multitude of industries ranging from the electric utility industry
to the information technology industry. Two employees, Eric Berg and Myron
Anduri, are particularly valuable to us because they possess specialized
knowledge about our company and operations and both have specialized skills for
our operations making them very difficult to replace. Doug Saathoff currently
serves as our Chief Executive Officer, and has experience in raising capital for
small cap companies and providing financial oversight that is vital to our
ongoing success. We do not currently have employment agreements with Messrs.
Anduri, Berg and Saathoff that prohibit them from competing with us upon
termination of their employment. Our business may not be successful if, for any
reason, any of these officers ceased to be active in our management.

THE LIMITED PUBLIC MARKET FOR OUR SHARES MAY MAKE IT DIFFICULT TO TRANSFER OUR
SHARES.

Although our stock is traded on the over-the-counter bulletin board, there is
limited trading in our stock and thus no established market for our securities.
Holders of our stock may find it difficult to trade their shares until a time
that there is a more established market for our securities.

WE DO NOT ANTICIPATE DECLARING ANY DIVIDENDS IN THE FORESEEABLE FUTURE AND MAY
NEVER DO SO.

We anticipate that, following the completion of this offering and for the
foreseeable future, earnings, if any, will be retained for the development of
our business and will not be distributed to shareholders as cash dividends. The
declaration and payment of cash dividends, if any, by us at some future time
will depend upon our results of operations, financial condition, cash
requirements, future prospects, limitations imposed by credit agreements or
senior securities and any other factors deemed relevant by our Board of
Directors.

RISKS RELATED TO OUR INDUSTRY

WELL-FUNDED COMPETITORS COULD ENTER THE MARKET WITH SIMILAR PRODUCTS AND, IF WE
CAN NOT EFFECTIVELY COMPETE, OUR BUSINESS MAY FAIL.

To our knowledge, we are the only company to develop and market an easy to use
"plug and play" intelligent wireless remote control device. While we have
extensive knowledge of utilizing a paging network to provide remote control
services, we are not the only company with this knowledge. If another company
enters the market, we may have to lower our prices to compete which could
adversely affect our revenues. We may also have to increase our costs to
differentiate our products. Even if we lower our prices or differentiate our
products, we may not be able to compete effectively. If we can not compete
effectively, our business may fail.

IF THE COSTS OF CELLULAR SERVICE DECREASE, WE MAY HAVE TO ADAPT OUR PRODUCTS FOR
CELLULAR TECHNOLOGY WHICH WOULD INCREASE OUR COSTS AND ADVERSELY AFFECT OUR
GROSS PROFITS.

While paging is a very low cost telecommunications medium that enjoys extensive
geographic coverage both in the United States and abroad, cellular service now
has vast geographic reach as well. Moreover, while the costs of using cellular
service for remote control currently are significantly higher than paging,
cellular costs may eventually come down to an affordable price for remote
control. In this case, to remain competitive, we would have to expend resources
to adapt our products for cellular technology, or develop or acquire a cellular
product of our own.

WE ARE DEPENDENT UPON THIRD-PARTY SUPPLIERS FOR PAGING AND SATELLITE SERVICES
AND MAY BE UNABLE TO FIND ALTERNATIVE SUPPLIERS.

We rely on other companies to supply key components of our network
infrastructure, including paging carriers and satellite providers, both of which
are critical to our ability to provide remote control services to our customers.
We have only a few long-term agreements governing the supply of many of paging
services and are dependent upon a third party for several of the other paging
services that serve our customers. Additionally, we have only one contract with
a satellite carrier. If we were unable to continue to obtain these services, at
a commercially reasonable cost, it would adversely affect our business,
financial condition and results of operations.

IF OUR PRODUCTS FAIL TO GAIN WIDESPREAD MARKET ACCEPTANCE, OUR ABILITY TO
GENERATE SUFFICIENT REVENUES OR PROFIT MARGINS WILL BE LIMITED.

There may not be sufficient demand for our products to enable us to become
profitable. We do not know whether any of our products will be sold in
sufficient numbers to provide enough revenues to cover operating expenses. In
addition, if the electric utility industry develops alternative conservation or
load control devices, it could have an adverse effect on our sales.

RISKS RELATED TO THIS OFFERING

OUR STOCK PRICE IS VOLATILE AND YOU MAY NOT BE ABLE TO SELL YOUR SHARES FOR
HIGHER THAN WHAT YOU PAID.

Our common stock is quoted on the "OTC - Bulletin Board Service" under the
symbol "NIHK.OB." The market price of our common stock has been and is likely to
continue to be highly volatile and subject to wide fluctuations due to various
factors, many of which may be beyond our control, including: annual variations
in operating results; announcements of technological innovations or new
software, services or products by us or our competitors; and changes in
financial estimates and recommendations by securities analysts. In addition,
there have been large price and volume fluctuations in the stock market, which
have affected the market prices of securities of many technology and services
companies, often unrelated to the operating performance of these companies.
These broad market fluctuations, as well as general economic and political
conditions, may adversely affect the market price of our common stock. In the
past, volatility in the market price of a company's securities has often led to
securities class action litigation. This litigation could result in substantial
costs and diversion of our attention and resources, which could have a material
adverse effect on our business, financial condition and operating results.

EXISTING STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION FROM THE SALE OF
SECURITIES PURSUANT TO OUR INVESTMENT AGREEMENT WITH DUTCHESS.

The sale of shares pursuant to our Investment Agreement with Dutchess may have a
dilutive impact on our stockholders. As a result, our net income per share could
decrease in future periods and the market price of our common stock could
decline. In addition, the lower our stock price is at the time we exercise our
put option, the more shares we will have to issue to Dutchess to draw down on
the full equity line with Dutchess. If our stock price decreases, then our
existing stockholders would experience greater dilution. At a stock price of
$0.12 or less, we would have to issue all 40,000,000 shares registered under
this offering in order to draw down on the full equity line.

DUTCHESS WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK
WHICH COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.

Our common stock to be issued under our agreement with Dutchess will be
purchased at a 5% discount to the lowest closing best bid price during the five
days immediately following our notice to Dutchess of our election to exercise
our put right. Dutchess has a financial incentive to sell our common stock
immediately upon receiving the shares to realize the profit between the
discounted price and the market price. If Dutchess sells our shares, the price
of our stock could decrease. If our stock price decreases, Dutchess may have a
further incentive to sell the shares of our common stock that it holds. The
discounted sales under our agreement with Dutchess could cause the price of our
common stock to decline.

WE WILL NEED TO RAISE ADDITIONAL FUNDING AND IF WE ISSUE SUBSTANTIAL AMOUNTS OF
COMMON STOCK, CURRENT STOCKHOLDERS MAY EXPERIENCE DILUTION AND OUR STOCK PRICE
MAY DECREASE.

We will need to raise additional funding to implement our business plan. As a
result, we may issue substantial amounts of common or preferred stock. Sales of
substantial amounts of common stock could have a material dilutive effect on
shareholders. Additionally, it may be necessary to offer warrants or other
securities to obtain strategic relationships or to raise additional capital. All
of these issuances will dilute the holdings of existing shareholders thereby
reducing the holder's percentage ownership and possibly lowering the price of
our common stock.

WE MUST COMPLY WITH PENNY STOCK REGULATIONS THAT COULD EFFECT THE LIQUIDITY AND
PRICE OF OUR STOCK.

The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions in "penny stocks." Penny stocks generally are equity
securities with a price of less than $5.00, other than securities registered on
certain national securities exchanges or quoted on NASDAQ, provided that current
price and volume information with respect to transactions in these securities is
provided by the exchange or system. Prior to a transaction in a penny stock, a
broker-dealer is required to:

- deliver a standardized risk disclosure document prepared by the SEC;

- provide the customer with current bid and offer quotations for the penny
stock;

- explain the compensation of the broker-dealer and its salesperson in the
transaction;

- provide monthly account statements showing the market value of each penny
stock held in the customer's account;

- make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's executed
acknowledgement of the same; and

- provide a written agreement to the transaction.

These requirements may have the effect of reducing the level of trading activity
in the secondary market for our stock. Because our shares are subject to the
penny stock rules, you may find it more difficult to sell your shares.

USE OF PROCEEDS

Up to 2,614,500 shares of common stock covered by this prospectus will be sold
by selling shareholders, who will receive the shares pursuant to the conversion
of Special Warrants and the exercise of the underlying common stock purchase
warrants. The selling shareholders will receive all of the proceeds from such
sales. We received $232,400 from the sale of 1,162,000 Special Warrants, and
paid $43,625 in related expenses. First Associates received a warrant to
purchase 145,250 Special Warrants in return for sponsoring the placement of the
Special Warrants. We will receive the proceeds from the exercise price of the
warrant by First Associates and from the exercise of any of the common stock
purchase warrants, if they are exercised. The warrants can be exercised for
$0.30 per share of common stock and expire two years from their date of
issuance. If First Associates converts their warrant, and all of the common
stock purchase warrants are exercised, we will receive $421,225 in gross cash
proceeds. We do not know if we will receive any proceeds from the warrant issued
to First Associates in the near future, nor do we expect to receive proceeds
from the exercise of the common stock purchase warrants at $0.30 in the near
future because, as of November 18, 2004, the closing price of our stock was
$0.125.

Up to 8,000,000 shares of common stock covered by this prospectus will be sold
by Dutchess, who will receive all of the proceeds from such sales. We received
$250,000 in proceeds from the sale of convertible debentures.

Up to 250,000 shares of common stock covered by this prospectus will be sold by
Dutchess, who will receive the shares pursuant to the exercise of warrants
issued by us along with the convertible debentures. Dutchess will receive all of
the proceeds from such sales. We will receive the proceeds from the exercise of
the warrants. The warrants can be exercised for $0.125 per share of common stock
and expire on August 10, 2009. If all of the warrants are exercised, we will
receive $31,250 in proceeds.

Up to 40,000,000 shares of common stock covered by this prospectus will be sold
by Dutchess, who will receive all of the proceeds from such sales. However, we
could receive up to $10,000,000 in proceeds from the sale of our common shares
pursuant to our Investment Agreement with Dutchess.

For illustrative purposes, we have set forth below our intended use of proceeds
for the range of net proceeds received or expected to be received subsequent to
June 30, 2004. The gross proceeds shown below consist of $31,250 from the
Dutchess warrants, and a range of proceeds from the Investment Agreement. The
gross proceeds shown below do not include proceeds from the issuance of any
additional Special Warrants at $0.20 or from the exercise of the common stock
warrants underlying the Special Warrants at $0.30, because those prices are well
above our recent closing stock prices. Estimated expenses of the Offering
include a 5% commission on the proceeds from the Debenture Agreement and the
Investment Agreement.

Proceed if 100% Proceeds if 50% Proceeds if 25% Proceeds if 10%
of Investment of Investment of Investment of Investment
Agreement Agreement Agreement Agreement
Priority Sold Sold Sold Sold

Gross Proceeds $10,031,250 $5,031,250 $2,531,250 $1,031,250
Estimated expenses of the Offering 525,000 275,000 150,000 75,000
---------------- ---------------- ---------------- ----------------
Net proceeds $9,506,250 $4,756,250 $2,381,250 $956,250
================ ================ ================ ================

Working capital and general
corporate expenses 1st $3,000,000 $2,500,000 $2,000,000 $900,000
Expansion of internal operations 2nd $2,000,000 $1,000,000 $381,250 $56,250
Potential acquisition costs(1) 3rd $4,506,250 $1,256,250 $- $-
---------------- ---------------- ---------------- ----------------
$9,506,250 $4,756,250 $2,381,250 $956,250
================ ================ ================ ================

(1) From time to time we evaluate opportunities to make acquisitions of assets or businesses that we believe would help us
achieve our goal of profitability, but we are not currently planning any material acquisitions.

Proceeds of the offering which are not immediately required for the purposes
described above will be invested in United States government securities,
short-term certificates of deposit, money market funds and other high-grade,
short-term interest-bearing investments.

DETERMINATION OF OFFERING PRICE

The selling stockholders may sell shares in any manner at the current market
price or through negotiated transactions with any person at any price.

DILUTION

Our net tangible book value as of June 30, 2004 was ($1,001,870), or ($0.04) per
share of common stock. Net tangible book value per share is determined by
dividing our tangible book value (total tangible assets less total liabilities)
by the number of outstanding shares of our common stock. Net tangible book value
as of June 30, 2004 is calculated by subtracting our net intangible asset of
$8,658 from net total book value (total assets less total liabilities) of
($993,212). Since this offering is being made solely by the selling stockholders
and none of the proceeds will be paid to us, our net tangible book value will be
unaffected by this offering. Our net tangible book value, however, will be
impacted by the common stock to be issued to Dutchess Private Equities Fund II
under the Debenture Agreement and Investment Agreement, and to any additional
purchasers of Special Warrants and their underlying common stock purchase
warrants. The amount of dilution resulting from share issuances to Dutchess will
be determined by our stock price at or near the time of the conversion of the
debentures by Dutchess or the put of shares to Dutchess by us. The amount of
dilution resulting from share issuances to purchasers of Special Warrants will
depend on how many additional Special Warrants are sold by us and how many of
the underlying common stock purchase warrants are exercised. The following
example shows the dilution to new investors assuming i) no additional sales of
Special Warrants and no exercises of the underlying common stock purchase
warrants; ii) The conversion of all $250,000 convertible debentures at $0.09
which is based on our closing bid price of $0.12 on October 29, 2004; iii) the
exercise of 250,000 warrants at $0.125 issued with the convertible debentures,
and iv) the issuance of 100%, 50%, 25% and 10% of the 40,000,000 shares of
common stock to Dutchess Private Equities Fund at an assumed offering price of
$0.13 per share which is based on the closing price of our common stock on
October 29, 2004 of $0.14 adjusted for the 5% discount at which we will issue
shares under our agreement with Dutchess Private Equities Fund. The discount is
defined as 95% of the lowest closing bid price of our common stock during the
five consecutive trading day period immediately following our notice to Dutchess
Private Equities Fund of our election to exercise our put rights.

Using the above assumptions, less $25,000 of offering expenses and 5% cash
commission, our pro forma net tangible book value as of June 30, 2004 would
have been as follows:

Pro Forma Effects of Dilution from Offering:
Assumed percentage of shares issued 100% 50% 25% 10%
Number of shares issued (in millions) 40 20 10 4
Assumed public offering price per share $0.13 $0.13 $0.13 $0.13
Stock discount recognized as interest expense $363,333 $223,333 $153,333 $111,333
Net tangible book value per share before this offering ($0.04) ($0.04) ($0.04) ($0.04)
Net tangible book value after this offering $3,932,547 $1,545,548 $352,049 ($364,050)
Net tangible book value per share after this offering $0.06 $0.03 $0.01 ($0.01)
Dilution of net tangible book value per share to new investors $0.12 $0.11 $0.11 $0.9
Increase in net tangible book value per share to existing
shareholders $0.10 $0.07 $0.05 $0.03

You should be aware that there is an inverse relationship between our stock
price and the number of shares to be issued under the Debenture Agreement and
the Investment Agreement to Dutchess. That is, as our stock price declines, we
would be required to issue a greater number of shares under the Debenture
Agreement for a conversion and under the Investment Agreement for a given
advance. This inverse relationship is demonstrated by the table below, which
shows the number of shares to be issued under the Debenture Agreement at a price
of $0.09 per share and the Investment Agreement at a price of $0.13 per share,
and 25%, 50% and 75% discounts to those prices.

% discount 0% 25% 50% 75%
Offering price(1) $0.13 $0.10 $0.07 $0.03
Conversion price(2) $0.09 $0.07 $0.05 $0.02
No of shares(3) 10,769,231 14,358,974 21,538,462 43,076,923
No of shares(4) 2,777,778 3,703,704 5,555,556 11,111,111
Total outstanding(5) 40,080,697 44,596,366 53,627,705 80,721,722
% outstanding(6) 34% 41% 51% 67%

(1) Represents sales price under Investment Agreement.

(2) Represents conversion price under Debenture Agreement.

(3) Represents the number of shares of common stock to be issued at the prices
set forth in the table to generate $1.4 million in gross proceeds under the
Investment Agreement.

(4) Represents the number of shares of common stock to be issued at the prices
set forth in the table upon conversion of $250,000 in convertible debentures.

(5) Represents the total number of shares of common stock outstanding after the
issuance of the shares from (3) and (4) above, assuming no issuance of any other
shares of common stock.

(6) Represents the shares of common stock to be issued as a percentage of the
total number shares of common stock outstanding (assuming no exercise or
conversion of any options, warrants or other convertible securities).

SELLING SECURITY HOLDERS

Based upon information available to us as of November 18, 2004, the following
table sets forth the names of the selling stockholders, the number of shares
owned, the number of shares registered by this prospectus and the number and
percent of outstanding shares that the selling stockholders will own after the
sale of the registered shares, assuming all of the shares are sold. The
information provided in the table and discussions below has been obtained from
the selling stockholders. The selling stockholders may have sold, transferred or
otherwise disposed of, or may sell, transfer or otherwise dispose of, at any
time or from time to time since the date on which they provided the information
regarding the shares beneficially owned, all or a portion of the shares of
common stock beneficially owned in transactions exempt from the registration
requirements of the Securities Act of 1933. As used in this prospectus, "selling
stockholder" includes donees, pledgees, transferees or other
successors-in-interest selling shares received from the named selling
stockholders as a gift, pledge, distribution or other non-sale related transfer.
Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated
by the Commission under the Securities Exchange Act of 1934. Unless otherwise
noted, each person or group identified possesses sole voting and investment
power with respect to the shares, subject to community property laws where
applicable.

Percentage
Owned
Ownership Before Offering Shares Being Offered Shares after the Offering (1) After the
Offering(2)
---------------------------- ----------------------- ----------------------------- --------------
Dutchess Private Equities
Fund II, LP (3) 0 48,250,000 0 0%
312 Stuart St., Third Floor
Boston, MA 02116

U.S. Euro Securities 2,100,000 2,000,000 100,000 *
330 Washington Blvd,, Ste 706
Marina del Rey, CA 90292 (5)

Christopher Vorberg 1,420,000 1,100,000(4) 320,082 1%
7671 Abercrombie Drive,
Richmond, British Columbia, Canada

Rod Saville 600,000 600,000(4) 0 0%
7987 Wentworth Drive SW,
Calgary, Alberta, Canada

Douglas Hunter 544,000 500,000(4) 44,000 *
1420 Joliet, Ave., SW,
Calgary, Alberta, Canada

Fraser Hindson 179,000 124,000(4) 55,000 *
5099 Topaz Place,
Richmond, British Columbia, Canada

First Associates 0 290,500(4) 0 0
Suite 500, Bentall Five,
550 Burrard St.
Vancouver, BC V6C 2B5 (6)

* Less than 1%
(1)The numbers assume that the selling stockholder have sold all of the
shares offered hereby prior to completion of this offering.
(2)Based on 30,622,518 shares outstanding as of November 18, 2004.
(3)Michael Novielli and Douglas Leighton are the Managing Members of
Dutchess Capital Management, LLC, which is the General Partner of
Dutchess Private Equities Fund II, LP.
(4)Shares that may be acquired pursuant to our Special Warrant offering. Our
Special Warrant offering resulted in the issuance of 1,162,000 Special
Warrants to accredited investors, and an option to First Associates
Allowing them to purchase an additional 12.5 percent, or 145,250, of the
Total number of Special Warrants sold. Each Special Warrant is convertible
into one share of our common stock and one common stock purchase warrant
to purchase a share of our common stock for $0.30 per share. The number
of shares reflects the underlying shares for both the Special Warrant and
the purchase warrant.
(5)The principals of U.S. Euro Securities are Michael R. Fugler, Chairman, and
Ray Dowd, President.
(6)The principals of First Associates are William Packham, Chairman and Chief
Executive Officer, and Stuart R. Raftus, President and Chief Operating
Officer.

PLAN OF DISTRIBUTION

The selling stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale. The selling stockholders
may sell the shares from time to time:

- in transactions on the Over-the-Counter Bulletin Board or on any national
securities exchange or U.S. inter-dealer system of a registered national
securities association on which our common stock may be listed or quoted at the
time of sale; or

- in private transactions and transactions otherwise than on these exchanges or
systems or in the over-the-counter market;

- at prices related to prevailing market prices, or

- in negotiated transactions, or

- in a combination of these methods of sale; or

- any other method permitted by law.

The selling stockholders may be deemed underwriters. The selling stockholders
may effect these transactions by offering and selling the shares directly to or
through securities broker-dealers, and these broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders and/or the purchasers of the shares for whom these
broker-dealers may act as agent or to whom the selling stockholders may sell as
principal, or both, which compensation as to a particular broker-dealer might be
in excess of customary commissions.

Dutchess Private Equities Fund, II, First Associates and U.S. Euro Securities
and any broker-dealers who act in connection with the sale of our shares will be
deemed to be "underwriters" within the meaning of the Securities Act, and any
discounts, concessions or commissions received by them and profit on any resale
of the shares as principal will be deemed to be underwriting discounts,
concessions and commissions under the Securities Act.

On or prior to the effectiveness of the registration statement to which this
prospectus is a part, we will advise the selling stockholders that they and any
securities broker-dealers or others who may be deemed to be statutory
underwriters will be governed by the prospectus delivery requirements under the
Securities Act. Under applicable rules and regulations under the Securities
Exchange Act, any person engaged in a distribution of any of the shares may not
simultaneously engage in market activities with respect to the common stock for
the applicable period under Regulation M prior to the commencement of this
distribution. In addition and without limiting the foregoing, the selling
security owners will be governed by the applicable provisions of the Securities
and Exchange Act, and the rules and regulations thereunder, including without
limitation Rules 10b-5 and Regulation M, which provisions may limit the timing
of purchases and sales of any of the shares by the selling stockholders. All of
the foregoing may affect the marketability of our securities.

On or prior to the effectiveness of the registration statement to which this
prospectus is a part, we will advise the selling stockholders that the
anti-manipulation rules under the Securities Exchange Act may apply to sales of
shares in the market and to the activities of the selling security owners and
any of their affiliates. We have informed the selling stockholders that they may
not:

- engage in any stabilization activity in connection with any of the shares;

- bid for or purchase any of the shares or any rights to acquire the shares,

- attempt to induce any person to purchase any of the shares or rights to
acquire the shares other than as permitted under the Securities Exchange Act; or

- effect any sale or distribution of the shares until after the prospectus shall
have been appropriately amended or supplemented, if required, to describe the
terms of the sale or distribution.

We have informed the selling stockholders that they must affect all sales of
shares in broker's transactions, through broker-dealers acting as agents, in
transactions directly with market makers, or in privately negotiated
transactions where no broker or other third party, other than the purchaser, is
involved.

The selling stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act. Any commissions paid or
any discounts or concessions allowed to any broker-dealers, and any profits
received on the resale of shares, may be deemed to be underwriting discounts and
commissions under the Securities Act if the broker-dealers purchase shares as
principal.

In the absence of the registration statement to which this prospectus is a part,
certain of the selling stockholders would be able to sell their shares only
pursuant to the limitations of Rule 144 promulgated under the Securities Act.

We engaged U.S. Euro Securities as our placement agent with respect to the
securities to be issued under the Equity Line of Credit. To our knowledge U.S.
Euro Securities has no affiliation or business relationship with Dutchess
Private Equities Fund II. U.S. Euro Securities is our exclusive placement agent
in connection with the Investment Agreement. We agreed to pay U.S. Euro
Securities 5% of the Put Amount on each draw. The Placement Agent agreement
terminates when our Investment Agreement with Dutchess Private Equities Fund II
terminates pursuant to the terms of that Investment Agreement.

We engaged First Associates as the underwriter with respect to the Special
Warrants. To our knowledge, First Associates has no affiliation with Dutchess
Private Equities Fund, II. First Associates received a cash commission of 8%, or
$18,592, of the gross proceeds from the sale of the Special Warrants and 12.5%
of the amount of Special Warrants sold for a total number of Special Warrants
for First Associates of 145,250.

LEGAL PROCEEDINGS

In April 2004, the Company, along with current officers, board members, and
several of the Company's former directors, were sued in the Colorado District
Court by a former director (Larry Brady) and former member of management (Mark
Brady, Larry's son) for, among other things, breach of contract for unlawful
termination and failure to provide stock allegedly promised during their service
as Company director and Chief Financial Officer, respectively, for part of 2001
and part of 2002. The Company denied the allegations. Further, the Company
counter-sued the Bradys for non-performance and breach of fiduciary duties.
Pursuant to a court order, dated June 23, 2005, the judge terminated the Bradys'
lawsuit, dismissing it, outright. In July of 2005, in an effort to bar the
Bradys from raising these issues in the future, the Company engaged in a mutual
release of all claims and issued a total of 250,000 shares of unregistered
common stock and $10,000 to Lawrence Brady, Mark Brady, and their counsel. The
Company recognized $32,500 in expenses for the quarter ended June 30, 2005 in
relation to this settlement.

DIRECTORS, EXECUTIVE OFFICERS, SIGNFICANT EMPLOYEES AND CONTROL PERSONS

The following persons are executive officers and directors of the Company:

H. Douglas Saathoff, 43 - Chief Executive Officer, Chief Financial Officer

H. Douglas "Doug" Saathoff, CPA, joined the Company as its full-time Chief
Financial Officer on January 1, 2003 after serving in that capacity on a
part-time consulting basis beginning in October 2002. On March 26, 2003, he was
promoted to the position of Chief Executive Officer. Prior to joining the
Company, he served as Chief Financial Officer for ATSI Communications, Inc.
(AMEX: AI), from June 1994 through July 2002 and as a Board Member of ATSI's
publicly traded subsidiary, GlobalSCAPE, Inc. (GSCP.OB) from April 1997 through
June 2002. During his tenure at ATSI, he was directly responsible for
establishing and monitoring all accounting, financial, internal reporting and
external reporting functions, and had primary responsibility for fundraising
efforts. ATSI raised over $60 million in debt and equity financing from both
individuals and institutions during Doug's tenure, and moved from the Canadian
OTC market to the U.S. OTC market and eventually to a listing on the American
Stock Exchange in February 2000. ATSI grew from San Antonio-based start-up with
11 employees to an international operation with in excess of 500 employees and
operations in the U.S., Mexico, Costa Rica, Guatemala and El Salvador with
annual revenues in excess of $60 million. He was instrumental in the acquisition
of subsidiaries and customer bases, as well as the divestiture of GlobalSCAPE in
June 2002. Prior to joining ATSI, Doug served as the Accounting Manager,
Controller and Financial Reporting Manager for U.S. Long Distance Corp. from
1990 to 1993. While at USLD he was responsible for supervising all daily
accounting functions, developing internal and external financial reporting of
budgeted and actual information, and for preparing financial statements for
shareholders, lending institutions and the Securities and Exchange Commission.
Doug also served as Senior Staff Accountant for Arthur Andersen & Co. where he
planned, supervised and implemented audits for clients in a variety of
industries, including telecommunications, oil & gas and financial services. Doug
graduated from Texas A&M University with a Bachelor of Business Administration
degree in Accounting.

Myron Anduri, 49 - President

Mr. Anduri joined the Company in January 2000 and was promoted to President in
December 2003 from his previous position as Vice President of Sales. From 1999
to 2000 he was Vice President-New Business Development for Kyocera Solar Inc. of
Scottsdale, Arizona. While with Kyocera, he worked to develop new market areas
for the company's solar power products. From 1997 to 1999 he served as Vice
President- Telecommunications Division, a $21 million international unit, where
he managed all sales and engineering efforts. From 1993-1997 Mr. Anduri was
Senior Vice President-Marketing and Sales for Photocomm Inc. a Nasdaq-traded
company based in Scottsdale Arizona, which was ultimately acquired by Kyocera in
1997. He also served as Vice President-Industrial Division of Photocomm from
1989-1993 and was the Rocky Mountain Regional Manager from 1987-89. Mr. Anduri
holds a BA in Economics from Colorado State University.

Max Polinsky, 47 - Chairman of the Board

Mr. Polinsky was elected a member of the Board in April 2002 and is a member of
our audit committee. He is a director and principal of Venbanc, Inc., an
investment and merchant bank located in Winnipeg, Manitoba Canada that he
founded with a partner in 1994. Venbanc specializes in the structuring and
financing of start-up companies and provides follow-up financial and management
advisory assistance. It has successfully funded and taken public several
companies in Canada and the United States in the past ten years. Prior to this
Mr. Polinsky was the general manager of City Machinery Ltd., a nationwide power
transmission parts distributor with offices across Canada. He began his career
as a stockbroker at Canarim Investment Corp. (now Canaccord Capital) in 1982.
Mr. Polinsky graduated with honors from the University of Manitoba with a degree
in Business Administration, Finance Major.

Patrick A. Gorman, 40 - Board Member

Mr. Gorman was elected a member of the Board in April 2002, and is a member of
the compensation committee. He is the managing director of Gorman and
Associates, Inc., a strategic consulting firm for corporate and government
affairs. Since its inception, the company has been dedicated to being the
preeminent business development firm for companies seeking to do business with
the Fortune 500 as well as the advisory firm of choice in understanding the
federal government in Washington, D.C. Mr. Gorman's focus at Gorman and
Associates, Inc. includes law and the legislative process, communications,
government relations, and operations. Over the last 10 years, he has advised
corporations, NGOs, non-profits, and individuals on issues pertaining to
criminal law, the environment, telecommunications, international trade, fund
raising, community development, media relations, and alternative dispute
resolution. Mr. Gorman is a member of the Advisory Board of New Media
Strategies, Inc., an Internet service provider focused on public relations,
communications, and viral marketing. Mr. Gorman is also a Board member of the
Echo Hill Campership Fund, a local non-profit whose mission is to send the
neediest, very low-income, inner-city youths to camp on the Chesapeake Bay. Mr.
Gorman is admitted to practice law in Maryland and the District of Columbia and
has successfully appeared at the administrative, district, circuit, and
appellate court levels.

On November 26, 2003, each member of the Board of Directors was elected for a
one-year term or until their successor shall have been elected and qualified.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

BENEFICIAL OWNERS OF MORE THAN 5% OF NIGHTHAWK SYSTEMS, INC. COMMON STOCK

NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS. . . . . . . . . .. . OWNER BENEFICIAL OWNERSHIP CLASS

Common stock. . . . . . . . . Steven Jacobson 3,705,317 (a)(b) 9.6%
6600 E Hampden Ave
3rd Floor
Denver, CO 80224

Common stock. . . . . . . . . . Herbert I. Jacobson 2,636,800 (c) 7.1%
1011 S. Valentia St., #87
Denver, CO 80247

Common stock. . . . . . . . . . Myron Anduri 3,124,815 (d) 8.2%
P.O. Box 1051
Fairplay, CO 80440

Common stock. . . . . . . . . . Tomas Revesz 3,156,884 (e) 8.3%
P.O. Box 2498
McAllen, TX 78502

NOTES:

(a) Includes 150,000 shares under options which are vested or vest within 60
days, and 1,875,317 shares held under in an irrevocable voting agreement with
Myron Anduri which was executed on September 8, 2003 and which will survive for
a period of five years from that date. See Note (d) below.

(b) Includes 550,000 shares held in a trust that expires on 6/11/06 for
Aaron Guth and 550,000 shares held in a trust that expires on 3/31/09 for Adam
Guth. Steve Jacobson acts as trustee for both trusts, and has all rights
afforded any shareholder, including voting rights, until the trusts expire.

(d) Includes 431,416 shares and 166,666 under warrants and options,
respectively, which are exercisable within 60 days. Also includes 1,875,317
shares held under an irrevocable voting agreement with Steve Jacobson which was
executed on September 8, 2003 and which will survive for a period of five years
from that date. Pursuant to this agreement, Mr. Anduri has the right to vote
the proxy of said shares on all matters submitted to a vote of the shareholders
with the single exception of votes on any proposal to change fifty one percent
(51%) or more of the ownership of the Company. Mr. Anduri receives no economic
benefits from the shares subject to this Voting Agreement.

(e) Includes 2,010,050 shares under warrants, exercisable at any time up to
March 31, 2005, and 750,000 shares that are convertible at any time under a
promissory note. The warrants expired unexercised on April 1, 2005.

BENEFICIAL OWNERS OF MORE THAN 5% OF NIGHTHAWK SYSTEMS, INC. COMMON STOCK

NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS. . . . . . . . . .. . OWNER BENEFICIAL OWNERSHIP CLASS

Common stock. . . . . . . . . Max Polinsky 925,000 (a) 2.6%
138 Portage Ave. East, Ste. 406
Winnipeg, Manitoba R2CAO1

Common stock. . . . . . . . . . Patrick Gorman 675,000 (b) 1.9%
1666 K Street NW, Ste 500
Washington, D.C. 20006

Common stock. . . . . . . . . . H. Douglass Saathoff 781,658 (c) 2.2%
25106 Callaway
San Antonio, TX 78258

Common stock. . . . . . . . . . Myron Anduri 3,124,815 (d) 8.2%
P.O. Box 1051
Fairplay, CO 80440

Common stock Directors and officers as a group 5,506,473 13.7%

NOTES:

(a) Includes 200,000 shares that are owned by Venbanc, Inc., of which Mr.
Polinsky is a partner, and 575,000 shares under options exercisable within 60
days.

(b) Includes 575,000 shares under options exercisable within 60 days.

(a) Includes 333,334 shares under options exercisable within 60 days.

NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES EQUITY COMPENSATION
TO BE ISSUED UPON WEIGHTED AVERAGE PLANS (EXCLUDING
EXERCISE OF EXERCISE PRICE OF SECURITIES REFLECTED IN
PLAN CATEGORY. . . . . . . . . . . OUTSTANDING OPTIONS OUTSTANDING OPTIONS COLUMN (A)

(a) (b) (c)

Nighthawk Systems, Inc. 2003 Stock
Option Plan approved by security
Holders. . . . . . . . . . . . . . 3,035,000 $0.17 1,335,000

DESCRIPTION OF COMMON STOCK

Our Certificate of Incorporation authorizes us to issue 50,000,000 shares of
common stock, par value $.001 per share. The number of shares of common stock
issued and outstanding on November 18, 2004 was 30,622,518 shares. We do not
have enough authorized shares to issue all of the shares on this registration
statement. We intend to hold a special meeting for the purpose of increasing our
authorized shares.

VOTING RIGHTS. The holders of shares of common stock are entitled to one vote,
either in person or by proxy, per share on each matter submitted to a vote of
stockholders. At each election of Directors, every stockholder entitled to vote
in such election shall have the right to vote in person or by proxy the number
of shares owned by him or it for as many persons as there are directors to be
elected and for whose election he or it has the right to vote, but the
shareholder shall have no right to accumulate his or its votes with regard to
such election. Holders of Common Stock have no preemptive or other rights to
subscribe for shares.

DIVIDEND POLICY. All shares of common stock are entitled to receive when, as and
if declared by our Board of Directors, out of the funds legally available
thereof, the dividends payable in cash, common stock, or otherwise.

INTEREST OF NAMED EXPERTS AND COUNSEL

No expert or counsel within the meaning of those terms under Item 509 of
Regulation S-B will receive a direct or indirect interest in our company or was
a promoter, underwriter, voting trustee, director, officer, or employee. No
expert has any contingent based agreement with us or any other interest in or
connection to us.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The consolidated balance sheet as of December 31, 2004 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the years in the two-year period ended December 31, 2004 included in
this Prospectus, have been audited by GHP Horwath, P.C., independent registered
public accounting firm, as stated in their report appearing herein.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article X of our Amended and Restated Articles of Incorporation and Bylaws state
every person who was or is a party or is threatened to be made a party to or is
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or a person of
whom he is the legal representative is or was a director or officer of the
corporation or is or was serving at the request of the corporation or for its
benefit as a director or officer of another corporation, or as its
representative in a partnership, joint venture, trust or other enterprise, shall
be indemnified and held harmless to the fullest extent legally permissible under
the General Corporation Law of the State of Nevada from time to time against all
expenses, liability and loss (including attorneys' fees, judgments, fines and
amounts paid or to be paid in settlement) reasonably incurred or suffered by him
in connection therewith. The expenses of officers and directors incurred in
defending a civil or criminal action, suit or proceeding must be paid by the
corporation as they are incurred and in advance of the final disposition of the
action, suit or proceeding upon receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he is not entitled to be indemnified by the
corporation. Such right of indemnification shall be a contract right which may
be enforced in any manner desired by such person. Such right of indemnification
shall not be exclusive of any other right which such directors, officers or
representatives may have or hereafter acquire and, without limiting the
generality of such statement, they shall be entitled to their respective rights
of indemnification under any bylaw, agreement, vote of stockholders, provision
of law or otherwise, as well as their rights under this Article.

The Board of Directors may cause the corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director or officer of another corporation, or as its representative in a
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred in any such capacity or arising out of
such status, whether or not the corporation would have the power to indemnify
such person.

Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons in accordance
with the provisions contained in our Certificate of Incorporation and By-laws,
Nevada law or otherwise, we have been advised that, in the opinion of the
Securities and Exchange Commission, this indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. If a
claim for indemnification against such liabilities (other than the payment by us
of expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person, we will, unless in the opinion of our
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and we will follow the
court's determination.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and
uncertainties. We generally use words such as "believe," "may," "could," "will,"
"intend," "expect," "anticipate," "plan," and similar expressions to identify
forward-looking statements, including statements regarding our expansion plans.
You should not place undue reliance on these forward-looking statements. Our
actual results could differ materially from those anticipated in the
forward-looking statements for many reasons, including the risks described in
our "Risk Factor" section and elsewhere in this report. Although we believe the
expectations reflected in the forward-looking statements are reasonable, they
relate only to events as of the date on which the statements are made, and our
future results, levels of activity, performance or achievements may not meet
these expectations. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of the forward-looking
statements. We do not intend to update any of the forward-looking statements
after the date of this document to conform these statements to actual results or
to changes in our expectations, except as required by law.

DESCRIPTION OF BUSINESS
General

Nighthawk Systems, Inc. ("Nighthawk" or "the Company") designs and manufactures
intelligent remote power control products that are easy to use, inexpensive and
can remotely control virtually any device from any location. Our proprietary,
wireless products are ready to use upon purchase, so they are easily installed
by anyone, regardless of technical ability, and are also easily integrated into
third-party products, systems and processes. They allow for intelligent control
by interpreting instructions sent via paging and satellite media, and execution
of the instructions by 'switching' the electrical current that powers the
device, system or process. Our intelligent products can be activated
individually, in pre-defined groups, or en masse, and for specified time periods
with a simple click of a mouse or by dialing a telephone number.

Our products have been uniquely designed and programmed to be simple and ready
to use upon purchase by anyone, almost anywhere, at affordable prices. As such,
it is the Company's goal to have its products become commonplace, accepted and
used by businesses and consumers alike in their daily routines.

We save consumers and businesses time, effort and expense by eliminating the
need for a person to be present when and where an action needs to be taken. By
utilizing existing wireless technology, we give our users the flexibility to
move their application from place to place, without re-engineering their
network. Currently, most commercial control applications utilize telephone or
Internet connections, which tether the system to a single location and have
associated installation and monthly charges. Our products make companies more
profitable by eliminating installation costs and monthly charges for telephone
or Internet connections, and allow control of unmanned or remote locations that
operate on traditional electrical power, solar or battery generated power.

Effective February 1, 2002, the Company acquired 100% of the issued and
outstanding shares of Peregrine Control Technologies, Inc. ("PCT") in exchange
for 14,731,200 post reverse split shares of the Company's common stock. In
conjunction with the acquisition and the change in focus of the Company's
business, the Company changed its name to Peregrine, Inc. on January 10, 2002
and later to Nighthawk Systems, Inc. on April 29, 2002. Prior to the
acquisition of PCT, the Company had conducted a reverse split of its shares on a
1:100 basis, and had 4,600,256 shares outstanding. The acquisition was recorded
as a reverse acquisition, with PCT being the accounting survivor.

PCT was originally incorporated as a Colorado company in 1992, and operated as a
family-owned business specializing in paging repair. Through knowledge gained
in the operation of the business, the Company began developing a specialized
circuit board that could receive paging signals and switch electrical power. In
its simplest form, the technology gave the user the ability to turn devices "on"
or "off" from or to remote sites. Through limited marketing, the Company was
able to solve specific control problems for both large and small companies
through customization of the original circuit board.

As of the date of this report, the Company has eight full time employees.

MISSION STATEMENT

To become the premier provider of intelligent, wireless remote power control
products and services that allow businesses and consumers to save time and money
through more efficient management of resources.

THE MARKETPLACE

The controls industry is characterized by companies that sell remote asset
management and tracking systems and related products. It is the Company's
belief that there is almost no limit to the size of the remote control market;
the application of remote control is limited only by one's imagination.
Companies both large and small are seeking ways to save money and lower the risk
of liability by replacing processes that require human intervention with
processes that can be controlled remotely without on-site human intervention.
Today, the remote control of physical assets and processes is performed
primarily through the use of telephone and Internet based systems. However,
these connections are expensive, requiring high monthly fees, and more
importantly, they restrict the remote control to the availability of the
physical connection between the person operating the remote control and the
asset to be controlled. In contrast, Nighthawk's products are wireless and can
therefore be operated from any location, without our device being connected to a
telephone line or Internet connection. This means that the asset does not have
to be tethered to a fixed location in order to be accessed. Moreover,
Nighthawk's products are designed to work with a variety of wireless media
including paging and satellite-based systems. Almost any device that runs off of
an electrical current, whether battery, solar or line generated, can be
controlled by a Nighthawk device. The Company has identified primary markets
(Electric Utility, IT Professional, Emergency Management and Traffic Control),
as well as secondary markets (Irrigation, Outdoor Advertising, Oil/Gas and
Security) for its products.

TECHNOLOGY AND PRODUCTS

Nighthawk products have been in service for over six years, primarily to fit
custom applications. Customers using Nighthawk products today include IBM, the
Naval Air Warfare Center - Weapons Division, Mercury Online Solutions, and a
number of electric utilities around the country. The Company has three
distinguishing features that are not shared by its competitors in the market:
(i) its proprietary firmware and software (which together provide the
intelligence for our solutions); (ii) the design of its products (which provides
the ease with which they are installed and operated), and; (iii) the
wireless-based medium typically used to operate its products (which allows for
low cost access, security and flexibility). The Company's products are shipped
ready for use and are pre-programmed before shipment to the customer.

Nighthawk's products and suggested applications:

- NH1 & NH100: rebooting or on/off applications to a single device.
- NH8: rebooting or on/off applications for up to eight electrical devices
from a single unit.
- CEO700: whole house disconnect/reconnect for the Electric Utility market.
- PT1000: designed for OEM integration and control of up to eight devices.
- PT1-LC: designed for load control programs in the Electric Utility
market.
- PT FAS: designed to aid in firehouse automation, the PT FAS will
simultaneously print instructions, activate alarms, turn on lights, turn
off stoves, open baydoors and activate outdoor flashing lights. The PT FAS
is a low cost way for fire departments to automate critical tasks.
- Hydro 1: remote irrigation control.
- AL100: remote public alert systems.
- ST1500: utilizing the Orbcomm satellite system, the ST1500 allows for
rebooting and on/off applications for up to three devices anywhere in the
world.

All of Nighthawk's products can be and have been modified to fit custom
applications.

Through innovative engineering, Nighthawk's products typically utilize a common
paging signal found virtually worldwide. Paging is often used because it is
very secure, inexpensive, and easy to use. Customers can choose to source their
own paging service or Nighthawk will arrange for the service directly. The
Company also offers Windows-based software packages that enable customers to
activate the remote control units from a PC. Paging, when combined with
Nighthawk's proprietary firmware and software, allows for a "group call" feature
whereby a user can access multiple sites at the same time using a single paging
number. This exponentially increases the functionality and ease of use of the
products. It is important to note that the Company's products can be adapted to
function with any wireless, or wireline-based, communications medium.

In September 2003, the Company signed an agreement to become a value-added
reseller for Orbcomm, a low-earth orbit ("LEO") satellite system. This
relationship expands Nighthawk's coverage beyond the reach of paging and
cellular systems and allows the Company to offer global solutions for companies
that have global needs. Additionally, satellite technology enables Nighthawk's
products to be used in conjunction with monitoring equipment due to the two-way
communication capability. Unlike paging, which allows for one-way
communication, satellite communications allow the customer to get confirmation
from the device that the control has been effectuated or that the flow, for
example, of liquids being monitored has been shut off or turned on, as the case
may be.

The Company completes the assembly of its products at its Denver, Colorado
facility. The Company sub-contracts for assembly of various components, and
utilizes several vendors for parts that do not require assembly. Parts and
sub-assembly services are widely available. During the final assembly process,
individual units are programmed depending on their destination or customer
requirements, tested, and then shipped to the customer for installation.

In July 2003, the Company sold back the assets and liabilities it had acquired
from Vacation Communication, Inc. in September 2001 to the original owners of
Vacation Communication, Inc. The assets disposed of in the sale consisted
primarily of a retail paging customer base. The Company now purchases wholesale
paging services from paging carriers, including Vacation Communication, Inc.,
for regional, nationwide and international coverage. The Company utilizes these
paging carriers to offer paging services to customers that buy Nighthawk
products, but do not have their own private paging networks. Several customers
own their own private paging networks and, hence, do not require Nighthawk to
arrange for their paging services.

PATENTS PENDING

The Company has two patent applications pending at the U.S. Patent Office: one
is titled "Remote Disconnect for Utility Meters" and is for whole house
disconnect systems, and the second is titled "Paging Remote Disconnect Systems"
and is for the remote wireless control for turning on and off electrical and
telephonic lines.

Under the first patent application, the user dials a pager number that is
pre-programmed into the unit. The paging service then transmits a signal to a
radio frequency ("RF") receiver in the module. The signal is then decoded and
sent to a processor. The processor then causes a relay to open or close in
accordance with the decoded signal in order to connect or disconnect the
electrical power.

Under the second application, a user simply plugs the power cord or
telecommunication line of their device, such as a computer or appliance, into
the outlet of the module. The user is then able to dial a pager number that is
pre-programmed. The paging service then transmits a signal to an RF receiver in
the module. The signal is then decoded and sent to a processor. The processor
then causes a relay to open or close in accordance with the decoded signal in
order to activate the power supply or to turn the power off to the electronic
device or to connect or disconnect the telecommunications line.

COMPETITION

We have three distinguishing features that are not shared by our competitors in
the market: (i) our proprietary firmware and software, which together provide
intelligent solutions; (ii) the design of our products, which provides the ease
with which they are installed and operated; and (iii) the wireless-based medium
typically used to operate our products, which allows for low cost access,
security and flexibility.

Utility competition. Two of our competitors, Comverge, Inc. and Canon
Technologies, Inc. evolved from software companies, and advertise that they
provide complete, end-to-end solutions for utility load management. Their
services are relatively expensive, and must be engineered into the utility's
network. As an alternative, we offer equipment that is off-the-shelf and ready
to use upon purchase, is easily installed and much less expensive. It is our
belief that we offer a much more affordable solution that allows the utility to
utilize information which already exists within its own network. Paging offers
inexpensive and reliable access to the units, and also allows for a group call
feature that enhances the ability to implement an effective load control
program. As evidence of this, the Alabama Municipal Electric Authority ordered
5,000 Nighthawk load control circuit boards as part of a retro-fit of technology
originally installed by Fisher Pierce. In addition, we repaired load control
units during 2004 that were originally manufactured by KeySpan Energy and sold
to PECO Energy. In light of advances made by us, KeySpan Energy no longer makes
load control units, but has recommended to PECO Energy that they contact us for
their load control needs. There is one other competitor that provides
paging-based control boards and represents the closest direct competition to us,
BLP Components, Ltd. This competitor provides components to us, and entered into
the market when we were experiencing financial difficulties. The paging
technology utilized by this competitor limits their coverage to urban areas.
There is another competitor by the name of Telemetric Corporation within the
electric utilities market, but their product is more expensive because it
utilizes cellular technology, and it also does not afford the same coverage area
as paging.

Rebooting competition. Remote rebooting of computers has historically utilized
telephone lines or Internet-based technology to access the product. To our
knowledge, we are the only company that offers paging-based rebooting units. Our
units are competitively priced in comparison to alternative products, and offer
the distinct advantage of being wireless, thus allowing the units to be moved
from place to place without moving lines and incurring installation charges.

Wireless competition. Wireless remote control through the use of radio signals
has historically been performed utilizing private system data radios, cellular
telephones, or satellite-based systems. While our technology can be modified to
utilize any of these wireless media, our core expertise has been in the use of
paging. This medium, combined with our proprietary technology, allows for a high
level of security, the lowest overall cost and greatest control flexibility.
Only a handful of small, undercapitalized companies utilize paging for this
purpose. To our knowledge, we are the only company emphasizing paging technology
that manufactures a product that is ready-to-use upon receipt.

SALES AND DISTRIBUTION

The Company believes that it has the opportunity to meet current demand for
applications of its technology within specific markets, and to create
opportunities in many other markets as well. Despite historically having little
or no marketing resources to target these markets, customers in our targeted
markets have found that the Company's technology successfully meets their needs.
As such, Nighthawk will focus significant direct, and supplier-based, sales
efforts in these industries.

Nighthawk's intelligent products attach to existing customer hardware and act as
a "brain", receiving wireless instructions sent from a remote location, allowing
the hardware to perform as instructed. As mentioned above, Nighthawk's products
are typically set up to receive these instructions via a paging protocol, which
allows for secure, reliable and low cost operation. Nighthawk products
literally serve as the "intelligence" between the wireless service medium and
the hardware that must perform the desired action. As such, we believe
substantial opportunities exist to partner with wireless service providers as
well as hardware manufacturers and dealers, each of which stand to gain from the
use of Nighthawk's products. The Company will also attempt to establish itself
as a supplier of products to paging and other wireless service providers, and
establish dealer networks in a number of markets, including, but not limited to,
computer controls, utilities, irrigation, traffic control, and wide area
notification.

In early 2005, the Company expanded its sales force, hiring two seasoned sales
professionals and has also established relationships with a number of
distributors that service the electric utility industry

PREDECESSOR OPERATIONS

The Company was incorporated as TPI, Inc., under the laws of the State of Utah
on April 26, 1983. In 1985, the Corporation changed its situs from Utah to
Nevada and its name to Connections Marketing Corp. In July 1992, the
shareholders of the Corporation voted to change the name to LSI Communications,
Inc. (LSI).

On June 21, 1999, the Company entered into a Plan of Acquisition with Coaching
Institute, Inc., a Utah corporation, wherein the Company issued 2,500,000
shares of common stock for 85,000 shares, 85% of the outstanding common stock of
Coaching Institute, Inc. The agreement provided for the Company to receive
options to acquire the remaining 15% of the issued and outstanding stock of
Coaching Institute, Inc. in exchange for 2,045,455 shares of the Company's
common stock. In February 1, 2001, the Company exercised its option by issuing
to Coaching Institute, Inc. 2,045,455 shares of its common stock valued at
$2,045. After the acquisition, both companies were surviving with Coaching
Institute, Inc. being a wholly owned subsidiary of LSI Communications, Inc.

The acquisition of Coaching Institute, Inc. was recorded using the purchase
method of a business combination. Operating activities have been included from
Coaching Institute in the consolidated financials since June 21, 1999. Due to
the common ownership of Coaching and LSI, the Company valued the acquisition of
Coaching Institute at its historical cost, which was $34,728.

In November 2001, the Company sold the assets and liabilities of Coaching
Institute, Inc. to a major shareholder. The Company recognized a loss on the
sale of $574,236. At the time of the reverse acquisition of PCT, the Company had
no assets or liabilities, or ongoing operations.

NASD OTC Bulletin Board Quotations

From July 8, 2002 through May 23, 2003, our common stock traded on the Over the
Counter Bulletin Board ("OTCBB") under the symbol "NIHK". From May 27, 2003
until November 25, 2003 our stock was traded on the pink sheets under the same
symbol, after which our stock resumed trading on the OTCBB. For information
concerning these stock quotations during the past two years, see the section
entitled "Market for Common Equity And Related Stockholder Matters." The
quotations presented do not represent actual transactions or broker/dealer
markups, markdowns or commissions. On November 25, 2003, Nighthawk was cleared
to resume trading on the OTCBB.

EMPLOYEES

As of December 31, 2004, we had eight full time employees. We believe our
relations with all of our employees are good.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following information should be read in conjunction with the Company's
audited financial statements and the notes thereto for the fiscal years ended
December 31, 2004 and 2003.

General

The Company's financial results include the accounts of Nighthawk Systems, Inc.
(formerly Peregrine, Inc.) and its subsidiary, Peregrine Control Technologies,
Inc. ("PCT"). Effective February 1, 2002, the two companies were brought
together under common management through an acquisition in which Peregrine, Inc.
acquired all of the outstanding shares of PCT. Because Peregrine, Inc. issued
more shares to acquire PCT than it had outstanding just prior to the
acquisition, the transaction was accounted for as a reverse acquisition of
Peregrine, Inc. by PCT. Peregrine, Inc. subsequently changed its name to
Nighthawk Systems, Inc.

The Company designs and manufactures intelligent remote monitoring and power
control products that are easy to use, inexpensive and can remotely control
virtually any device from any location. Our proprietary, wireless products are
ready to use upon purchase, so they are easily installed by anyone, regardless
of technical ability, and are also easily integrated into third-party products,
systems and processes. They allow for intelligent control by interpreting
instructions sent via paging and satellite media, and executing the instructions
by 'switching' the electrical current that powers the device, system or process.
Our intelligent products can be activated individually, in pre-defined groups,
or en masse, and for specified time periods with a simple click of a mouse or by
dialing a telephone number.

We save consumers and businesses time, effort and expense by eliminating the
need for a person to be present when and where an action needs to be taken. By
utilizing existing wireless technology, we give our users the flexibility to
move their application from place to place, without re-engineering their
network. Currently, most commercial control applications utilize telephone
lines, which tether the system to a single location and have associated
installation and monthly charges. Our products make companies more profitable
by eliminating installation costs and monthly charges for telephone lines, and
allow for remote control of unmanned or remote locations that may operate on
traditional electrical power, or solar or battery generated power.

Active applications for our intelligent products include, but are not limited
to:
- Rebooting unmanned computer stations
- Remote switching of residential power
- Managing power on an electrical grid
- Activation/deactivation of alarm and warning devices
- Displaying or changing a digital or printed message or warning sign
- Turning pumps on or off
- Turning heating or cooling equipment on or off

Companies both large and small are seeking ways to save money and lower the risk
of liability by replacing processes that require human intervention with
processes that can be controlled remotely without on-site human intervention.
Today, the remote control of industrial or commercial assets and processes is
performed mainly through the use of telephone-line based systems. Opportunities
exist for companies that provide intelligent wireless solutions, as telephone
lines are expensive and limited in availability and function. Nighthawk's
products are wireless, and can be designed to work with a variety of wireless
media. The number of applications for wireless remote control is virtually
limitless. The Company has identified primary markets (Utility, IT Professional,
Traffic Control), as well as secondary markets (Irrigation, Outdoor Advertising,
Oil/Gas, Security) for its products.

During 2003, the Company spent a significant amount of time resolving corporate
governance and operational issues. This process culminated in the resignation
of the Company's Chief Executive Officer in March 2003, the resignations of five
board members including one who served as the Company's Chief Operating Officer
during 2002, the disqualification and subsequent resignation of a sixth board
member, and the disposal of the Company's paging operations that were originally
purchased during 2001.

The Company has historically had minimum funds available to it to support its
operations and has been largely dependent on the private equity placements with
accredited investors to fund its negative cash flows. As such, minimum capital
has been available historically to fund and sustain sales and marketing efforts.
In August 2004, the Company signed a financing arrangement with Dutchess Private
Equities, II, L.P. ("Dutchess") which was amended on August 26, 2004 and on
September 24, 2004. Under the terms of the amended arrangement, the Company
received a total of $250,000 under a debenture during the three-month period
ended September 30, 2004. The Company also signed an investment agreement
under which, subsequent to the December 2004 effectiveness of its SB-2
registration statement filed with the Securities and Exchange Commission
("SEC"), Dutchess has agreed to purchase up to $10.0 million in common
stock from the Company, at the Company's discretion, over the next three
years, subject to certain limitations including the Company's then current
trading volume. As is more fully explained in Liquidity and Capital Resources
below, the Company began utilizing the investment agreement in December 2004 in
order to implement a sales and marketing effort designed to generate revenues
during 2005. This effort for 2005 should include the following:

- Hiring sales and marketing personnel. The Company plans to increase its
sales force with experienced salespeople to effectively target existing and
new markets. Those individuals that are specialized in a field will be
assigned to those market applications of our products.

- Product marketing including print media and attendance at trade shows.
This method has proved the most effective for the Company to date, and it
plans to increase its presence in the current space to attract new
customers.

- An improved Internet presence, including an e-commerce website for retail
sales.

- Leveraging existing customer relationships by up-selling new products or
fully integrating systems with the Company's products.

- The establishment of distribution and dealer networks. Through an
effective dealer network, the Company can increase awareness in its
products and utilize a dealer's sales force to actively promote its
products.

- New applications in irrigation control, civil defense and emergency
management. The current product design can be altered with little cost to
the Company to be effectively implemented into a wide array of fields.
Through the commitment of funding, the Company can now research all
possible applications and begin to market directly to new customers.

- The development and launch of a product designed to be used for multiple
purposes by consumers.

In addition to the marketing and sales objectives, the Company has identified
the following strategic goals for 2005:

- Joint ventures with wireless service providers and equipment
manufacturers.

- The identification of complementary products and companies for potential
acquisition.

COMPARISON OF YEARS ENDED DECEMBER 31, 2004 AND 2003

Revenue

The components of revenue, including revenues from discontinued operations, and
their associated percentages of total revenues, for the fiscal years ended
December 31, 2004 and 2003 are as follows:

YEARS ENDED DECEMBER 31,
-------------------------
2004 2003
---- -----

Product Revenues
-----------------------------------
Nighthawk NH1, NH2 & NH8. . . . . . $ 186,492 31% $ 508,352 47%
PT1 LC. . . . . . . . . . . . . . . 64,536 11% 319,615 30%
PT 1000 & PT Boards . . . . . . . . 99,256 16% 128,914 12%
CEO 700 . . . . . . . . . . . . . . 197,508 32% 28,557 3%
Other product . . . . . . . . . . . 11,938 2% 5,945 0%
Freight . . . . . . . . . . . . . . 6,848 1% 20,624 2%
------------------------- ----- ---------- ----
Total product revenues. . . . . . . 566,578 93% 1,012,007 94%
Airtime sales . . . . . . . . . . . 43,602 7% 18,786 2%
------------------------- ----- ---------- ----
Revenues from continuing operations 610,180 100% 1,030,793 96%

Discontinued operations
-----------------------------------
Airtime sales . . . . . . . . . . . - 0% 45,880 4%
------------------------- ----- ---------- ----
Total revenues. . . . . . . . . . . $ 610,180 100% $1,076,673 100%
====================================================

Revenues from continuing operations are made up of product sales and airtime
billed to customers for Nighthawk Systems, Inc. products, while revenues from
discontinued operations consist of airtime revenues generated by the Company's
paging operations, which were disposed of effective July 31, 2003. Revenues
from continuing operations declined $420,613 or 41% between years primarily due
to the completion of two large contracts during 2003. Combined, the two
contracts contributed $749,600 or 74%, of total product revenues for 2003. One
of the contracts was for the Company's Nighthawk NH2 product and produced
revenues of $432,600 in 2003. The second contract was for the Company's PT1 LC
product and produced revenues of approximately $317,000 in 2003. This contract
was approximately 81% complete as of December 31, 2003. Sales of the Company's
CEO-700 product increased $168,951 or 592% between years and offset to some
degree the effects of the large 2003 contracts. During 2004 and 2003, the
Company spent approximately $9,200 and $6,000, respectively, on product
advertising due to limited availability of operating funds.

Cost of goods sold declined $219,730 or 33% between years and increased as a
percentage of product revenues from 64% in 2003 to 72% in 2004. As a result,
the Company's gross margin decreased from 36% in 2003 to 28% in 2004. This
decrease in gross margin is due primarily to the overall decrease in product
volume between years. Lower production volume limits the Company's ability to
cover fixed costs of production. In addition, 47% of sales were generated by
the Company's higher margin rebooting products during 2003 as compared to only
31% in 2004.

Selling, general and administrative ("SG&A) expenses stayed relatively flat,
increasing $21,681, approximately 2%, from 2003 to 2004. The comparative figure
for 2003 SG&A expenses is net of $333,000 related to the reversal of 2002
deferred compensation and the reversal of 2002 consulting expenses in 2003.
Although the Company reduced employee and employee related costs, insurance,
telecommunications and travel costs, the reductions were more than offset by
increased expenditures in 2004 for consulting and public relations related
activities as well as $55,000 for a legal settlement with a former director.

During 2003, the Company canceled the remaining 300,000 shares that were
originally issued to members of its board of directors during 2002, as it
determined that the associated services were not performed. This resulted in a
reversal of $300,000 of deferred compensation that was originally recorded in
2002. During the second quarter of 2003, the Company authorized the
cancellation of 300,000 shares of common stock previously issued during 2002. A
$33,000 reduction in consulting expense was recorded during the second quarter
of 2003 related to this cancellation, as the Company's board of directors
determined that the shares had not been properly authorized for issuance, and
that there was a lack of sufficient evidence that any services had been
performed.

The Company's loss from operations during 2004 was $1,140,117 as compared to a
loss of $584,553 in 2003. The increased net loss was the result of decreased
revenues and decreased gross margin in 2004 as well as the adjustments in 2003
operating expenses related to deferred compensation and consulting expenses.

Net interest expense for 2004 was $236,634 as opposed to $45,875 in 2003, an
increase of $190,759. The increase in interest expense in 2004 is primarily due
to the value of warrants issued to creditors who exchanged approximately
$242,000 in notes and accrued interest for warrants and common stock, and the
recognition of approximately $92,000 in beneficial conversion expenses related
to the debenture agreement between the Company and Dutchess Private Equities,
II, L.P.

Airtime sales were approximately $65,700 in 2003, $45,800 of which is included
in discontinued operations. The majority of the airtime revenues produced during
2003 were produced by retail paging customers rather than by the Company's
equipment customers. The Company sold the customer base, as well as related
assets and obligations originally purchased from Vacation, back to the owners of
Vacation and recognized a gain of $92,443 in 2003. This segment produced a net
loss from operations of $14,472 during 2003 prior to its disposal. The airtime
revenues included in 2004 and 2003 revenues from continuing operations resulted
from airtime related to Nighthawk equipment sales rather than the traditional
paging revenues associated with Vacation.

The net loss for 2004 was $1,376,751 or $0.05 per share as compared to a net
loss of $552,457 or $0.03 per share in 2003. The increased net loss and net loss
per share was the result of decreased revenues and decreased gross margin,
interest expense associated with note conversions and our funding arrangement
with Dutchess in 2004, as well as the adjustments in 2003 operating expenses
related to deferred compensation and consulting expenses.

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004

Revenue

The components of revenue and their associated percentages of total revenues,
for the three months ended June 30, 2005 and 2004 are as follows:

THREE MONTHS ENDED JUNE 30,
---------------------------
2005 2004 CHANGE % CHANGE $
-------------------------------------------------
Revenues:
Rebooting Products:
NH100,NH1, NH2 & NH8 $ 21,002 21% $62,388 39% -66% $ (41,386)
Logic Boards: PT 1000,
PT1 LC & PT Boards 14,144 15% 47,618 30% -70% (33,474)
Utility Products: CEO 700 47,590 48% 41,174 25% 16% 6,416
Airtime sales 13,556 14% 10,207 6% 33% 3,349
Other products 1,282 1% - 0% n/a 1,282
Freight 798 1% - 0% n/a 798
-----------------------------------------------------
Total revenues $ 98,372 100% $ 161,387 100% -39% $ (63,015)

Revenues for the three-month period ended June 30, 2005 were $98,372 as compared
to $161,387 for the corresponding period of the prior year, a decrease of 39%
between periods. During the three months ended June 30, 2004, the Company sold
approximately $50,000 of its NH2 rebooting device to a single customer in
support of that customer's primary contract with AT&T Wireless. As a result of
the AT&T Wireless/Cingular merger, that customers' primary contract was
suspended subsequent to June 30, 2004. Because the Company did not have
customers to replace the lost demand, sales of the Company's rebooting devices
declined in the current quarter when compared to the quarter ended June 30,
2004. In an effort to improve the functionality of the NH2 and reduce its cost
of production, the Company replaced the NH2 with the NH100 in March 2005.
Although revenues from rebooting products shipped during the quarter ended June
30, 2005 were only approximately $21,000, the Company received additional
purchase orders during the quarter for approximately $60,000 of rebooting
devices. As of June 30, 2005, the Company was waiting on customer site
information before those units could be produced and shipped.

The Company hired two salesmen in February 2005. The initial focus of these
salesmen has been on selling the Company's 'plug and play' products for
rebooting and electric utility use. During the three months ended June 30,
2005, the Company shipped three orders for its CEO 700 utility product to one
customer. Revenues from these three orders represented approximately 32% of the
Company's total product revenues for the period. Overall sales of the Company's
utility products increased 16% between the periods presented.

Sales of the Company's logic boards, which must be engineered into systems and
are not considered 'plug and play' products, declined 70% between periods.
Airtime sales, which consist of recurring charges for access to customers'
units, increased 33% between periods due to the additional units sold during the
2005 period. As mentioned earlier, one of the Company's primary customers had
its account suspended by AT&T Wireless/Cingular. As a result, should AT&T
Wireless/Cingular choose not to continue its program with the Company's
customer, airtime revenues could decrease going forward.

Cost of goods sold includes parts and pre-manufactured components used to
assemble our products as well as allocated overhead for production personnel and
facilities costs. Cost of goods sold decreased by $22,958 or 21% to $85,099 for
the three months ended June 30, 2005 from $108,057 for the corresponding period
of the prior year and increased as a percentage of revenues between the periods
from 67% in the second quarter of 2004 to 87% in the second quarter of 2005. The
decrease in gross profit was due to lower sales volume and the decrease in gross
margin was due to poorer utilization of our productive capacity. During the
quarter ended June 30, 2005, allocated overhead for production and facilities
cost amounted to approximately $19,000.

Selling, general and administrative expenses for the three months ended June 30,
2005 increased by $323,175 or 122% to $588,040 from $264,865 for the three-month
period ended June 30, 2004. The Company spent approximately $138,000 in cash on
public relations and promotional activity to increase its exposure to potential
investors during the quarter ended June 30, 2005 as opposed to $0 during the
previous year's quarter. The Company incurred approximately $98,500 in non-cash
expenses in the second quarter of 2005 for consulting and other services. This
represents an increase of approximately $58,000 in non-cash expenses when
compared to the quarter ended June 30, 2004. During the 2005 period, the
Company incurred approximately $64,000 in cash expenses directly related to
sales and marketing efforts, including compensation for the two salesmen hired,
trade shows and travel costs. The Company also recognized $32,500 in expenses
during the quarter ended June 30, 2005 related to the settlement of a lawsuit.

Interest expense increased $319,810 or 829% between the three-month periods
presented. The increase was due primarily to interest expense related to the
Dutchess notes, some of which have no stated interest rate but have a repayment
amount greater than the funded amount. The Company recognizes the difference
between the face amount of the notes and the amounts actually received in cash
as interest expense over the life of the loans. In addition, the value of the
incentive shares issued in conjunction with the notes is recognized as interest
expense over the life of the loans. Penalties on late payment of notes and any
interest incurred during these periods are also recognized as interest expense.
In total, the Company recognized approximately $132,000 in non-cash expenses
related to the amortization of these loan discounts, approximately $84,000 in
non-cash expenses related to incentive shares and approximately $86,000 in
penalties on late payments of notes.

The net loss for the three-month period ended June 30, 2005 was $933,296
compared to $252,333 for the three-month period ended June 30, 2004. The
increase in net loss from continuing operations was due primarily to increased
non-cash expenses for consulting and other services, expenses related to
fundraising efforts, and increased non-cash interest expense from incentive
shares and the amortization of discounts on notes payable.

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004

Revenue

The components of revenue and their associated percentages of total revenues,
for the six months ended June 30, 2005 and 2004 are as follows:

SIX MONTHS ENDED JUNE 30,
-------------------------
2005 2004 CHANGE % CHANGE $
--------------------------------------------------
Revenues:
Rebooting Products: NH100,
NH1, NH2 & NH8 $ 42,606 16% $119,246 45% -64% $ (76,640)
Logic Boards: PT 1000,
PT1 LC & PT Boards 39,997 15% 62,449 23% -36% (22,452)
Utility Products: CEO 700 78,815 29% 51,109 19% 54% 27,706
Hydro 1 76,750 28% - 0% n/a 76,750
Airtime sales 27,789 10% 20,373 8% 36% 7,416
Other product 1,637 1% 9,464 4% -83% (7,827)
Freight 2,000 1% 1,584 1% 26% 416
---------------------------------------------------
Total revenues $ 269,594 100% $ 264,225 100% 2% $ 5,369

Revenues for the six-month period ended June 30, 2005 were $269,594 as compared
to $264,255 for the corresponding period of the prior year, an increase of 2%
between periods. During the six months ended June 30, 2005, one customer, who
purchased the Company's Hydro I product, represented approximately 28% of the
Company's total revenue.

Selling, general and administrative expenses for the six months ended June 30,
2005 increased by $608,755 or 113% to $1,149,700 from $540,945 for the six-month
period ended June 30, 2004. The Company incurred approximately $235,000 in
non-cash expenses in the six-month period ended June 30, 2005 for consulting and
other services. This represents an increase of approximately $161,000 in
non-cash expenses when compared to the same period ended June 30, 2004. Other
SG&A expense increases from the six-month period ended June 30, 2004 to 2005
include: non-manufacturing related employee costs increased approximately
$57,000, the Company spent approximately $49,000 more on sales, marketing and
travel, incurred approximately $33,000 in settling a lawsuit, spent
approximately $51,000 more on legal fees and incurred approximately $263,000 in
expenses related to fundraising activity.

Interest expense increased $432,319 or 764% between the six-month periods
presented. The increase was due primarily to interest expense related to the
Dutchess notes, some of which have no stated interest rate but have a repayment
amount greater than the funded amount. The Company recognizes the difference
between the face amount of the notes and the amounts actually received in cash
as interest expense over the life of the loans. In addition, the value of the
incentive shares issued in conjunction with the notes is recognized as interest
expense over the life of the loans. Penalties on late payment of notes and any
interest incurred during these periods are also recognized as interest expense.
In total, the Company recognized approximately $198,000 in non-cash expenses
related to the amortization of these loan discounts, approximately $134,000 in
non-cash expenses related to incentive shares and approximately $86,000 in
penalties on late payments of notes.

The net loss for the six-month period ended June 30, 2005 was $1,559,576
compared to $519,532 for the six-month period ended June 30, 2004. The increase
in net loss from continuing operations was due primarily to increased non-cash
expenses for consulting and other services, increased fundraising expenditures,
and increased non-cash interest expense.

LIQUIDITY AND CAPITAL RESOURCES

The Company's financial statements for the six months ended June 30, 2005 have
been prepared on a going concern basis, which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business. The Company incurred a net loss of approximately $1.38 million during
the year ended December 31, 2004 and a net loss of approximately $1.56 million
during the six months ended June 30, 2005. The Company had a stockholders'
deficit and working capital deficiency of approximately $1.24 million and $1.04
million, respectively, as of December 31, 2004 and $1.82 million and $1.77
million respectively, as of June 30, 2005.

The Report of Independent Registered Public Accounting Firm on the Company's
financial statements as of and for the year ended December 31, 2004 includes a
"going concern" explanatory paragraph which means that the auditors expressed
substantial doubt about the Company's ability to continue as a going concern.

During the six months ended June 30, 2005, cash used in operating activities was
approximately $940,000. The net loss of approximately $1.56 million for the
six-month period was partially offset by approximately $572,000 in non-cash
expenses and decreases in accounts receivable and prepaids and an increase in
accrued expenses. Uses of cash were increases in inventories as well as a
decline in accounts payable. Cash used in operating activities in the six-month
period ended June 30, 2004 was approximately $413,000. The net loss for the
period of approximately $520,000 was partially offset by approximately $112,000
in non-cash expenses and increase in accounts payable and accrued expenses.
Other uses of cash during the period were increases in accounts receivable and
inventories.

The Company purchased approximately $2,000 in computer equipment in the
six-month period ended June 30, 2005. There were no cash flows from investing
activity for the six-month period ended June 30, 2004.

Net cash provided by financing activities for the six-month period ended June
30, 2005 was approximately $901,000 and resulted primarily from the issuance of
notes payable to Dutchess, the sale of common stock and warrants and the
exercise of puts with Dutchess. The Company issued 2,276,610 shares of common
stock in return for approximately $362,000 in net cash proceeds during the
period. The Company also received $1,113,500 from Dutchess during the six-month
period in exchange for notes. These cash inflows were offset to some degree by
payments on notes payable of approximately $575,000 during the period. Net cash
provided by financing activity for the six-month period ended June 30, 2004 was
approximately $415,000 and resulted primarily from the sale of common stock,
preferred stock, special warrants and notes from related and other parties
offset by payments on notes payable and other related party payables.

Until the Company is able to generate positive cash flows from operations in an
amount sufficient to cover its current liabilities and debt obligations as they
become due, it will remain reliant on borrowing funds or selling equity to meet
those obligations. The Company had historically sold its equity securities
through private placements with various individuals. Raising funds in this
manner typically requires much time and effort to find new accredited investors,
and the terms of such an investment must be negotiated for each investment made.
Cash from these types of investments has historically been generated in amounts
of $50,000 or less, in an unpredictable manner, making it difficult to fund and
implement a broad-based sales and marketing program.

During February 2004, the Company met with several brokerage firms and private
equity groups to investigate the possibilities of raising an amount of cash
sufficient to both fund a comprehensive sales and marketing plan and improve its
working capital position from a deficit to a surplus. As a result of those
meetings, the Company announced in March 2004 that a brokerage firm based in
Vancouver, British Columbia would sponsor an offering of equity securities of
the Company. However, this offering would be performed on a best-efforts basis,
without any guarantee of success. In an effort to fund the Company's operations
in advance of such an offering, the brokerage firm sponsored a private placement
of Special Warrants that are convertible into units consisting of both one share
of common stock of the Company at $0.20 per share and a warrant to purchase one
share of common stock at $0.30 per share. This private placement effort resulted
in net proceeds of $188,775, net of issuance costs of $43,625.

A challenge faced by the Company is the ability to purchase and maintain an
inventory of parts necessary to complete orders as quickly as possible after
they are received. If the Company is able to complete orders more quickly, it
can generate and collect cash from its contracts more quickly. The Company
generates recurring orders from several of its customers. Therefore, the
expeditious completion of orders could lead to the generation of additional
orders from existing customers and improved cash flows for the Company. Also, as
noted earlier, the Company's cost of production will be higher on a per unit
basis if it does not maintain minimum levels of production in its facility.
Delays caused by the purchasing of parts after orders were received during 2004
resulted in higher production costs per unit. Because the Company has some
fixed costs of production, delays or work stoppages due to inventory shortages
causes inefficiency in production. In addition, ordering parts in smaller
quantities does not allow the Company to take advantage of volume discounts
offered by some of its suppliers. These delays and inefficiencies ultimately
result in decreased or slower cash flows and delays in follow-up orders from
customers.

In an effort to assist the Company in completing orders for customers in a more
expeditious manner, in August 2004 the Company's largest creditor loaned the
Company an additional $60,000. Proceeds from this loan were used to purchase
parts required to complete orders held at that time by the Company. The
creditor was repaid from the receipts generated by the orders, plus 10% annual
interest. Although no assurance may be given that it will be able to do so, the
Company anticipates that it will also be able to utilize its investment
agreement with Dutchess to assist it in processing orders more expeditiously.
The Company believes that it will be able to initiate a sales and marketing plan
designed to utilize direct sales efforts, as well as indirect sales efforts
through dealer networks and through improvements to its own web site. The
Company also plans to utilize funds generated through debt and equity
arrangements to expedite the production of the orders it receives in an effort
to improve the Company's ability to generate cash flows from operations on a
recurring basis. Additionally, in order to lessen the Company's dependence on
securing large contracts for recurring cash flows, the Company is in the initial
stages of developing a consumer-based product, which it believes may eventually
produce recurring cash flows from sales.

In August 2004, the Company signed a financing arrangement with Dutchess, which
was amended on August 26, 2004 and on September 24, 2004. Under the terms of the
amended arrangement, the Company received $100,000 under a convertible debenture
on August 11, 2004, $25,000 on August 26, 2004, and $125,000 under the debenture
on September 27, 2004. Interest accrues on the debenture at an annual rate of
8%. The debenture can be converted into common shares anytime prior to its
maturity on August 10, 2007 at the lesser of (i) 73% of the lowest closing bid
price on the date of conversion, or (ii) twelve and a half cents ($0.125). Any
portion of the debenture that remains outstanding at August 10, 2007 will
automatically convert into common shares. The number of shares converted at any
time is limited so as not to exceed 4.99% of the shares of Nighthawk common
stock outstanding. In addition, Dutchess was issued a warrant to purchase up to
250,000 shares of common stock at a price of twelve and a half cents ($0.125)
for a period of up to five years. The Company also signed an investment
agreement under which Dutchess agreed to purchase up to $10.0 million in common
stock from the Company, at the Company's discretion, over the next three years,
subject to certain limitations including the Company's then current trading
volume.

On December 3, 2004 Dutchess loaned the Company an additional $250,000 under a
second note (Second Dutchess Note). The Second Dutchess Note had no stated
interest rate but had a face value of $300,000 and matured April 3, 2005,
resulting in an implied annual rate of 72.8%. The note was intended to be repaid
via puts exercised under the investment agreement, with the Company making
payments of the greater of $75,000 every 30 days or 50% of each put until the
note is paid in full.

On January 18, 2005, Dutchess loaned the Company an additional $225,000. The
note has no stated interest rate but has a face amount of $270,000 and matured
on May 18, 2005. In connection with the note, Dutchess was issued 250,000
shares of common stock as an incentive and the Company also signed a consulting
agreement with a company in which an employee of Dutchess is a member of
management. Under the consulting agreement, the company was issued 500,000
shares of Company common stock.

On April 7, 2005, Dutchess loaned the Company an additional $488,500. The note
has no stated interest rate but has a face amount of $586,200 and matured on
June 7, 2005. A portion of the proceeds of this loan was used to repay the note
dated December 3, 2004 with a face amount of $300,000, which matured on April 3,
2005. In connection with the note, Dutchess was issued 250,000 shares of common
stock as an incentive and the Company signed a consulting agreement with a
company in which an employee of Dutchess is a member of management. Under the
consulting agreement, the company was issued 300,000 shares of Company common
stock.

During the six months ended June 30, 2005, Dutchess loaned the Company a total
of $1,113,500 in the form of notes payable. The notes have no stated interest
rate but have a face amount greater than the funded amount. This difference is
recognized as interest expense over the life of the loan. Under the terms of
the notes, Dutchess is also issued incentive shares, which are recorded as
prepaid interest and expensed over the life of the loan.

During the six months ended June 30, 2005, the Company exercised six (6) puts to
Dutchess totaling 1,276,610 shares for net proceeds of $222,726. Of the total
proceeds, $125,633 was used to repay portions of previously issued notes to
Dutchess and $67,838 went to the Company.

On March 9, 2005, Dutchess exercised 250,000 warrants at $0.125 each, for total
proceeds of $31,250, $15,000 of which was applied to outstanding notes and
accrued interest.

Also during the period from January 1, 2005 through April 12, 2005, Dutchess
elected to convert at total of $75,000 of the 36-month convertible note for
600,000 shares of the Company's common stock.

The Company used the proceeds from the notes, puts and warrants to fund its
operating cash flow deficits and to repay outstanding notes and accrued interest
and penalties to Dutchess.

Although no assurance may be given that it will be able to do so, the Company
expects to be able to continue to access funds under this arrangement to help it
fund near-term and long-term sales and marketing efforts, and to cover cash flow
deficiencies.

In the first six months of 2005, the Company identified sales and marketing
objectives and implemented a sales and marketing plan utilizing the Dutchess
financing agreement designed to stimulate revenue growth. This effort has
continued throughout 2005, and as of August 18, 2005, the Company has
established relationships and business opportunities that it believes will
result in increased sales and revenues in the future. While our customers have
identified needs that are substantial, our efforts have indicated that customers
are more likely to order our products in stages so that their installation and
utilization can be managed efficiently. Historical results have shown that once
customers have adopted the use of our products, they often order multiple times
thereafter in order to meet their overall needs. As such, and in order to avoid
the concentration of risk among only a few customers, the Company's approach for
the foreseeable future will be to obtain customers through test and trial
programs if necessary, in order to grow its overall customer base and increase
the likelihood of future sales to those same customers. Initial customer
contact is typically made through the use of lead generation programs offered by
third parties, attendance at trade shows, mailers to targeted lists, and direct
customer inquiries through our website.

Critical Accounting Policies and Estimates

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

Revenue recognition

Revenue from product sales is recognized when all significant obligations of the
Company have been satisfied. Revenues from equipment sales are recognized either
on the completion of the manufacturing process, or upon shipment of the
equipment to the customer, depending on the Company's contractual obligations.
The Company occasionally contracts to manufacture items, bill for those items
and then hold them for later shipment to customer-specified locations. Revenue
related to airtime billing is recognized when the service is performed. Some
customers pre-pay airtime on a quarterly or annual basis and the pre-paid
portion is recorded as deferred revenue.

Stock-based compensation

We believe that stock-based compensation is a critical accounting policy that
affects our financial condition and results of operations. Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation defines a fair-value based method of accounting for stock-based
employee compensation plans and transactions in which an entity issues its
equity instruments to acquire goods or services from non-employees, and
encourages but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
continue to account for employee stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25") and related
interpretations.

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R "Share-Based Payment", which addresses the accounting for share-based
payment transactions. SFAS 123R eliminates the ability to account for
share-based compensation transactions using APB 25, and instead, generally
requires that such transactions be accounted and recognized in the statement of
operations based on their fair value. SFAS No. 123R will be effective for small
business issuers as of the beginning of the first interim or annual reporting
period that begins after December 15, 2005. SFAS No. 123R offers the Company
alternative methods of adopting this standard. The Company has not yet
determined which alternative method it will use. Depending upon the number and
terms of options that may be granted in future periods, the implementation of
this standard could have a material impact on the Company's financial position
and results of operations.

DESCRIPTION OF PROPERTY

The Company's sales and operations departments are in leased facilities located
at 8200 East Pacific Place, Suite 204, Denver, Colorado. The lease for this
facility expired on March 2002, but the Company has maintained use of the
facilities on a month-to-month basis since that time. The leased property
consists of approximately 2400 square feet, for which the Company pays $1,650
per month. It consists of office space and a manufacturing floor. The
Company's executive offices are located in 679 square feet of leased office
space at 10715 Gulfdale, Suite 200, San Antonio, Texas. The Company leases the
space at a monthly rate of $815.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During the fourth quarter of 2003, the Company canceled the issuance of 300,000
shares of its common stock originally issued to outside directors for services,
as it determined that no associated services had been performed.

During 2003, the Company made payments of $25,504 to Arlen Felsen while he was a
director and employee to reduce amounts owed to him for the purchase of certain
assets and liabilities of Vacation Communications. Effective July 31, 2003, the
Company sold back to Mr. Felsen the assets and liabilities associated with the
original purchase and recognized a gain of $92,443 on this transaction.

During 2003, the Company paid a total of $12,678 to Myron Anduri, the Company's
current President and then Vice President of Sales, for amounts owed for
commissions and salary earned in previous periods. During 2003, Mr. Anduri
loaned the Company $7,964 under short-term notes, of which $4,203 was repaid by
December 31, 2003. As of December 31, 2003 the Company owed Mr. Anduri $38,708
under short-term note arrangements. During the twelve months ended December 31,
2004, Mr. Anduri was paid an additional $2,289 in cash and $22,278 in Company
common stock, 181,416 shares, and 181,416 warrants to purchase common stock for
$0.25 per share, for amounts outstanding under these short-term notes. Based on
calculations using Black-Scholes, the fair value of the warrants issued to Mr.
Anduri was $9,454. This amount is reflected in interest expense and additional
paid-in capital for the period ended December 31, 2004.

At a meeting of the Board of Directors held on March 26, 2003, H. Douglas
Saathoff was named Chief Executive Officer of the Company. During 2003, Mr.
Saathoff loaned the Company $54,100 under short-term notes, of which $45,100 was
repaid by December 31, 2003. The remaining $9,000 was repaid in 2004.

At a meeting of the Board of Directors held on March 26, 2003, the Board
accepted the resignation of Steve Jacobson as chief executive officer, but
remained as an employee of the Company. On July 9, 2003, Steve Jacobson resigned
as a member of the Company's board of directors. On September 8, 2003, the
Company entered into a separation agreement with Steve Jacobson under which,
among other things, he agreed to a) resign as an employee of the Company; b)
return 545,454 shares of stock held by him to the Company in payment of the
$118,629 he owed the Company as of that date; and c) transfer voting rights for
shares owned or held in trust by him to Myron Anduri, an employee of the Company
for five years. Under the agreement, the Company agreed to issue Steve Jacobson
450,000 options to purchase shares of the Company's common stock at $0.22 per
share, with such options vesting over a three-year period at a rate of 150,000
shares per year. As a result of the transaction, the Company recorded an
additional $39,933 in compensation expense to Steve Jacobson for amounts owed by
him to the Company upon his resignation. The Company retired the 545,454 shares
returned to the Company under the agreement.

During 2004, the Company entered into an agreement with Steve Jacobson in which
it allowed him to transfer up to 600,000 shares of his stock, which he was
contractually restricted from selling under his separation agreement until June
2005, to various consultants who had agreed to perform services for the Company.
As of December 31, 2004, 200,000 of these shares had been distributed to a
consultant and the Company recognized $20,000 in consulting expenses related to
this transaction. The remaining 400,000 shares were not distributed, and are
not included in the issued and outstanding shares of the Company as of December
31, 2004. As part of the agreement, the Company agreed to replace Mr.
Jacobson's 600,000 shares with 730,000 shares of stock that would not be
eligible for resale until November 2005. The Company recorded $13,000 in
consulting expense associated with this agreement. In addition, the Company
amended Mr. Jacobson's separation agreement to allow him to sell 50,000 shares
of common stock in each of the months of March, April, May and June 2005.

On December 19, 2003 the Company entered into a settlement and release agreement
with a former director, Herb Jacobson, and his wife. Under terms of the
agreement, Mr. & Mrs. Jacobson and the Company agreed to dismiss any and all
claims against each other in return for, among other things, payment of a total
of $25,000 over a four-month period from the Company to Mr. Jacobson. The
Company paid this amount during 2003 and 2004. In addition, Mr. and Mrs.
Jacobson, along with their son Steven Jacobson, agreed to refrain from selling,
transferring, conveying or otherwise disposing of their remaining share
ownership for a period of eighteen months subsequent to selling an aggregate of
850,000 shares. As a result of the agreement, the Company recorded a gain of
$23,912 due to a reduction in the amount previously recorded by the Company as
owed to Mr. Jacobson.

During the twelve months ended December 31, 2004, the Company also borrowed and
repaid approximately $25,000 from a company in which its Chairman is a partner.

In August 2004, in an effort to improve its working capital position, the
Company issued 558,007 shares of common stock and warrants to purchase 558,007
common shares at $0.20 per share to an individual and a company in exchange for
approximately $88,700 in notes payable plus accrued interest owed them by the
Company. The individual is a business partner of the Company's Chairman and the
company is affiliated with the father of the Company's Chairman. Based on
calculations using Black-Scholes, the fair value of the warrants issued to the
two parties was $29,079. This amount is reflected in interest expense and
additional paid-in capital for the period ended December 31, 2004.

During the twelve months ended December 31, 2004, a business partner of the
Company's Chairman billed the Company $20,000 for consulting services.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

From July 8, 2002 through May 23, 2003, our common stock traded on the Over the
Counter Bulletin Board ("OTCBB") under the symbol "NIHK". From May 27, 2003
until November 25, 2003 our stock was traded on the pink sheets under the same
symbol, after which our stock resumed trading on the OTCBB. The CUSIP number is
65410X-10-4. Knight Securities, L.P., Schwab Capital Markets, L.P. and ACAP
Financial, Inc. are among the most active market makers for the stock. From
February 1, 2002 through July 8, 2002, our common stock traded on the OTCBB
under the symbol "PGRN." Prior to February 1, 2002, the stock traded on the
OTCBB under the symbol "LSIM".

The following is a table of the high and low bid prices of our stock for each of
the four quarters of the fiscal years ended December 31, 2004 and 2003, and the
first quarter of fiscal 2005:

QUARTER ENDED. . . HIGH LOW QUARTER ENDED HIGH LOW
------------------ ---- ---- ------------------ ----- -----

December 31, 2004. 0.23 0.09 December 31, 2003 $0.29 $0.15
September 30, 2004 0.25 0.12 September 30, 2003 0.32 0.15
June 30, 2004. . . 0.38 0.20 June 30, 2003 0.72 0.25
March 31, 2004 . . 0.35 0.18 March 31, 2003 0.73 0.20

These quotations reflect interdealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.

EXECUTIVE COMPENSATION

The following table sets forth the aggregate compensation paid by us for
services rendered during the periods indicated:

SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS PAYOUTS

SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL. . . . . COMPENSATION STOCK OPTIONS/SARS LTIP COMPENSATION
POSITION . . . . . . . . . YEAR SALARY BONUS ($) AWARD ($) (#) PAYOUTS ($)
($)
H. Douglas Saathoff,
Chief Executive
Officer (a) . . . . . . . 2004 $120,000 $- - - - - -

2003 $115,000 $- - - 500,000 - -

Myron Anduri,
President (b) . . . . . . . 2004 $120,000 $- - - - - -

2003 $84,125 $- - - 250,000 - -

NOTES:

(a) H. Douglas Saathoff was named the Chief Executive Officer in March 2003.
Myron Anduri was named President in December 2003. Mr. Anduri was given 181,416
shares of the Company's common stock in exchange for $22,276 in debt he had
incurred on the Company's behalf and for which the Company had recognized a
liability to Mr. Anduri.

No options or stock appreciation rights were granted to executive officers of
the registrant in 2004.

Max Polinsky received 150,000 shares in return for serving as Chairman of the
Board through his term ending November 13, 2003. Patrick Gorman received 100,000
shares for serving as a board member through his term ending November 13, 2003.
Both Mr. Polinsky and Mr. Gorman were granted 75,000 options to purchase common
shares at a price of $0.22 per share in return for one year of service on the
board beginning November 13, 2003. On December 8, 2004, both Mr. Polinsky and
Mr. Gorman were granted 500,000 options to purchase common shares at a price of
$0.09 per share in return for services rendered.

EMPLOYMENT CONTRACTS

We do not have employment contracts with our executive officers.

STOCK OPTION PLANS

Nighthawk Systems, Inc. 2003 Stock Option Plan (the "Plan") authorized the
issuance of a maximum of 5,000,000 shares of common stock. Of that amount,
2,335,000 shares of common stock authorized to be issued under the Plan are
subject to outstanding options already granted under the Plan and 1,235,000 are
available for future grants thereunder. Participation in the Plan is limited to
those employees, directors and consultants of the Company and its subsidiaries
who are believed by the Board to be in a position to make a substantial
contribution to our success.

NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES EQUITY COMPENSATION
TO BE ISSUED UPON PLANS(EXCLUDING
EXERCISE OF WEIGHTED AVERAGE SECURITIES REFLECTED IN
PLAN CATEGORY OUTSTANDING OPTIONS EXERCISE PRICE OF OUTSTANDING OPTIONS COLUMN (A)
----------------------------
(a) (b) (c)
------------------------- -------------------------------------- ------------------------
Nighthawk Systems, Inc.
2003 Stock Option Plan
approved by security holders 2,335,000 $0.22 1,235,000

DIRECTOR COMPENSATION

Max Polinsky received 150,000 shares in return for serving as Chairman of the
Board Through his term ending November 13, 2003. Patrick Gorman received 100,000
shares for serving as a board member through his term ending November 13, 2003.
Both Mr. Polinsky and Mr. Gorman were granted 75,000 options to purchase common
shares at a price of $0.22 Per share in return for one year of service on the
board beginning November 13, 2003.

ADDITIONAL INFORMATION

Our common stock is registered with the SEC under section 12(g) of the
Securities Exchange Act of 1934. We file with the SEC periodic reports on Forms
10-KSB, 10-QSB and 8-K, and proxy statements, and our officers and directors
file reports of stock ownership on Forms 3, 4 and 5. We intend to send annual
reports containing audited financial statements to our shareholders.
Additionally, we filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act of 1933 for the
shares of common stock in the offering, of which this prospectus is a part. This
prospectus does not contain all of the information in the registration statement
and the exhibits and schedules that were filed with the registration statement.
For further information we refer you to the registration statement and the
exhibits and schedules that were filed with the registration statement.

Statements contained in this prospectus about the contents of any contract or
any other document that is filed as an exhibit to the registration statement are
not necessarily complete, and we refer you to the full text of the contract or
other document filed as an exhibit to the registration statement. A copy of the
registration statement and the exhibits and schedules that were filed with the
registration statement may be inspected without charge at the Public Reference
Room maintained by the Securities and Exchange Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of all or any part of the registration
statement may be obtained from the Securities and Exchange Commission upon
payment of the prescribed fee. Information regarding the operation of the Public
Reference Room may be obtained by calling the Securities and Exchange Commission
at 1-800-SEC-0330.

The Securities and Exchange Commission maintains a web site that contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the SEC. The address of the site is
www.sec.gov.

FINANCIAL STATEMENTS

INDEX
------
PAGE
------
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheet as of December 31, 2004. . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations for the Years Ended December 31, 2004 and 2003. . . . . . F-3
Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 2004 and 2003 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2003. . . . . . F-5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . F-7

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------

Board of Directors
Nighthawk Systems, Inc.

We have audited the accompanying consolidated balance sheet of Nighthawk
Systems, Inc. and subsidiary ("the Company") as of December 31, 2004, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for each of the years in the two-year period ended December 31, 2004.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nighthawk Systems,
Inc. and subsidiary as of December 31, 2004, and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31, 2004, in conformity with accounting principles generally accepted in the
United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company reported a net loss of
approximately $1.38 million during the year ended December 31, 2004, and has a
stockholders' deficit and working capital deficiency of approximately $1.24
million and $1.04 million, respectively, at December 31, 2004. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans with regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

GHP Horwath, P.C.

Denver, Colorado
March 11, 2005, except for Notes 8 and 9 as to which the date is April 12, 2005

F-1

NIGHTHAWK SYSTEMS, INC.

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2004

ASSETS

Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,118
Accounts receivable, net of allowance for doubtful accounts of $134. . . . . . . . . . . . . . . . . . . 45,754
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,709
Prepaids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,762
------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274,343
Furniture, fixtures and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,067
Intangible and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,742
------------
$ 301,152
============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 422,254
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,805
Line of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,792
Notes payable:
Related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,401
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613,012
------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,316,264
------------
Long-term liabilities:
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224,479
------------
Commitments and contingencies

Stockholders' deficit:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 5,000 issued and outstanding; liquidation
preference $12,500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500
Common stock; $0.001 par value; 50,000,000 shares authorized; 31,959,247 issued and outstanding . . . . . 31,960
Special warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188,775
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,884,516
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,357,342)
------------
Total stockholders' deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,239,591)
------------
$ 301,152
============

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

F-2

NIGHTHAWK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,

2004 2003
------------ ------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 610,180 $ 1,030,793
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 438,473 658,203
------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,707 372,590

Selling, general and administrative expenses . . . . . . . . . . . . . . . 1,311,824 1,290,143
Reversal of 2002 deferred compensation . . . . . . . . . . . . . . . . . . - (300,000)
Reversal of 2002 consulting expense. . . . . . . . . . . . . . . . . . . . - (33,000)
------------ ------------
Loss from operations. . . . . . . . . . . . . . . . . . . . . . . . . (1,140,117) (584,553)
------------ ------------
Interest expense:
Related parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,656 15,036
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,978 30,839
------------ ------------
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 236,634 45,875
------------ ------------

Loss from continuing operations. . . . . . . . . . . . . . . . . . . . . . (1,376,751) (630,428)
------------
Discontinued operations:
Loss from operations of discontinued segment. . . . . . . . . . . . . . (14,472)
Gain on disposal of discontinued segment. . . . . . . . . . . . . . . . 92,443
------------
77,971
------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,376,751) (552,457)
Less: preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . (644)
------------ ------------
Net loss applicable to common stockholders . . . . . . . . . . . . . . . . $(1,377,395) $ (552,457)
============ ============

Loss from continuing operations per basic and diluted common share . . . . $ (0.05) $ (0.03)
============ ============

Income from discontinued operations per basic and diluted common share . . $ *
============

Net loss to common stockholders per basic and diluted common share . . . . $ (0.05) $ (0.03)
============ ============

Weighted average common shares outstanding - basic and diluted . . . . . . 27,674,693 22,021,229
============ ============

* Less than $0.01 per share

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

F-3

NIGHTHAWK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2004 AND 2003

Addit- Stock-
ional holder Special Accum- Total
Preferred Stock Common Stock paid-in receiv- Warrants ulated
Shares Amount Shares Amount capital able deficit
------ ------ --------- -------- --------- ---------- --------- ----------- --------
Balances,
December 31,
2002 22,808,780 $22,809 $2,815,863 ($118,629) ($3,428,134) ($708,091)

Cancellation of
consulting
arrangement (300,000) (300) (32,700) (33,000)

Common stock
and warrants
issued for
cash, net
of issuance
costs of
7,000 1,575,000 1,575 261,425 263,000

Issuance of
stock
options to
consultants 6,825 6,825

Cancellation
of agree-
ments under
deferred
compen-
sation (300,000) (300) (299,700) (300,000)

Common
stock
issued for
services 1,116,667 1,117 233,633 234,750

Common
stock
issued
for
interest
expense 25,000 25 11,475 11,500

Shares
received
for sale
of operat-
ing segment (150,000) (150) (28,350) (28,500)

Exchange of
shares for
shareholder
receivable (454,545) (455) (113,182) 118,629 4,992

Net loss (552,457) (552,457)
------ ------ --------- -------- --------- ---------- --------- ----------- --------

Balances,
December 31,
2003 24,320,902 $24,321 $2,855,289 ($3,980,591) ($1,100,981)

Common stock
and warrants
issued and
options
exercised
for cash 1,488,333 1,488 235,863 $ 188,775 426,126

Common stock
and options
issued
for consult-
ing and
other services 2,345,000 2,345 323,228 325,573

Common
stock
issued for
interest 61,875 62 12,312 12,374

Conversion of
notes payable
to common
stock and
warrants 1,439,423 1,440 311,413 312,853

Preferred
stock
issued
for cash 5,000 $12,500 12,500

Warrants
issued
for cash 18,750 18,750

Common stock
issued for
investment
agreements,
placement fees
& incentives 2,350,000 2,350 35,150 37,500

Beneficial
Conversion
feature
of convertible
debt 92,465 92,465

Cancellation
of shares (50,000) (50) 50 -

Series A -
Preferred
dividend 3,714 4 (4)

Net loss (1,376,751) (1,376,751)
------ ------ --------- -------- --------- ---------- --------- ----------- ----------

Balances,
December 31,
2004 5,000 $12,500 31,959,247 $31,960 $3,884,516 $ - $ 188,775 ($5,357,342) ($1,239,591)
====== ======= ========== ======== ========== ========== ========= ============ ============

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

F-4

Nighthawk Systems, Inc.
Consolidated Statements of Cash Flows
Years ended December 31,

2004 2003
------------ -------------
Cash flows from operating activities:
Net loss $ (1,376,751) $ (552,457)
------------ -------------
Adjustments to reconcile net loss
to net cash used in operating activities:
Loss from operations of discontinued
segment - 14,472
Gain on disposition of operating
Segment - (92,443)
Depreciation and amortization 7,707 5,859
Provision for bad debts 380 -
Settlement of other related party
payable - (23,912)
Amortization of loan discounts 15,104 -
Beneficial conversion feature 92,465 -
Common stock issued for services 205,775 234,750
Common stock issued for interest 78,658 11,500
Common stock issued for placement
fees and incentives 37,500 -
Issuance of stock options to consultants
for services 119,798 6,825
Compensation expense on settlement
of receivable from shareholder - 4,992
Reversal of 2002 deferred compensation - (300,000)
Reversal of consulting agreement - (33,000)
Change in assets and liabilities:
Decrease (increase) in accounts receivable (4,217) 160,232
Decrease (increase) in inventories 48,620 (15,621)
Increase in prepaids (105,407) (35,355)
Increase in intangible and other assets (5,084) (720)
Increase in accounts payable 29,716 53,659
Increase in accrued expenses 67,396 8,643
Decrease in deferred revenue - (432,600)
Increase (decrease) in customer deposit (63,544) 63,544
------------ -------------
Total adjustments 524,867 (369,175)
------------ -------------
Net cash used in operating activities of
continuing operations (851,884) (921,632)
------------ -------------

Cash flows from investing activities:
Purchases of furniture, fixtures
and equipment - (18,124)
------------ -------------
Net cash used in investing activities - (18,124)
------------ -------------

Cash flows from financing activities:
Cash overdraft (3,902) 3,902
Proceeds from the sale of
preferred stock 12,500 -
Proceeds from notes payable,
related parties 26,261 62,064
Payments on notes payable,
related parties (36,318) (49,302)
Payments made on factoring
Arrangement - (82,502)
Proceeds from notes payable, other 335,000 365,000
Payments on notes payable,
other and line of credit (71,664) (25,447)
Proceeds from the issuance of
convertible debt and warrants 250,000 -
Net proceeds from the issuance
of special warrants 188,775 -
Payments on other related
party payable (25,000) -
Net proceeds from issuance of
common stock and warrants 237,350 263,000
------------ -------------
Net cash provided by
financing activities 913,002 536,715
------------ -------------
Cash used in discontinued operations - (25,636)
------------ -------------
Net increase (decrease) in cash 61,118 (428,677)
Cash, beginning of year - 428,677
------------ -------------
Cash, end of year $ 61,118 $ -
============ =============

Supplemental disclosures
of cash flow information:

Cash paid for interest $ 26,228 $ 22,408
============ =============

Supplemental disclosure
of non-cash investing and
financing activities:

Conversion of notes payable
and accrued interest to common stock
Notes payable $ 224,390
Accrued interest 22,179
-------------
Total amount converted $ 246,569
============

Preferred stock dividends
issued in common stock $ 644
=====

Exchange of shares for shareholder receivable
Carrying value of receivable
from shareholder $ 118,629
Value of stock returned to
and retired by Company (113,637)
-------------
Compensation expense on settlement
of receivable from shareholder $ 4,992
=============

Disposition of operating segment
Carrying value of assets $ 26,176
Liabilities (90,119)
Value of stock returned
to and retired by Company (28,500)
-------------
Gain on disposition of
operating segment $ (92,443)
=============

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

F-5

NIGHTHAWK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003

1. Organization, going concern, results of operations and management's
plans:

Organization:

Nighthawk Systems, Inc. ("Nighthawk" or "the Company") designs and manufactures
intelligent remote power control products that are easy to use, inexpensive and
can remotely control virtually any device from any location. The Company's
proprietary, wireless products are ready to use upon purchase, so they are
easily installed by anyone, regardless of technical ability, and are also easily
integrated into third-party products, systems and processes. They allow for
intelligent control by interpreting instructions sent via paging and satellite
media, and executing the instructions by 'switching' the electrical current that
powers the device, system or process. Nighthawk's intelligent products can be
activated individually, in pre-defined groups, or en masse, and for specified
time periods with a simple click of a mouse or by dialing a telephone number.

In November 2001, the Company sold the assets and liabilities of its investment
in a majority owned subsidiary to a major stockholder. On February 1, 2002, the
Company acquired Peregrine Control Technologies, Inc. ("PCT"). The transaction
represented a reverse acquisition of the Company by PCT, since PCT owned
approximately 76% of the post acquisition shares of the consolidated entity
immediately after the completion of the transaction. At the date of the
transaction, the Company was a shell company with no net assets. For accounting
purposes, the acquisition was treated as an acquisition of the Company by PCT
and a recapitalization of PCT. The historical stockholders' deficit of PCT has
not been retroactively restated since the shares exchanged in the transaction
were on a one-for-one basis. The accompanying consolidated financial statements
include the accounts of Nighthawk Systems, Inc., and its subsidiary, PCT.

PCT was incorporated as a Colorado corporation in 1992. In September 2001, the
Company purchased certain assets and assumed certain liabilities of Vacation
Communication, Inc. (dba Gotta Go Wireless), a Colorado corporation, engaged in
providing wireless paging airtime and in pager sales. Through Vacation
Communication, the Company was able to provide paging services to customers that
purchase its remote control products and also provided paging services to retail
paging customers. Effective July 31, 2003, the Company sold back the remaining
assets and liabilities of the paging business to the original owners. Since
that date, the Company has provided paging services to customers by reselling
services that it obtains from various paging airtime vendors.

Going concern, results of operations and management's plans:

The Company incurred a net loss of approximately $1.38 million during the year
ended December 31, 2004 and had a stockholders' deficit and working capital
deficiency of approximately $1.24 million and $1.04 million, respectively, as of
December 31, 2004. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Although no assurance can be given that
such plans will be successfully implemented, management's plans to address these
concerns include:

1. Raising working capital through additional borrowings.
2. Raising equity funding through sales of the Company's common stock.
3. Implementation of a sales and marketing plan.

In August 2004, the Company signed a financing arrangement with Dutchess Private
Equities, II, L.P. ("Dutchess") which was amended on August 26, 2004 and on
September 24, 2004. Under the terms of the amended arrangement, the Company
received $100,000 under a convertible debenture on August 11, 2004, $25,000 on
August 26, 2004, and $125,000 under the debenture on September 27, 2004.
Interest accrues on the debenture at an annual rate of 8%. The debenture can be
converted into common shares anytime prior to its maturity on August 10, 2007 at
the lesser of (i) 73% of the lowest closing bid price on the date of conversion,
or (ii) twelve and a half cents ($0.125). Any portion of the debenture that
remains outstanding at August 10, 2007 will automatically convert into common
shares. The number of shares converted at any time is limited so as not to
exceed 4.99% of the outstanding shares of Nighthawk common stock outstanding. In
addition, Dutchess was issued a warrant to purchase up to 250,000 shares of
common stock at a price of twelve and a half cents ($0.125) for a period of up
to five years. The Company also signed an investment agreement under which
Dutchess agreed to purchase up to $10.0 million in common stock from the
Company, at the Company's discretion, over the next three years, subject to
certain limitations including the Company's then current trading volume. On
December 3, 2004 Dutchess loaned the Company an additional $250,000. The note
has no stated interest rate but has a face amount of $300,000 and matured April
3, 2005 resulting in an implied annual rate of 72.8%. The note is intended to
be repaid via puts exercised under the investment agreement with the Company
making payments of the greater of $75,000 every 30 days or 50% of each put until
the note is paid in full. In the event of default, the investor, Dutchess, has
the right to convert the note to common stock at the lesser of (i) seventy-five
(75%) of the lowest closing bid price during the fifteen (15) days immediately
preceding default or (ii) one hundred percent (100%) of the lowest bid price for
the twenty (20) trading days preceding default. Although the amount and timing
of specific cash infusions available under the entire financing arrangement
cannot be predicted with certainty, the arrangement represents a contractual
commitment by Dutchess to provide funds to the Company. Subsequent to December
31, 2004, the Company issued two additional notes, exercised a number of puts
and Dutchess elected to exercise warrants and converted a portion of the
long-term note payable to common stock. See Notes 8 and 9.

The accompanying financial statements do not include any adjustments relating to
the recoverability and classification of assets or the amounts of liabilities
that might be necessary should the Company be unsuccessful in implementing these
plans, or otherwise be unable to continue as a going concern.

F-6

2. Summary of significant accounting policies

Concentration of credit risk

Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade accounts receivable. Receivables arising
from sales to customers are not collateralized and, as a result, management
continually monitors the financial condition of its customers to reduce the risk
of loss. At December 31, 2004, the Company had $45,754 in accounts receivable,
net of the allowance for doubtful accounts. Approximately $14,700 of this
balance was from one customer, which was collected subsequent to December 31,
2004.

During 2004, the Company's three largest suppliers accounted for approximately
47%, 11% and 11%, respectively, of the Company's purchases of pre-manufactured
component materials. During 2003, the Company's two largest suppliers accounted
for approximately 66% and 15%, respectively, of the Company's purchases of
pre-manufactured component materials.

Inventories

Inventories consist of parts and pre-manufactured component materials and
finished goods. Inventories are valued at the lower of cost or market using the
first-in, first-out (FIFO) method.

Property and equipment

Property and equipment are recorded at cost. Depreciation is recorded using the
straight-line method over the estimated useful lives of five to seven years.
Maintenance and repairs are expensed as incurred and improvements are
capitalized. Upon sale or retirement of assets, the cost and related accumulated
depreciation or amortization is eliminated from the respective accounts and any
resulting gains or losses are reflected in operations.

Intangible assets

Intangible assets include patent costs and are stated at cost. Beginning on
the date of grant, the Company will amortize the patents over the shorter of the
lives of the patents or the estimated useful lives using the straight line
method. The Company reviews these and any other long-lived assets for impairment
whenever events or changes in circumstances indicate their carrying amounts may
not be recoverable. Recoverability of an asset to be held and used is measured
by a comparison of the carrying amount of the asset to future undiscounted cash
flows expected to be generated by the asset. If the asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Based on its
review, management does not believe that any impairment of intangible or other
long-lived assets exists at December 31, 2004.

Revenue recognition

Revenue from product sales is recognized when all significant obligations of the
Company have been satisfied. Revenues from equipment sales are recognized
either on the completion of the manufacturing process, or upon shipment of the
equipment to the customer, depending on the Company's contractual obligations.
The Company occasionally contracts to manufacture items, bill for those items
and then hold them for later shipment to customer-specified locations. The
Company had no bill and hold sales at December 31, 2004. Revenue related to
airtime billing is recognized when the service is performed. Some customers
pre-pay airtime on a quarterly or annual basis and the pre-paid portion is
recorded as deferred revenue. Deferred revenue, included in accrued liabilities
on the balance sheet at December 31, 2004, is approximately $6,500.

Provision for doubtful accounts

The Company reviews accounts receivable periodically for collectibility and
establishes an allowance for doubtful accounts and records bad debt expense when
deemed necessary.

Advertising

Advertising costs are expensed as incurred. For the years ended December 31,
2004 and 2003, advertising costs were approximately $9,200 and $6,000,
respectively.

Income taxes

Deferred tax assets and liabilities are recorded for the estimated future tax
effects of temporary differences between the tax basis of assets and liabilities
and amounts reported in the accompanying balance sheets, and for operating loss
and tax credit carry forwards. The change in deferred tax assets and liabilities
for the period measures the deferred tax provision or benefit for the period.
Effects of changes in enacted tax laws on deferred tax assets and liabilities
are reflected as adjustments to the tax provision or benefit in the period of
enactment. The Company's deferred tax assets have been completely reduced by a
valuation allowance because management does not believe realization of the
deferred tax assets is sufficiently assured at the balance sheet date.

F-7

Financial instruments

The carrying amounts of cash, accounts receivable and accounts payable
approximate their fair values due to their short duration. Notes with floating
or fixed interest rates approximate their fair values based on market rate
information currently available to the Company. The fair values of notes with
related parties are not practicable to estimate based upon the related party
nature of the underlying transactions.

Net loss per share

Basic net loss per share is computed by dividing the net loss applicable to
common stockholders by the weighted-average number of shares of common stock
outstanding for the year. Diluted net loss per share reflects the potential
dilution that could occur if dilutive securities were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company, unless the effect of such inclusion would reduce
a loss or increase earnings per share. For the years ended December 31, 2004
and 2003, the effect of the inclusion of dilutive shares would have resulted in
a decrease in loss per share. Accordingly, the weighted average shares
outstanding have not been adjusted for dilutive shares.

Use of estimates

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

Shipping and handling fees and costs

The Company records shipping and handling fees billed to customers as revenue,
and shipping and handling costs incurred with the delivery of its products as
cost of sales. For the years ended December 31, 2004 and 2003, the Company
recognized approximately $6,900 and $20,600, respectively, as revenue from
shipping and handling fees. For the years ended December 31, 2004 and 2003, the
Company recognized approximately $4,300 and $28,300, respectively, in cost of
sales for shipping and handling fees.

Comprehensive income

For the years ended December 31, 2004 and 2003, the Company had no components of
comprehensive income to report.

Stock-based compensation

The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). The provisions of SFAS
123 allow companies to either expense the estimated fair value of stock options
or to continue to follow the intrinsic value method set forth in Accounting
Principles Bulletin Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") but disclose the pro forma effects on net income (loss) had the fair
value of the options been expensed. The Company has elected to continue to apply
APB 25 in accounting for its employee stock option incentive plans.

Under APB 25, where the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation is recognized. As all employee options were issued at or above
market during 2004 and 2003, no compensation expense was recognized in either
year. If compensation expense for the Company's stock-based compensation plans
had been determined consistent with SFAS 123, the Company's net loss and net
loss per share including pro forma results would have been the amounts indicated
below:

F-8

YEAR ENDED DECEMBER 31,
-------------------------
2004 2003
----------- ----------
Net loss applicable to common stockholders:
As reported $ (1,377,395) $(552,457)
Total stock-based employee compensation expense determined
under fair value based method for all employee awards, net
(68,703) (13,685)
----------- ----------
Pro forma net loss $ (1,446,098) $(566,142)
=========== ==========

Net loss per share:
As reported:
Basic and diluted $ (0.05) $ (0.03)
=========== ==========
Pro forma:
Basic and diluted $ (0.05) $ (0.03)
=========== ==========

The pro forma effect on net loss may not be representative of the pro forma
effect on net income or loss of future years due to, among other things: (i) the
vesting period of the stock options and the (ii) fair value of additional stock
options in future years.

For the purpose of the above table, the fair value of each option grant is
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following assumptions:

Black-Scholes Assumptions
2004 2003

Dividend yield. . . . . . 0.00% 0.00%
Expected volatility . . . 1.167 1.229 - 1.316
Risk-free interest rate . 4.50% 4.50%
Expected life in years. . 2 years 1 to 3 years

The weighted average fair value at date of grant for options granted during 2003
ranged from $0.009 to $0.027 per share using the above assumptions. The fair
value at grant date for options granted in 2004 was $0.055 per share using the
above assumptions.

Recently issued accounting pronouncements

In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a revision
to FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest
Entities. FIN 46R clarifies some of the provisions of FIN 46 and exempts
certain entities from its requirements. FIN 46R requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or is
entitled to receive a majority of the entity's residual returns or both. FIN
46R also requires disclosures about variable interest entities that a company is
not required to consolidate but in which it had a significant variable interest.
FIN 46R is effective for variable interest entities created after December 15,
2003 for public companies and is effective for all other variable interest
entities by the beginning of the first annual reporting period beginning after
December 15, 2004 for public companies that are small business issuers. As the
Company does not currently have an interest in a VIE, the adoption of FIN 46R
did not have an impact on the Company's financial position or results of
operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments With Characteristics of both Liabilities and Equity." SFAS No. 150
establishes new standards on how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
provisions of SFAS No. 150 are generally effective for all financial instruments
entered into or modified after May 31, 2003, except for those provisions
relating to manditorily redeemable non-controlling interests, which have been
deferred. The Company has adopted the applicable provisions of SFAS No. 150
which did not have a material impact on the financial condition or results of
operations of the Company. However, numerous provisions have been delayed and
will be adopted in the future. Management believes that the adoption of the
delayed provisions will not have a material impact on its results of operations
or financial condition.

F-9

Reclassifications

Certain amounts reported in the 2003 consolidated financial statements have been
reclassified to conform to the 2004 presentation.

3. Discontinued operations

On September 30, 2001, the Company acquired certain assets and assumed certain
liabilities of Vacation Communication, Inc. ("VCI"), a Colorado corporation, in
exchange for $50,000 cash, 150,000 shares of the Company's common stock valued
at $150,000, and notes payable of $183,135, in a transaction accounted for as a
purchase. The Company acquired these assets and liabilities to enable it to
market and sell paging airtime to customers that purchase its equipment.
Effective July 31, 2003 the Company sold the remaining assets and liabilities
originally purchased with or originated as a result of the purchase of VCI. back
to the original owners of the operation. In return, the Company received 150,000
shares of its common stock, and the owners of VCI facilitated the return of
approximately $34,000 in cash to the Company that had been held in an account
under their control. In 2003, the Company recognized a gain on this transaction
of $92,443, and has presented the financial results of this paging business
segment as discontinued operations in the accompanying financial statements.
Revenue from discontinued operations was approximately $45,900 for the year
ended December 31, 2003.

4. Furniture, fixtures and equipment

Furniture, fixtures and equipment consist of the following at December 31, 2004:

Equipment . . . . . . . . . . $ 30,306
Furniture and fixtures. . . . 3,378
Software. . . . . . . . . . . 3,171
---------
36,855
Less accumulated depreciation (23,788)
---------
$ 13,067
=========

5. Commitments and contingencies

Leases

The Company leases office and warehouse space under month-to-month operating
leases in Denver, Colorado and San Antonio, Texas. Rent expense incurred for the
years ended December 31, 2004 and 2003 was approximately $29,600 and $26,000,
respectively.

Pending litigation

In May 2003, the Company was sued by a former Board member, Charles McCarthy,
seeking recovery for the value of 350,000 shares, or $209,500, and $120,000 due
his law firm under a retainer agreement between the Company and his firm.
McCarthy had previously signed a settlement agreement with the Company in which
he agreed to cancel all potential claims against the Company and its directors
in return for 150,000 unregistered shares trading at a value of $0.60 or higher.
In October 2004 we reached an agreement with him to settle the case for $55,000.
Under the Settlement Agreement and Release, we made a cash payment to McCarthy
of $10,000 during October 2004, a cash payment of $15,000 in January 2005 and
will settle the remaining balance in the fourth quarter of 2005.

The Company, along with the current officers and board members and several
former directors, were sued by Lawrence Brady, a former director of the Company,
and his son Mark Brady, who served for a period of time as Chief Financial
Officer, for, among other things, breach of contract for unlawful termination
and failure to provide stock allegedly promised. The alleged breaches and other
claims all stem from their service as director of the Company and chief
financial officer, respectively, for part of 2001 and part of 2002. The
aggregate amount of damages claimed is not specified. The case is proceeding in
the state court in Denver, Colorado. Several of the individually-named
defendants have been voluntarily dismissed by the plaintiffs. The Company plans
to vigorously defend itself and its current directors and officers, and filed a
counterclaim against the plaintiffs for non-performance and breach of fiduciary
duties. This counterclaim was allowed to proceed by the court over the objection
of the plaintiffs. No assurance can be given, however, as to the ultimate
outcome of the case.

Certain claims and lawsuits have arisen against the Company in its normal course
of business. The Company believes that such claims and lawsuits have not had,
and will not have, a material adverse effect on the Company's financial
position, cash flow or results of operations.

F-10

6. Income taxes

The Company accounts for income taxes using the liability method in accordance
with SFAS No. 109, Accounting for Income Taxes. The liability method provides
that the deferred tax assets and liabilities are recorded based on the
difference between the tax bases of assets and liabilities and their carrying
amount for financial reporting purposes, as measured by the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Deferred tax assets are carried on the balance sheet with the presumption that
they will be realizable in future periods when pre-tax income is generated.
Predicting the ability to realize these assets in future periods requires a
great deal of judgment by management. In management's judgment, the Company
cannot predict with reasonable certainty that the tax assets resulting from
losses will be fully realized in future periods. SFAS No. 109 requires a
valuation allowance to reduce the deferred tax assets reported if, based on the
weight of the evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. After consideration of all of the
evidence, both positive and negative, management determined that a $1,737,000
valuation allowance at December 31, 2004 was necessary to reduce the deferred
tax assets to the amount that will more likely than not be realized. The change
in the valuation allowance for the current year is a net increase of $513,000.
At December 31, 2004, the Company has approximately $5,000,000 of net operating
loss carryforwards, which expire from 2014 through 2024. The net operating loss
carryforwards include losses from the acquisition of PCT and may be subject to
certain restrictions in the future.

Income tax benefit consists of the following:

YEARS ENDED DECEMBER 31,
2004 2003
Deferred tax benefit
Federal . . . . . . . . . . . $(444,000) $(233,000)
State . . . . . . . . . . . . (69,000) (42,000)
---------- ----------
(513,000) (275,000)
Increase in valuation allowance 513,000 275,000
---------- ----------
$ - $ -
========== ==========

The difference between the expected tax (benefit) computed at the Federal
statutory income tax rate of 34% and the effective tax rate for the years ended
December 31, 2004 and 2003 follows:

YEARS ENDED DECEMBER 31,
2004 2003
AMOUNT % AMOUNT %

Computed "expected" tax (benefit) . (469,000) 34% (188,000) 34%
State income taxes, net of federal
income tax benefit. . . . . . . . . (46,000) 3% (18,000) 3%
Increase in valuation allowance . . 513,000 -37% 275,000 -50%
Non-deductible expenses and other . 2,000 0% (69,000) 13%
-----------------------------------------
$ - 0% $ - 0%
=========================================

Significant deferred tax assets and liabilities represent the future impact of
temporary differences between the financial statement and tax bases of assets
and liabilities and are as follows:

YEAR ENDED DECEMBER 31,
2004
Deferred tax assets:
Net operating loss carry forwards $ 1,737,000
Valuation allowance . . . . . . . (1,737,000)
-------------
Net deferred tax assets . . . . . . $ -
=============

F-11

7. Line of credit

The Company has $19,792 outstanding at December 31, 2004 under a $20,000
unsecured line of credit with a bank. Borrowings under the line of credit bear
interest at the Wall Street Journal's published prime rate plus 3% (8% at
December 31, 2004); interest due monthly. The line of credit is guaranteed by
three stockholders and an officer of the Company.

8. Notes payable

At December 31, 2004, notes
payable consist of the following:

Related parties:
Note payable, officer; unsecured;
interest at prime rate plus 5.5%
(10.5% at December 31, 2004);
due on demand. . . . . . . . . . . . $ 10,107
Note payable, officer; unsecured;
interest at 23.99%, due on demand . 5,294
-----------
$ 15,401
===========

Other:
Convertible note payable to
stockholder, 8% interest rate,
in default as of the date
of this report (1) . . . . . . . . . $160,000
Notes payable to stockholder,
8% interest rate, in default
as of the date of this report (1). . 165,000
Unsecured note with a financial
institution, 14.99% interest rate,
interest and principal due monthly
through November 2008 . . . . . . . 24,912
Note payable to stockholder, 10%
interest rate, in default . . . . . 600
Note payable, $300,000 face
amount, no stated interest rate
but with an implied annual rate
of 72.8%, due April 3, 2005 (2). . . 262,500
-----------
$613,012
===========

Long Term:
Convertible debenture, 8%
interest rate, due
July 11, 2007 (2). . . . . . . . . . $224,479
===========

1) The Company is currently in discussions with Mr. Revesz, the holder of
the notes that are in default as of the date of this report and expects to
extend the maturity dates on those notes as it has done several times
previously. In April 2004, the Company reached an agreement with Tomas Revesz,
its largest creditor and former board member, under which, in return for an
additional $25,000 in borrowings and the extension of the maturity dates of
three notes to July 31, 2004, the Company granted the creditor a secured
position in the assets of the Company. The Company also agreed to pay the
creditor cash interest at an annual rate of 8% retroactive to the signing of the
notes, and monthly at an annual rate of 8% on the new total of $375,000 in
notes, with $750 of the monthly interest due being paid in cash and the
remainder being paid in stock at a rate of $0.20 per share. In August 2004, the
creditor extended the maturity dates of the notes to October 31, 2004, and
converted $50,000 of the convertible notes to 250,000 shares of common stock of
the Company. For the period of March through December of 2004, the Company
issued 61,875 shares to the creditor for $12,750 of interest owed under this
arrangement. In December of 2004, the creditor extended the maturity dates of
the notes to March 31, 2005.

2) On January 18, 2005, Dutchess loaned the Company an additional $225,000.
The note has no stated interest rate but has a face amount of $270,000 and
matures on May 18, 2005. In connection with the note, Dutchess was issued
250,000 shares of common stock as an incentive and the Company also signed a
consulting agreement with a company in which an employee of Dutchess is a member
of management. Under the consulting agreement, the company was issued 500,000
shares of Company common stock.

F-12

On April 7, 2005, Dutchess loaned the Company an additional $488,500. The note
has no stated interest rate but has a face amount of $586,200 and matures on
June 7, 2005. A portion of the proceeds of this loan was used to repay the note
dated December 3, 2004 with a face amount of $300,000, which matured on April 3,
2005. In connection with the note, Dutchess was issued 250,000 shares of common
stock as an incentive and the Company signed a consulting agreement with a
company in which an employee of Dutchess is a member of management. Under the
consulting agreement, the company was issued 300,000 shares of Company common
stock.

During the period from January 1, 2005 through April 12, 2005, the Company
exercised six (6) puts to Dutchess totaling 1,276,610 shares for proceeds of
$222,726. Of the total proceeds, $142,635 was used to repay portions of
previously issued notes to Dutchess and $80,091 went to the Company.

On March 9, 2005, Dutchess exercised 250,000 warrants at $0.125 each, for total
proceeds of $31,250, $15,000 of which was applied to outstanding notes.

Also during the period from January 1, 2005 through April 12, 2005, Dutchess
elected to convert at total of $75,000 of the 36-month convertible note for
600,000 shares of the Company's common stock.

9. Stockholders' deficit

Preferred stock:

The Company has authorized 5,000,000 shares of $0.001 par value, preferred
stock. In 2001, PCT issued 391,200 shares of its common stock in return for
$391,200 in cash proceeds. Based on a review of Company records during 2003,
Company management determined that associated warrants to purchase 391,200
shares of common stock at $1.50 per share were never delivered to the purchasers
subsequent to their investment. Company management also determined this to be
the case with 255,000 shares issued by the Company between January and June 2002
in return for $255,000 in cash proceeds, for which warrants to purchase 255,000
shares at $1.50 per share should have been delivered. According to Company
records, all such warrants should have been exercisable for a period of two
years from their date of issuance; therefore, the warrants owed to investors
from 2001 expired without being delivered to the investors. In order to fulfill
the terms of their investment, in January 2004 the Company offered new warrants
to each of the investors whose funds were received in 2001 and during the first
six months of 2002 in order to permanently replace those that were never issued.
Terms of the new warrants allowed the investors to purchase one share of Series
A Preferred Stock (Preferred Stock) for $2.50 per share for every $10 originally
invested in the Company. The Preferred Stock will pay a 7% annual dividend, on a
quarterly basis, in the form of Company common stock. The Preferred Stock is
convertible into common shares of the Company on a 1 for 10 basis at any date
through June 30, 2005. On that date, all outstanding Preferred Stock will
convert to common stock on a 1 for 10 basis. The new warrants to purchase
Preferred Stock were to be exercised on or before April 30, 2004. A total of
5,000 shares of Series A Preferred Stock were purchased through the exercise of
the warrants. Preferred stock dividends of $644 were accrued in the form of a
stock dividend equal to 3,714 shares of common stock of the Company.

Common stock:

The Company held a special shareholders' meeting on January 6, 2005 where an
amendment to the Amended and Restated Articles of Incorporation of Nighthawk
Systems, Inc. was approved to increase the number of authorized shares of our
common stock from 50,000,000 to 200,000,000.

In October 2002, the Company issued 300,000 shares of common stock to a
consultant for services rendered, and to be rendered. At the date of the
commitment, the total consulting cost was calculated to be $33,000 based on the
fair value of the Company's common stock on that day. During the second quarter
of 2003, the Company canceled the share issuance and recorded a $33,000
reduction in consulting expense. The Company's board of directors determined
that the shares had not been properly authorized for issuance, and that there
was a lack of sufficient evidence that any services had been performed.

During the fourth quarter of 2003, the Company issued a total of 1,116,667
shares of its common stock in exchange for $234,750 of consulting expense
incurred during 2003. This included a total of 450,000 shares to five
independent directors.

During 2003, the Company issued a total of 1,575,000 shares of its common stock
and 1,575,000 warrants with an exercise price of $0.25 per share in exchange for
net cash proceeds of $263,000. The warrants are exercisable within two years of
the date of each grant.

During 2004, the Company received $127,850, net of offering costs of $900, for
the issuance of 858,333 shares of common stock and warrants to purchase 858,333
additional shares for $0.25 per share. In addition, the Company received
$109,500 in cash proceeds upon the exercise of 630,000 options issued to
consultants during the period. A total of 50,000 shares, which had been issued
to a consultant in previous periods, were cancelled during 2004.

F-13

Also during 2004, in order to provide the Company with working capital, a
Canadian brokerage firm sponsored a private placement of up to $300,000 in
Special Warrants, which are convertible into shares of common stock of the
Company at $0.20 per share, and also provide the purchaser with a warrant to
purchase an equal number of shares of common stock of the Company for a period
of two years at $0.30 per share. The Special Warrants will automatically convert
at the earlier of i) an effective registration statement filed with the
Securities and Exchange Commission or receipt of a qualified prospectus by a
Canadian provincial authority, whichever comes later; or ii) one year from their
date of issue. As of December 31, 2004, the Special Offering was closed and the
Company had issued $188,775 in Special Warrants, net of issuance costs of
$43,625 for a total of 1,162,000 Special Warrants to the investors and 145,250
Special Warrants to the brokerage firm.

A total of 2,345,000 shares of common stock were issued during 2004 to
consultants and others in return for $325,573 in services. One million of these
shares were issued to consultants in relation to the Dutchess funding agreement.
In addition, Dutchess received 250,000 warrants to purchase common stock of the
Company at $0.125 per share.

A total of $312,853 in notes payable and accrued interest were converted into
1,439,423 shares of common stock, 739,423 warrants to purchase common stock at
$0.20 per share and 375,000 warrants to purchase common stock at $0.25 per share
during 2004.

A total of 61,875 shares of common stock were issued during 2004 as interest
payments on notes payable.

A total of 2,350,000 shares of common stock were issued as part of investment
agreements, incentives and placement fees related to the Dutchess equity and
debt agreements during 2004.

Common stock warrant transactions during 2004 and 2003 are summarized below:

WEIGHTED
AVERAGE
EXERCISE
WARRANTS PRICE
----------- --------
Outstanding at January 1, 2003. . 2,695,200 $ 0.53
Granted . . . . . . . . . . . . . 1,575,000 0.25
Exercised . . . . . . . . . . . . - -
Forfeited . . . . . . . . . . . . (391,200) 1.50
----------- --------
Outstanding at December 31, 2003. 3,879,000 0.32
Granted . . . . . . . . . . . . . 3,530,006 0.26
Exercised . . . . . . . . . . . . - -
Forfeited . . . . . . . . . . . . (2,304,000) 0.45
Other (a) . . . . . . . . . . . . 1,510,050 0.10
----------- --------
Outstanding at December 31, 2004. 6,615,056 $ 0.19
=========== ========

(a) During 2003, the Company issued a total of 1,575,000 shares of its common
stock and 1,575,000 warrants with an exercise price of $0.25 per share in
exchange for net cash proceeds of $263,000. The warrants are exercisable within
two years of the dates of each grant. During 2004, the Company issued a total
of 3,530,006 warrants with an average exercise price of $0.26 and 2,304,000
warrants were forfeited. Up to $200,000 in warrants could be exercised prior to
March 31, 2005 at the lesser of $2.00 per share or 50% of the consecutive 10-day
average closing price prior to the election to exercise the warrant. As of
December 31, 2004, this gave the holder the right to exercise up to 2,010,050
warrants at $0.0995 each. 500,000 were included in the number of warrants
outstanding at December 31, 2003, resulting in the net addition of 1,510,050 in
2004. The warrants expired unexercised on April 1, 2005.

During the first quarter of 2005, the Company issued 463,100 shares for
consulting and other services or for the settlement of liabilities and 8,603
shares for accrued interest on notes payable and preferred dividends.

F-14

During the first quarter of 2005, the Company sold 650,000 shares of common
stock to an investor for cash at a price of $0.15 per share. Warrants to
purchase 650,000 shares of common stock at an exercise price of $0.25 per share
were also included in the sale. We did not publicly offer the securities and
the investor is an accredited investor. No underwriters were involved in the
sale.

10. Related party transactions

During 2003, the Company paid a total of $12,678 to Myron Anduri, the Company's
current President and then Vice President of Sales, for amounts owed for
commissions and salary earned in previous periods. During 2003, Mr. Anduri
loaned the Company $7,964 under short-term notes, of which $4,203 was repaid
during 2003. During the year ended December 31, 2004, Mr. Anduri was paid an
additional $2,289 in cash and $22,278 in Company common stock, 181,416 shares
and 181,416 warrants to purchase Company common stock at $0.25 per share, for
amounts outstanding under these short-term notes. Based on calculations using
Black-Scholes, the fair value of the warrants issued to Mr. Anduri was $9,454.
This amount is reflected in interest expense and additional paid-in capital for
the period ended December 31, 2004.

During the year ended December 31, 2004, the Company also borrowed and repaid
approximately $25,000 from a company in which its Chairman is a partner.

In August 2004, in an effort to improve its working capital position, the
Company issued 558,007 common shares and warrants to purchase 558,007 common
shares at $0.20 per share to an individual and a company in exchange for
approximately $88,700 in notes payable plus accrued interest owed them by the
Company. The individual is a business partner of the Company's Chairman and the
company is affiliated with the father of the Company's Chairman. Based on
calculations using Black-Scholes, the fair value of the warrants issued to the
two parties was $29,079. This amount is reflected in interest expense and
additional paid-in capital for the period ended December 31, 2004.

F-15

During the twelve months ended December 31, 2004, a business partner of the
Company's Chairman billed the Company $20,000 for consulting services.

11. Stock options

Upon the reverse acquisition of Peregrine, Inc. on February 1, 2002, the 2000
Performance Stock Option Plan (the "Plan") of PCT was automatically terminated.
As such, no options were outstanding as of December 31, 2002. This option plan
was subsequently adopted by the Company's Board effective January 1, 2003. The
Company may issue a maximum of 4,000,000 shares of common stock under the Plan.
The Plan provides for awards in the form of options, including incentive stock
options and non-qualified stock options. Under the plan, options granted vest
at a rate set by the board of directors or committee appointed by the board
directors, options are exercisable up to 10 years from the date of grant at not
less than 100% of the fair value of the common stock on the date of grant. If
the option holder owns 10% or more of the Company's common stock, the options
are exercisable at not less than 110% of the fair value of the common stock on
the date of grant. At the Company's Annual Shareholders meeting held in November
2003, the shareholders approved a name change for the plan to the Nighthawk
Systems, Inc. 2003 Stock Option Plan and increased the number of shares eligible
for distribution under the plan to 5,000,000.

During 2003, the Company granted options to purchase 375,000 shares of common
stock of the Company to non-employees, 325,000 of which vested immediately. The
remaining 50,000 vest over a three-year period. In accordance with SFAS 123,
the Company recognized approximately $6,800 in expense related to the portion of
the options vesting during 2003. A total of 1,935,000 options were issued to
employees during 2003, all of which vest in thirds on the first, second and
third anniversary dates of their issue. During 2004, 1,000,000 options, which
vested immediately, were granted to the Directors of the Company. Also during
2004, 630,000 options were granted for consulting services, which vested
immediately. The Company recognized $26,460 in expenses related to the issuance
of the options issued for consulting services.

The following summarizes the stock option activity for the years ended December
31, 2004 and 2003:

WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- ------
2003
Outstanding at beginning of year . . . . . - $ -
Options granted. . . . . . . . . . . . . . 2,310,000 0.22
Options exercised. . . . . . . . . . . . . - -
Options forfeited or expired . . . . . . . 25,000 0.22
--------- ------
Outstanding at end of year . . . . . . . . 2,285,000 $ 0.22
========= ======

Options exercisable at year end. . . . . . 325,000 $ 0.22
========= ======

Options available for grant at end of year 2,715,000
=========

2004
Outstanding at beginning of year . . . . . 2,285,000 $ 0.22
Options granted. . . . . . . . . . . . . . 1,630,000 0.11
Options exercised. . . . . . . . . . . . . 630,000 0.18
Options forfeited or expired . . . . . . . 250,000 0.22
--------- ------

Outstanding at end of year . . . . . . . . 3,035,000 $ 0.17
========= ======

Options exercisable at year end. . . . . . 1,995,000 $ 0.14
========= ======

Options available for grant at end of year 1,335,000
=========

F-16

Options outstanding at December 31, 2004 which have not yet vested will vest on
the second and third anniversary dates of their issuance as follows: 370,000
shares in January 2005 and 370,000 shares in January 2006; 150,000 shares in
September 2005 and 150,000 shares in September 2006.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Nighthawk Systems, Inc.

We have reviewed the accompanying condensed consolidated balance sheet of
Nighthawk Systems, Inc. and subsidiary as of June 30, 2005, the related
condensed consolidated statements of operations for the three-month and
six-month periods ended June 30, 2005 and 2004, the condensed consolidated
statement of stockholders' deficit for the six-month period ended June 30, 2005,
and the condensed consolidated statements of cash flows for the six-month
periods ended June 30, 2005 and 2004. These interim condensed consolidated
financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States of America.

GHP HORWATH, P.C.

Denver, Colorado
August 17, 2005

NIGHTHAWK SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2005

ASSETS

Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,927
Accounts receivable, net of allowance for doubtful accounts of $750. . . . . . 26,920
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,908
Prepaids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,920
------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 279,675
------------

Furniture, fixtures and equipment, net. . . . . . . . . . . . . . . . . . . . . . . 11,877
Intangible and other assets. . . . . .. . . . . . . . . . . . . . . . . . . . . . . 14,762
------------
$ 306,314
============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 339,701
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331,658
Line of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,792
Notes payable:
Related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,736
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,347,582
------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 2,053,469
------------

Long-term liabilities:
Convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,014
------------
Commitments and contingencies

Stockholders' deficit:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 5,000 issued
and outstanding; liquidation preference. . . . . . . . . . . . . . . . . . . . $12,500
Common stock; $0.001 par value; 200,000,000 shares authorized;
39,021,194 issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . 39,022
Additional paid- in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 5,046,227
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,916,918)
------------
Total stockholders' deficit. . . . . . . . . . . . . . . . . . . . . (1,819,169)
------------
$ 306,314
============

The accompanying notes are an integral part of these financial statements

F-17

Nighthawk Systems, Inc.
Condensed Consolidated Statements of Operations

Three months ended June 30, Six months ended June 30,
2005 2004 2005 2004
----------------------------- ---------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,372 $ 161,387 $ 269,594 $ 264,225
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . 85,099 108,057 189,623 180,623
----------------------------- ---------------------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . 13,273 53,330 79,971 83,602

Selling, general and administrative expenses . . . . . . . . . . . 588,040 264,865 1,149,700 540,945
----------------------------- ---------------------------
Loss from operations. . . . . . . . . . . . . . . . . . . . . (574,767) (211,535) (1,069,729) (457,343)

Interest expense:
Related parties . . . . . . . . . . . . . . . . . . . . . . . 148 2,227 839 5,600
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358,381 38,571 489,008 56,589
----------------------------- ---------------------------
Total interest expense. . . . . . . . . . . . . . . . . . 358,529 40,798 489,847 62,189
----------------------------- ---------------------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (933,296) (252,333) (1,559,576) (519,532)
Less: preferred stock dividends. . . . . . . . . . . . . . . . . . (221) (197) (440) (197)
----------------------------- ---------------------------
Net loss to common stockholders. . . . . . . . . . . . . . . . . . $ (933,517) $(252,530) $(1,560,016) $ (519,729)
============================= ===========================
Net loss per basic and diluted common share. . . . . . . . . . . . $ (0.03) $ (0.01) $ (0.04) $ (0.02)
============================= ===========================
Net loss to common stockholders per basic and diluted common share $ (0.03) $ (0.01) $ (0.04) $ (0.02)
============================= ===========================
Weighted average common shares outstanding - basic and diluted . . 37,249,225 25,911,034 35,501,257 25,434,668

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

Nighthawk Systems, Inc.
Condensed Consolidated Statements of Stockholders' Deficit
Six months ended June 30, 2005

Preferred Stock Common stock
-------------- -------------- Additional paid Special Accumulated
Shares Amount Shares Amount in capital Warrants deficit Total
-----------------------------------------------------------------------------------------------
Balances, December 31, 2004. . . . . 5,000 $ 12,500 31,959,247 $ 31,960 $3,884,516 $ 188,775 $(5,357,342) $(1,239,591)
Common stock issued, and puts
and warrants exercised for cash 2,276,610 2,277 359,526 361,803
Common stock issued as incentive
on notes payable 900,000 900 167,600 168,500
Common stock and options issued
for consulting and other services 1,200,000 1,200 229,325 230,525
Conversion of accrued liabilities
to common stock 313,100 313 56,307 56,620
Conversion of notes payable and
accrued interest to common stock. 1,400,000 1,400 161,150 162,550
Series A preferred dividend . . . 2,487 2 (2) -
Exercise of Special Warrants. . . 969,750 970 187,805 (188,775) -
Net loss. . . . . . . . . . . . (1,559,576) (1,559,576)
-----------------------------------------------------------------------------------------------
Balances, June 30, 2005. . . . . . . 5,000 $ 12,500 39,021,194 $ 39,022 $5,046,227 $ - $ (6,916,918) $(1,819,169)
===============================================================================================

The accompanying notes are an integral part of these financial statements

F-18

Nighthawk Systems, Inc.
Condensed Consolidated Statements of Cash Flows
Six months ended June 30,

2005 2004
----------- ----------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,559,576) $(519,532)
----------- ----------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 3,163 3,854
Bad debt expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,648
Amortization of loan discounts and warrants . . . . . . . . . . . . . . . . . . . 198,013 -
Common stock and options issued for consulting and other services . . . . . . . . 23,025 73,660
Common stock and warrants issued for interest . . . . . . . . . . . . . . . . . . - 34,500
Amortization of shares issued as incentives on notes payable. . . . . . . . . . . 133,908 -
Amortization of shares issued for prepaid consulting. . . . . . . . . . . . . . . 212,124 -
Changes in assets and liabilities, net of business acquisition:
Decrease (increase) in accounts receivable. . . . . . . . . . . . . . . . . . . . 17,186 (11,357)
(Increase) in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . (62,199) (39,189)
Decrease in prepaids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,810 -
Decrease in other assets and liabilities. . . . . . . . . . . . . . . . . . . . . (1,020) (2,198)
(Increase) decrease in accounts payable . . . . . . . . . . . . . . . . . . . . . (82,553) 11,801
Increase in accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 149,434 35,313
------------ ----------
Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619,539 106,384
------------ ----------
Net cash used in operating activities of continuing operations . . . . . . . . . . . (940,037) (413,148)
------------ ----------

Cash flows from investing activities:
Purchases of furniture, fixtures and equipment. . . . . . . . . . . . . . . . . . (1,973) -
------------ ----------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . (1,973) -
------------ ----------

Cash flows from financing activities:
Cash overdraft. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (3,902)
Proceeds from the sale of preferred stock . . . . . . . . . . . . . . . . . . . . - 12,500
Proceeds from notes payable, related parties. . . . . . . . . . . . . . . . . . . 567 25,516
Payments on notes payable, related parties. . . . . . . . . . . . . . . . . . . . (1,233) (34,655)
Proceeds from notes payable, other. . . . . . . . . . . . . . . . . . . . . . . . 1,113,500 25,000
Payments on notes payable, other. . . . . . . . . . . . . . . . . . . . . . . . . (573,818) (10,404)
Payments on other related party payable . . . . . . . . . . . . . . . . . . . . . - (25,000)
Proceeds from the issuance of special warrants. . . . . . . . . . . . . . . . . . - 188,775
Net proceeds from the sale of common stock, and the exercise of puts and warrants 361,803 237,350
------------ ----------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . . . . 900,819 415,180
------------ ----------
Net (decrease) increase in cash. . . . . . . . . . . . . . . . . . . . . . . . . . . (41,191) 2,032
Cash, beginning balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,118 -
------------ ----------
Cash, ending balance $ 19,927 2,032
============ ==========

Condensed Consolidated Statements of Cash Flows
(continued)

Supplemental disclosures of cash flow information:
2005 2004
-------- -------
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,722 $17,222
======== =======
Supplemental disclosure of non-cash investing and financing activities:

Common shares issued as incentives for notes payable . . . . . . . . . . $168,500
========
Common shares issued for prepaid consulting agreements . . . . . . . . . $207,500
========
Conversion of accrued expenses to common stock . . . . . . . . . . . . . $ 56,620
========
Conversion of notes payable and accrued interest to common stock
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $155,590 $71,640
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,960 8,876
-------- -------
Total amount converted . . . . . . . . . . . . . . . . . . . . . . . . . $162,550 $80,516
======== =======
Preferred stock dividends issued in common stock . . . . . . . . . . . . $ 440 $ 197
======== =======

F-19

NIGHTHAWK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2005 AND 2004
(unaudited)

1. Organization, going concern, results of operations and management's plans

Organization

Nighthawk Systems, Inc. ("the Company") designs and manufactures intelligent
remote power control products that are easy to use, inexpensive and can remotely
control virtually any device from any location. The Company's proprietary,
wireless products are ready to use upon purchase, so they are easily installed
by anyone, regardless of technical ability, and are also easily integrated into
third-party products, systems and processes. They allow for intelligent control
by interpreting instructions sent via paging and satellite media, and executing
the instructions by 'switching' the electrical current that powers the device,
system or process. Nighthawk's intelligent products can be activated
individually, in pre-defined groups, or en masse, and for specified time periods
with a simple click of a mouse or by dialing a telephone number.

GOING CONCERN, RESULTS OF OPERATIONS AND MANAGEMENT'S PLANS

The Company incurred a net loss of approximately $1.38 million during the year
ended December 31, 2004 and a net loss of approximately $1.56 million during the
six months ended June 30, 2005. The Company had a stockholders' deficit and
working capital deficiency of approximately $1.24 million and $1.04 million,
respectively, as of December 31, 2004 and $1.82 million and $1.77 million
respectively, as of June 30, 2005. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Although no
assurance can be given that such plans will be successfully implemented,
management's plans to address these concerns include:

1. Raising working capital through additional borrowings.
2. Raising equity funding through sales of the Company's common stock.
3. Implementation of a sales and marketing plan.

ADDITIONAL BORROWINGS AND EQUITY FUNDRAISING:

In August 2004, the Company signed a financing arrangement with Dutchess Private
Equities, II, L.P. ("Dutchess") under which the Company received $250,000 in
exchange for a convertible debenture during the third quarter of 2004. The
Company also signed an investment agreement under which Dutchess agreed to
purchase up to $10.0 million in common stock from the Company, at the Company's
discretion, over the next three years, subject to certain limitations including
the Company's then current trading volume. Although the amount and timing of
specific cash infusions available under the entire financing arrangement cannot
be predicted with certainty, the arrangement represents a contractual commitment
by Dutchess to provide funds to the Company.

During the six months ended June 30, 2005, Dutchess loaned the company a total
of $1,113,500 in the form of notes payable. The notes have no stated interest
rate but have a face amount greater than the funded amount. This difference is
recognized as interest expense over the life of the loan. Under the terms of
the notes, Dutchess is also issued incentive shares, which are recorded as
prepaid interest and expensed over the life of the loan.

On March 9, 2005, Dutchess exercised 250,000 warrants at $0.125 each, for total
proceeds of $31,250, $15,000 of which was applied to outstanding notes and
accrued interest.

The Company used the proceeds from the notes, puts and warrants to fund its
operating cash flow deficits and to repay outstanding notes and accrued interest
and penalties to Dutchess.

For more information on the transactions with Dutchess, please see Note 5, Notes
payable.

F-20

THE SALES AND MARKETING PLAN FOR 2005 INCLUDES THE FOLLOWING:

- Hiring sales and marketing personnel. The Company increased its sales
force in the first quarter of 2005 with experienced salespeople with the goal of
effectively targeting existing and new markets.

- Product marketing including print media and attendance at trade shows.
This method has proved the most effective for the Company to date, and it plans
to increase its presence in these areas to attract new customers.

- An improved Internet presence. The Company launched a new website in May
2005 to improve content and to make the site more friendly to search engines.
The Company has plans to add e-commerce functionality at a future date.

- Leveraging existing customer relationships by up-selling new products or
fully integrating systems with the Company's products.

- The establishment of distribution and dealer networks. Through an
effective dealer network, the Company can increase awareness in its products and
utilize a dealer's sales force to actively promote its products.

- New applications in irrigation control, civil defense and emergency
management. The current product design can be altered with little cost to the
Company to be effectively implemented into a wide array of fields. Through the
commitment of funding, the Company can now research all possible applications
and begin to market directly to new customers.

- The development and launch of a product designed to be used for multiple
purposes by consumers.

In addition to the marketing and sales objectives, the Company has identified
the following strategic goals for 2005:

- Joint ventures with wireless service providers and equipment
manufacturers.

- The identification of complementary products and companies for potential
acquisition.

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements, which
include the accounts of Nighthawk Systems, Inc. and its subsidiary PCT
(collectively referred to herein as "the Company"), have been prepared in
accordance with accounting principles generally accepted in the U.S. for interim
financial information. In the opinion of management, all adjustments (consisting
of only normal recurring items), which are necessary for a fair presentation
have been included. The results for interim periods are not necessarily
indicative of results that may be expected for any other interim period or for
the full year. These condensed consolidated financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for 2004 filed with the Securities and
Exchange Commission (the "SEC").

3. SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

Revenue from product sales is recognized when all significant obligations of the
Company have been satisfied. Revenues from equipment sales are recognized
either on the completion of the manufacturing process, or upon shipment of the
equipment to the customer, depending on the Company's contractual obligations.
The Company occasionally contracts to manufacture items, bill for those items
and then hold them for later shipment to customer-specified locations. The
Company had no bill and hold sales at December 31, 2004 or June 30, 2005.
Revenue related to airtime billing is recognized when the service is performed.
Some customers pre-pay airtime on a quarterly or annual basis and the pre-paid
portion is recorded as deferred revenue. Deferred revenue, included in accrued
expenses on the balance sheet at June 30, 2005, is approximately $6,300.

PROVISION FOR DOUBTFUL ACCOUNTS

The Company reviews accounts receivable periodically for collectibility and
establishes an allowance for doubtful accounts and records bad debt expense when
deemed necessary.

F-21

CONCENTRATIONS

Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade accounts receivable. Receivables arising
from sales to customers are not collateralized and, as a result, management
continually monitors the financial condition of its customers to reduce the risk
of loss. At June 30, 2005, the Company had approximately $26,900 in accounts
receivable, net of the allowance for doubtful accounts. Approximately $17,300
of this balance, or 64%, was from four customers. Each balance was collected
subsequent to June 30, 2005.

During the three month period ended June 30, 2005, two customers accounted for
approximately 45% of total revenue. During the six month period ended June 30,
2005, two customers accounted for approximately 44% of total revenue.

During the three and six month periods ended June 30, 2005, the Company's
largest supplier accounted for approximately 55% and 49%, respectively, of the
Company's purchases of pre-manufactured component materials.

INVENTORIES

Inventories consist of parts and pre-manufactured component materials and
finished goods. Inventories are valued at the lower of cost or market using the
first-in, first-out (FIFO) method.

INCOME TAXES

NET LOSS PER SHARE

Basic net loss per share is computed by dividing the net loss applicable to
common stockholders by the weighted-average number of shares of common stock
outstanding for the year. Diluted net loss per share reflects the potential
dilution that could occur if dilutive securities were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company, unless the effect of such inclusion would reduce
a loss or increase earnings per share. For the three and six month periods
ended June 30, 2005 and the year ended December 31, 2004, the effect of the
inclusion of dilutive shares would have resulted in a decrease in loss per
share. Accordingly, the weighted average shares outstanding have not been
adjusted for dilutive shares.

USE OF ESTIMATES

RECLASSIFICATIONS

Certain amounts reported in the consolidated financial statements for the three
and six months ended June 30, 2004 have been reclassified to conform to the June
30, 2005 presentation.

STOCK-BASED COMPENSATION

Under APB 25, where the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation is recognized. As all employee options were issued at or above
market during 2004 and the first six months of 2005, no compensation expense was
recognized in either of the periods. If compensation expense for the Company's
stock-based compensation plans had been determined consistent with SFAS 123, the
Company's net loss and net loss per share including pro forma results would have
been the amounts indicated below:

F-22

Three months ended June 30, Six months ended June 30,
---------------------------------------------------------
2005 2004 2005 2004
----------------------------- ---------------------------
Net loss applicable to common stockholders:
As reported . . . . . . . . . . . . . . . . . $ (933,517) $ (252,530) $(1,560,016) $(519,729)
Total stock-based employee compensation expense
determined under fair value based method for
all employee awards, net (6,148) (3,341) (12,296) (6,795)
------------- ----------- ----------- ----------
Pro forma net loss. . . . . . . . . . . . . . $ (939,665) $ (255,871) $(1,572,312) $(526,524)
============= =========== ============ ==========

Net loss per share:
As reported:
Basic and diluted . . . . . . . . . . . . . . . $ (0.03) $ (0.01) $ (0.04) $ (0.02)
Pro forma:
Basic and diluted $ (0.03) $ (0.01) $ (0.04) $ (0.02)

For the purpose of the above table, the fair value of each option grant is
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following assumptions:

Black-Scholes Assumptions Three months ended June 30, Six months ended June 30,
2005 2004 2005 2004
---------------------------- --------------------------
Dividend yield. . . . . . 0.00% 0.00% 0.00% 0.00%
Expected volatility . . . 1.31 1.122 1.31 1.122
Risk-free interest rate . 4.50% 4.50% 4.50% 4.50%
Expected life in years 2 years 3 years 2 years 3 years

The weighted average fair value at date of grant for options granted during the
first quarter of 2005 was $0.132 per share using the above assumptions. There
were no options granted to employees during the first and second quarters of
2004 or the second quarter of 2005.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

4. RELATED PARTY TRANSACTIONS

During the year ended December 31, 2004, a business partner of the Company's
Chairman billed the Company $20,000 for consulting services. The liability was
settled for 175,000 shares of the Company's common stock in the first quarter of
2005. During the second quarter of 2005, the Company sold 100,000 shares of
common stock to this same individual for $20,000. We did not publicly offer the
securities and this person is an accredited investor. No underwriters were
involved in the sale.

F-23

5. NOTES PAYABLE

At June 30, 2005, notes payable consist of the following:

Related parties:
Note payable, officer; unsecured; interest at prime . . . . . . . . . . . $ 9,824
rate plus 5.5% (10.75% at June 30, 2005); due on demand
Note payable, officer; unsecured; interest at 23.99%, revolving . . . . . . 4,912
----------
$ 14,736
==========
Other:
Convertible note payable to stockholder, 8% interest . . . . . . . . . . . $ 160,000
rate, in default as of the date of this report (1)
Notes payable to stockholder, 8% interest rate, in . . . . . . . . . . . . 165,000
default as of the date of this report (1)
Unsecured note with a financial institution, 15.99% . . . . . . . . . . . . 21,694
interest rate, revolving
Note payable, $586,200 face amount, no stated interest 586,200
rate but with an implied annual rate of 387.95%, due June 7, 2005 (2)
Note payable, $120,000 face amount, no stated interest
rate but with an implied annual rate of 73.70%, due December 12, 2005 (2) 104,571
Note payable, $240,000 face amount, no stated interest
rate but with an implied annual rate of 71.55%, due December 19, 2005 (2) 207,926
Note payable, $120,000 face amount, no stated interest
rate but with an implied annual rate of 65.16%, due January 8, 2006 (2) 102,191
---------
$ 1,347,582
=========
Long Term:

Convertible debenture, 8% interest rate, due August 10, 2007 (2) $ 72,014
=========

1) The Company is currently in discussions with Mr. Revesz, the holder of
the notes that are in default as of the date of this report. In April 2004, the
Company reached an agreement with Tomas Revesz, a former board member, under
which, in return for an additional $25,000 in borrowings and the extension of
the maturity dates of three notes to July 31, 2004, the Company granted the
creditor a secured position in the assets of the Company.

2) On April 7, 2005, Dutchess loaned the Company $488,500. The note had no
stated interest rate but had a face amount of $586,200 and matured on June 7,
2005. A portion of the proceeds of this loan was used to repay the note dated
December 3, 2004 with a face amount of $300,000, which matured on April 3, 2005.
Under the terms of the note, Dutchess was issued 250,000 incentive shares of
common stock. The Company recorded the fair value of these incentive shares as
prepaid interest, and will expense their value over the term of the note.
Dutchess also required the Company to hire Edgarization, LLC for consulting
services and Nighthawk issued the consulting company 300,000 shares of common
stock. The Company recorded the fair value of these shares as prepaid
consulting and will expense their value over the term of the agreement. The
implied annual rate of interest is 387.95%. The note was repaid on July 8, 2005
with a partial use of the proceeds of a new note.

On May 12, 2005, Dutchess loaned the Company $100,000. The note had no stated
interest rate but had a face amount of $120,000 and matures on December 12,
2005. Under the terms of the note, Dutchess was issued 100,000 incentive shares
of common stock. The Company recorded the fair value of these incentive shares
as prepaid interest, and will expense their value over the term of the note.
The implied annual rate of interest is 73.70%.

On May 19, 2005, Dutchess loaned the Company $200,000. The note had no stated
interest rate but had a face amount of $240,000 and matures on December 19,
2005. A portion of the proceeds of this loan was used to repay the note dated
January 18, 2005 with a face amount of $270,000, which matured on May 18, 2005.
Under the terms of the note, Dutchess was issued 200,000 incentive shares of
common stock. The Company recorded the fair value of these incentive shares as
prepaid interest, and will expense their value over the term of the note. The
implied annual rate of interest is 71.55%.

On June 8, 2005, Dutchess loaned the Company $100,000. The note had no stated
interest rate but had a face amount of $120,000 and matures on January 8, 2006.
Under the terms of the note, Dutchess was issued 100,000 incentive shares of
common stock. The Company recorded the fair value of these incentive shares as
prepaid interest, and will expense their value over the term of the note. The
implied annual rate of interest is 65.16%.

On July 8, 2005, Dutchess loaned the Company $795,154. The note had no stated
interest rate but had a face amount of $820,154 and matures on February 8, 2006.
A portion of the proceeds of this loan was used to repay the note dated April 7,
2005 with a face amount of $586,200, which matured on June 7, 2005. Under the
terms of the note, Dutchess was issued 285,000 incentive shares of common stock.
The Company recorded the fair value of these incentive shares as prepaid
interest, and will expense their value over the term of the note.

F-24

On August 3, 2005, Dutchess loaned the Company $130,000. The note had no stated
interest rate but had a face amount of $156,000 and matures on August 3, 2006.
Under the terms of the note, Dutchess was issued 285,000 incentive shares of
common stock. The Company recorded the fair value of these incentive shares as
prepaid interest, and will expense their value over the term of the note.

During the period from January 1, 2005 through June 30, 2005, the Company
exercised six (6) puts to Dutchess totaling 1,276,610 shares for proceeds of
$222,726 less commissions of $9,673. Of the total proceeds, $125,633 was used
to repay portions of previously issued notes to Dutchess and $67,838 went to the
Company.

On March 9, 2005, Dutchess exercised 250,000 warrants at $0.125 each, for total
proceeds of $31,250, $15,000 of which was applied to outstanding notes and
accrued interest.

Also during the period from January 1, 2005 through June 30, 2005, Dutchess
elected to convert a total of $162,550 of the 36-month convertible note for
1,400,000 shares of the Company's common stock.

During the period from July 1, 2005 through August 1, 2005, Dutchess elected to
convert a total of $51,767 of the 36-month convertible note for 680,000 shares
of the Company's common stock.

6. STOCKHOLDERS' DEFICIT

PREFERRED STOCK

Preferred stock dividends of $440 were accrued in the form of a stock dividend
equal to 2,487 shares of common stock of the Company during the six months ended
June 30, 2005.

COMMON STOCK

During the first quarter of 2005, the Company issued 463,100 shares for
consulting and other services, of which 175,000 shares were issued to a business
partner of the Company's Chairman to settle a $20,000 liability for consulting
services performed and expensed in 2004.

During the first quarter of 2005, the Company sold 650,000 shares of common
stock to an investor for cash at a price of $0.15 per share for proceeds of
$97,500. Warrants to purchase 650,000 shares of common stock at an exercise
price of $0.25 per share were also included in the sale. We did not publicly
offer the securities and the investor is an accredited investor. No
underwriters were involved in the sale.

During the second quarter of 2005, the Company sold 100,000 shares of common
stock to a business partner of the Company's Chairman for $20,000. We did not
publicly offer the securities and this person is an accredited investor. No
underwriters were involved in the sale.

During the second quarter of 2005, the Company issued 250,000 shares of common
stock to Prospect Hunter, Inc. for marketing services for a period of one year
beginning in April 2005.

Also during the second quarter of 2005, the Special Warrant holders exercised
their right to 969,750 shares of the Company's common stock. The Special
Warrants were sold in 2004 for net proceeds of $188,775 and consisted of the
right to one share of the Company's common stock and one warrant to purchase a
share of the Company's common stock for $0.30. The warrants remain unexercised
as of the date of this report.

7. SUBSEQUENT EVENTS

In April 2004, the Company, along with current officers, board members, and
several of the Company's former directors, were sued in the Colorado District
Court by a former director (Larry Brady) and former member of management (Mark
Brady, Larry's son) for, among other things, breach of contract for unlawful
termination and failure to provide stock allegedly promised during their service
as Company director and chief financial officer, respectively, for part of 2001
and part of 2002. The Company denied the allegations. Further, the Company
counter-sued the Bradys for non-performance and breach of fiduciary duties.
Pursuant to a court order, dated June 23, 2005, the judge terminated the Bradys'
lawsuit, dismissing it, outright. In July of 2005, in an effort to bar the
Bradys from raising these issues in the future, the Company engaged in a mutual
release of all claims and issued a total of 250,000 shares of unregistered
common stock and $10,000 to Lawrence Brady, Mark Brady, and their counsel. The
Company recognized $32,500 in expenses for the quarter ended June 30, 2005 in
relation to this settlement.

F-25